MARKET-ALERT – Rumblings Up, Down, and Around Wall Street – Issue #425 dated March 20, 2017, with Ray Dirks of RAYDIRKS Research and his team of Securities Analysts and Money Managers – along with the internationally-followed Web Sites – www.CorporateProfiles.com and www.CPreports.com, where Fashion meets Finance, and where Stocks meet Blonds.
Well…well…well : it was another winning week on Wall Street, as all three major stock indexes went up, even though by modest amounts.
For Rumblings’ readers/investors, the week ended Friday, March 18 was even better, as many of our Favorite Stocks for 2017 did even better, including our biggest favorite – Apple, Inc. (APPL), which closed at $139.99 after setting a new all-time high at $141.02. We’ll discuss more about Apple and some of the reasons why the company’s stock is doing so well, and will continue to, later in this issue, but first – let’s quote from “The Trader” column in tomorrow’ s Barron’s, The Dow Jones Business and Financial Weekly, where the headline reads : “Stocks Sidestep Trouble After Fed Rate Hike”.
The article starts off with a short and simple sentence : “It was the storm that wasn’t.”
Then it continues : “No, we’re not talking about the so-called blizzard that was supposed to bury New York City under a foot of snow last Tuesday. We mean the Federal Reserve interest rate hike, which instead of causing markets to tumble, fueled their rise.
The Dow Jones Industrial Average advanced 12 points, or 0.1%, to 20,915 last week, while the Standard & Poor’s 500 index rose 0.2%, to 2,378, its seventh weekly gain during the past eight weeks. The Nasdaq composite gained 0.7%, to 5,901. So much for three steps and a stumble.
In fact, the Fed did nothing to cloud the long-term outlook Heading into the meeting, the market was not only expecting a rate hike, but also dreading the possibility that the Fed would plan to do more to slow the U.S. economy, especially given the recent rise in inflation.
So when Janet Yellen and company left their forecast for future rate hikes unchanged, investors took it as their cue to start buying stocks.
“The worry, of course, was that the Fed was willing to slow economic growth to avert potential inflation fears, says Evercore ISI strategist Dennis DeBusschere.
In fact, the opposite appears to be true. While everyone was focused on the Fed, February’s inflation data was released. The consumer price index rose 2.7% last month, so even with the hike to a range of 0.75% to 1.0%, real rates – that is, federal funds minus inflation – remain firmly in negative territory,
Jefferies strategist Sean Darby explained in a note to clients. And with 50-year bond yields falling on the Fed news, “monetary conditions are loosening, not lightening,” Darby continued. “Good news for risk appetite.”
But what kind of risk appetite? Certainly, not the kind that drove the market’s rally following Donald Trump’s victory in November.
Last week, utilities and telecommunications – both big dividend-yielders – led the market higher, as lower bond yields make their payouts more attractive. Both sections rose 1.3%. Financial stocks, the biggest beneficiaries of higher rates, dropped 0.9%. It’s a strange sight to see investors scooping up defensive stocks in a week that saw the Netherlands avoid the worst-class scenario in its election.
But investors also appear to be embracing other aspects of the pre-Trump trade. Tech stocks are suddenly back in fashion. The sector has jumped 12% so far this year, the best in the S&P 500, as stocks like Facebook (FB) and Priceline Group (PCLN) resumed their pre-election climbs. That, says Manning & Napier senior analyst Greg Woodard, is a sign that investors have begun to doubt the economic growth spurt that was expected under the new administration. “They’re coming back to economic growth being OK, but not terrific,” he says. “They need companies that can grow.”
That doesn’t mean the market is headed for a fall. But we certainly could be stuck here for a while.
And now, as we promised early in this Issue, Rumblings is going to discuss briefly why the shares of Apple (APPL) are likely to advance by another 30% to 50% in the next 12 to 24 months, far faster than the stock market in the United States generally.
For one thing, iPhones, which bring in about two-thirds of annual revenue, show little sign of failing. The next phone could get a glassy body, a super-crisp, edge-to-edge display without a physical home button, and wireless charging , if rumor Websites are to be believed.
Meanwhile, services have brought in $25.5 billion in the past year, or more than 12% of revenue. Apple now makes more from services than from Mac computers. AppleCare and related activities now bring in 1.9% of total revenue. Other big contributors are iTunes, including movie rentals, and Apple Music, a streaming service, which combined deliver 2.5% of revenue; iCloud, Apple Pay, iAd, and such, which bring in 2.7%, and the app store – “The world’s greatest toll booth,” – at 3.9% of revenue.
By fiscal 2020, Apple’s service revenue could approach $50 billion, and it comes with gross profit margins of 69% or so. That’s more than 20 points higher than the rest of the business. It is one reason Apple’s earnings per share, $8.31 in the latest fiscal year, could reach $11.00 in three years.
Apple’s cash and investments have grown to $46 per share. Apple is trading at 15 times forward earnings. Rumblings thinks Apple stock should trade at 20 to 25 times earnings per share. For another sign that Apple is still a good value, look to Omaha. Berkshire Hathaway (BRK.A) has increased its stake to over 130 million shares from 10 million a year ago, becoming a top five shareholder.
Rumblings suggests that readers/investors do their due diligence, check with their investment advisers, and then purchase shares in Apple (APPL) and other companies in our Favorite Stock for 2017 list.
Rumblings also suggests that readers/investors place no more than 1% of the funds they devote to common stocks in the securities of any one company. It’s best to diversify…!
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