Behind The Headlines: Second Quarter Perspective
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The first quarter provided some impressive returns with the closely watched Dow turning in an 8.1% gain; it's best first quarter since 1998. However, just a couple of holiday-shortened weeks into April and we’re starting to see some of those gains rapidly deteriorate. As of April 11, the Dow has already given back almost 40% of its YTD gains. Lots of hype has surrounded the Dow’s nearly 25% gain from its Oct. 2011 lows, yet statistics like that can be misleading when you consider that the index was basically 50 points lower the other day from where it closed in late April a year ago at 12,760. This behind-the-scenes fact illustrates that the market remains a stagnant pool for growth, creating very little wealth by price appreciation alone.
While you won’t find those details in today’s headlines, other facts, such as the role central banks play in the global economy, unemployment, and even the VIX (also known as the fear indicator) do get lots of press and continue to support our belief that a market pullback is likely to take place in the second quarter.
In the past, the VIX, which has ranged from a high reading of 45 back in Oct. 2011 to a recent low of 15, has marked major market peaks and valleys. Readings near 15 in April 2011, April 2010, and in April 2008 pointed to market peaks. We believe the VIX at these levels suggests a pullback. Combine that with lackluster job report from March and no plans from either the European or US central banks to print money, and you get a recipe for uncertainty, which usually douses the fire of a hot market.
Heading into earnings season, we will be closely watching a variety of data for any indications of emerging trends and opportunities. Alcoa, the first major company reporting, surprised to the upside, but they don’t offer as much insight as a company such as Coca-Cola (NYSE: KO), which reports next week, because they generate significant revenues both here domestically and abroad. We’ll monitor how rising fuel costs may be affecting them and pay attention to what sales volumes in China and Europe portend for global growth and the likelihood for a deepening recession in Europe. Currently, we feel the price of KO is trading ahead of our fair-value estimate of $70 and expect investors will have the opportunity to pick it up below $68 before its next dividend payment later this summer.
This Friday we’ll gain some global insight from China’s report on its GDP; and next week retail sales numbers will provide a good look at the health of the U.S. consumer. Right now, we believe the warmer weather in Jan. and Feb. will have a negative effect on March retail sales results, which are typically higher in colder seasons as consumers are forced to come out of hibernation later and thus increase demand. Even adjusting for seasonality, we think the U.S. consumer is spending more and that some positive surprises in both economic data and earnings reports this quarter will keep the recovery intact. Albeit, in and around a healthy pullback due to global growth concerns, particularly in the Euro Zone, keeping the market below its all-time high of 14,100, at least for this year.
Based on our findings, investors may want to consider sticking with a sustainable, high-dividend theme that includes prospects for long-term capital appreciation as well. At current valuations, we suggest investors remain painfully patient in selecting income oriented companies so as to not overpay for them. Therefore, consider establishing small, initial positions and building them up over time as a means of smoothing out the bumps we’re expecting. One way to accomplish this is to select companies with a near-term dividend payment (usually less than 30-45 days away) and use the resulting income to help offset near-term volatility and/or pullbacks. Specifically, we feel the growing weakness in the Euro Zone could offer income-oriented investors the opportunity to inexpensively capture some solid income through well-known international companies with trusted brands used every day, such as Unilever NV (NYSE: UN) and France Telecom SA (NYSE: FTE) for example.
We like UN for its 3% dividend and well-known, global brands such as Dove, Ponds, Suave,TRESemme, and Noxzema to name a few. We have a 1-year price target on it of $35, which represents an 8% upside. For FTE we have a 1-year price target of $17 and with it’s nearly 14% dividend and 217 million customer base, we feel it represents significant value for income oriented investors despite recession concerns in the Euro Zone.
For the remainder of the year, we expect the Dow to fluctuate between 12,000 and 13,500, with the market ending the year in low double-digits based on a slowly but steadily improving U.S. economy and further intervention by central banks later this year (likely in June/July). The Stock Trader’s Almanac provides similar guidance from their historical analysis of first quarter results. They show that in previous years, when January, February, and March all had positive returns, patient investors were rewarded with double digit returns at year-end.
Disclaimer: The above article has been written utilizing data from publicly available sources, which are believed to be reliable, and is provided for informational and educational purposes only. Investors should consider their personal situation and become intimately familiar with any investment, including its prospectus, before investing. Past performance and current yields are no guarantee of future results.