What the Market Wants: Google Scares the Bears Away – Now What?

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Courtesy of David Brown, Chief Market Strategist, Sabrient

After one of the most volatile weeks in market history, Google (GOOG) single-handedly frightened the bears away this morning with its $12.5 billion purchase of Motorola Mobility (MMI).

If not for that acquisition there would be very little that is positive for the market’s outlook. One of the last major Q2 earnings announcements came from Lowe’s (LOW) today. The company not only announced weaker earnings but reduced their forward guidance as well. Today’s economic news certainly didn’t help.  The Empire State Manufacturing showed deteriorating business conditions with a reading of -7.7% versus the expected -0.4%. That’s not only disappointing but truly awful.  In other economic news, a strong retail sales report was offset somewhat by much-weaker-than-expected consumer sentiment.

On the global front, the gloom came from Japan’s announcement of a lower second quarter GDP, which was down -1.3%, although it was not as bad as feared.

You might wring some optimism from tomorrow’s meeting between France and Germany to discuss how to bail out the euro. The pessimists among us might think the two countries will talk about bailing out of the European Union itself, and letting the currencies of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) sink or swim.  That will probably not happen, as the PIIGS’ currencies would certainly sink, which would result in cheap competition to French and German exports. 

There’s no easy answer to that, so let’s return to Google’s big surprise.  Not only were they willing to part with $12.5 billion – which exceeds the size of any acquisition in their history – but they paid a 60% premium for Motorola Mobility.  No one knows how well it will turn out, but there’s no doubt Google bought a boatload of cellular phone patents, which is impressive in and of itself.

The important take-away is the realization that corporate America has tons of cash, as we’ve said many times, and valuations are better than they’ve been some time. Indeed, the forward P/E figures that we mentioned last week was 6.3; now it is 6.2. This is due not only to the tumbling market but also to the nearly double improvement of net upward EPS revisions.

Another interesting statistic is the expected absolute quarter-over-quarter earnings for each stock.  Last week, we reported that it had nearly doubled since May. It has now increased an additional 30% in the past week.  That’s caused in part by the fall in stock prices, but also by the growth in upward revisions in next quarter’s earnings estimates.  The revisions are based on the preponderance of positive earnings surprises from corporate America.  On a net basis, 22% of all revisions over the past 30 days have been positive for the year ahead.

Market Stats. Mid-cap Growth was the only positive style/cap last week, up +0.22% for the week, and that includes the Monday fall. Small-cap Value was the worst, at -3.4%.

Here are the market stats.

Two sectors had positive performance last week. Basic Industries gained +5.2% and Transportation barely made it over the zero line, +0.02%, and that was only because of steeply dropping oil prices. Consumer Durables turned in the worst performance, -3.1% down; Finance (-2.9%) and Capital Goods (-1.6%) weren’t a whole lot better.

Our forward-looking SectorCast rankings have moved Finance to the top, due in part to its sharp fall in recent weeks. Energy and Basic Industries are close behind.

After last week’s volatility, it’s difficult to have a great deal of confidence in anything, but I believe the lean mean corporate machine that has emerged will continue to use its earnings power and stashes of cash to drive the market higher. And hopefully hire a few of the unemployed along the way.  When you think about it, there aren’t many other places to put your dollars these days.

Last week, I said it was a good time to start nibbling, and indeed it was. The four stocks we identified – KRO, JBL, GGAL, and KEM – gained an average of 12% for the week, almost double the S&P 500 Index.  All are still very buyable, and below the table are four different undervalued stocks worth considering.

4 Stock Ideas for this Market

This week, I started with the GARP (Growth At a Reasonable Price) preset search in MyStockFinder (http://MyStockFinder.com). I also included Buys (in addition to Strong Buys), and slightly up-weighted Technicals. Here are four stock ideas worth considering:

Aetna (AET) – Finance
Chevron (CVX) – Energy
CF Industries (CF) – Basic Industries
MasTec (MTZ) – Capital Goods

Until next week,

David Brown