After recent wild fluctuations in the stock market, it would certainly be understandable if an investor decided to never go near a stock again. It would also be a mistake. The remedy is to ignore the siren calls of daily market news and rumors while holding stocks with sufficient financial strengths and earnings power to keep them on course during these periodic storms. I try to guide readers on that course, which has been working well, although there were a few moments recently when I wondered if my life might have been less eventful if I had remained as a Navy jet pilot.
It would probably also have been shorter, a reminder to me and to readers that a longer-range view is usually helpful in times of stress. In these times, that demands realizing that recovery from the greatest financial crisis since the Depression has been merely punctuated by the trials of Goldman Sachs, a major oil spill in a vital oil producing region and rippling fiscal crises across Southern Europe. These are major problems with uncertain outcomes yet even their aggregate is not sufficient to reverse recovering global growth, now in its second year.
The unemployment rate remains painfully high and sectors like housing are still in intensive care, but the overall momentum is unchecked. One major difference between this recovery and the failed government actions in the 1930’s is today’s pumping of funds by the world’s central banks into their economies. These actions are keeping interest rates low, one of the most key factors for investors to consider in comparing investments.
Interest rates are likely to rise sooner in Europe than in the U.S. under the impact of the pressures on European currencies. That provides a shield that should give the U.S. a few months grace as a stronger dollar strengthens its fiscal balance sheet, helping the Fed keep interest rates low and encouraging growth in businesses here. U.S. stocks thus seem more favorably positioned at this time.
With so many prevailing uncertainties, the stability of larger companies is valuable. DuPont (DD-$38) just raised its earnings guidance for 2010 to a range of $2.50 to $2.70. That would be a solid increase from 2009’s $1.94 and is accompanied by a 4.5% dividend yield. Its chemical and coatings businesses are improving and its agriculture lines are gaining market share. The company has a substantial debt load, thus the combination of low interest rates and a recovering economy are particularly advantageous to it.
Cummings (CMI-$72) is a new buy recommendation. This old-line Indiana-based company makes diesel engines and other lines of heavy equipment used all over the world. Sales of its big rig trucks fell below their replacement rate when the Recession loomed into view, leaving the age of the U.S. trucking fleet at a twenty-year peak. Demand for replacement is building, spurred by tighter emission standards.
This heavy equipment sector has substantial inertia and sales will probably not show significant increases until the end of this year. Current earnings estimates are for $3.50 this year, up 40%, and for more than $5.00 next year. The yield is only 1% but this is a classic cyclical growth play and a dividend increase is likely in a few months.
The energy sector remains volatile, as usual. Core Labs (CLB-$144) is another new buy. This savvy technological energy company provides techniques that enhance oil and gas production from existing reservoirs. With offshore drilling under a cloud and exploration increasing of shale deposits, it has a commanding niche. Earnings estimates this year are for nearly $6.00, increasing by at least 20% in 2011.
Amid the sound and fury, stocks continue to offer promising returns to thoughtful investors. Price targets for all the new buys are 25% above present levels by year-end.