"If you're going to stay invested, you should look to defensive sectors," explain Ron Rowland and Brandon Clay, who point to consumer staples as a top pick for the current market environment.
"In a bear market, opportunities are usually limited to certain sectors. Surveying the investment horizon, we think the consumer staples sector has the best opportunity for growth in this economy.
"Regardless how the economy acts, people still eat. Consumers may not shop at Whole Foods, but they'll still buy groceries. Companies like Wal-Mart (NYSE: WMT) and Safeway (NYSE: SWY) will continue to rake in revenues from hungry customers.
"In addition, these companies should continue to receive additional revenue from consumers who normally shop at specialty stores, but can no longer afford to.
"Consumers may not be shopping at Sharper Image any more, but there are other creature comforts that will be difficult for Americans to abandon.
"Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP) will still sell products during a prolonged downturn. In addition, companies providing toiletries and convenience like Procter and Gamble and CVS Pharmacy stand to do well during a shifty economy.
Merriman upgraded Smith & Wesson (NASDAQ:SWHC) to Buy from Neutral on valuation after channel checks indicated an increase in gun sales in October after an Obama win became apparent. The firm believes shares can trade up into the $4 to $5 range.
Credit Suisse upgraded Wells Fargo (NYSE:WFC) to Outperform from Neutral citing the company's improved balance and potential earnings power following its $11B equity offering.
JP Morgan upgraded Coca-Cola Enerprises (NYSE:CCE) to Overweight from Neutral on valuation and easing commodity and labor costs.
Manulife (NYSE:MFC) was raised to Outperform from Sector Perform at RBC Capital.
Molina Healthcare (NYSE:MOH) was upgraded to Equal Weight from Underweight at Barclays.
Analyst downgrades:
Barclays downgraded General Motors (NYSE:GM) to Underweight from Equal Weight on cash concerns and believes any assistance from the government would substantially dilute equity holders. Barclays set a $1 target on GM shares.
Stephens cut LandAmerica (NYSE:LFG) to Underweight from Equal Weight following the Fidelity National (NYSE:FNF) takeover as they expect no other bidders to emerge and believe shares could go back to under $5 if Fidelity National walks away.
Deutsche Bank downgraded solar companies to reflect deteriorating fundamentals in the sector, an adequate supply of c-Si modules, the strengthening dollar and restricted access to capital. First Solar (NASDAQ:FSLR), Canadian Solar (NASDAQ:CSIQ), Energy Conversion (NASDAQ:ENER) and Sunpower (NASDAQ:SPWRA) were downgraded to Hold from Buy.
FMC Technologies (NYSE:FTI) was lowered to Underweight from Neutral at JP Morgan.
Analyst initiations:
Freeport McMoRan, HLS Systems, and Kimberly Clark were today's noteworthy initiations:
Banc of America expects Freeport McMoRan's (NYSE:FCX) earnings will decline sharply in 2009 and thinks the dividend could be at risk. Shares were initiated with a Neutral rating and $29 target.
Roth Capital initiated HLS Systems (NASDAQ:HOLI) with a Buy rating and $5 target. The firm is positive on the company's management team and the company's outlook for EPS growth.
Citigroup thinks Kimberly Clark's (NYSE:KMB) margins have bottomed and that the current valuation is too low. Shares were assumed with a Buy rating and $65 target.
Clorox (NYSE: CLX) greeted investors on Friday with a sparkling clean earnings report for the fiscal first quarter. According to the press release, sales rose 8% once the effect of the Burt's Bees acquisition was eliminated, and earnings per share came in at $0.91. Analysts were looking for $0.84 per share.
That's an awesome beat. For the most part, shareholders don't have much to complain about. Operational cash flow did decrease, but you can once again factor in Burt's Bees and its effect on working capital. I always like to see cash flow increase, but since this is the first quarter, and since Clorox is backed by a whole bunch of powerful brands, I can let it go for now. Going beyond the numbers, I think the big thing to think about when considering Clorox is that it is, like colleagues Procter & Gamble (NYSE: PG), Colgate-Palmolive (NYSE: CL), and Kimberly-Clark (NYSE: KMB), a pretty strong name in supermarket aisles. Who hasn't purchased some of the company's bleach or trash bags at one time or another? I know I've been attracted to Clorox's brand equity.
On a forward-looking basis, Clorox can be looked upon as a long-term dividend play. Right now, the stock has a decent yield and is comfortably away from the 52-week low. Of course, we've been hearing a lot lately about how currency rates may start to give global companies a hard time. That's something to consider with Clorox. My feeling is that long-term thinkers shouldn't sweat it too much. One thing about the management here is they seem to be very willing to aggressively protect their brand equity against no-name brand competition and to figure out exactly what marketing messages will work with consumers. That's my top priority when it comes to consumer-products businesses and retail. I always ask myself the following question: Does management get that it's all about the branding/marketing? From what I've read, I think Clorox gets it.
No, I don't think the stock is simply going to rise from here. But I do think it could be one of the better defensive plays out there (assuming there still is such a thing as defensive play these days, that is).
Disclosure: I don't own any company mentioned; positions can change at any time.
Procter & Gamble (NYSE: PG), which competes with Clorox (NYSE: CLX), Johnson & Johnson (NYSE: JNJ), Kimberly-Clark (NYSE: KMB), and Colgate-Palmolive (NYSE: CL), will be reporting earnings for the fiscal first quarter on Wednesday. The data will be scrutinized carefully to see if P&G might be a viable idea in these tumultuous times. Of course, P&G is a great long-term investment for a core portfolio of buy-and-hold stocks, but there will be plenty of investors on Wall Street looking to gauge the company's potential as a defensive trade.
According to Earnings.com, P&G should earn about $0.98 per share. At least, that's the goal that analysts have set for management. If P&G hits that number, then it will have achieved a modest growth rate of around 6%. I expect P&G to beat expectations by a penny or two, given its recent history. The company usually is pretty good about that. Also, free cash flow should be more than acceptable to investors. Management watches cash-flow generation carefully (as it should), and traditionally makes that a priority. Naturally, it wants to balance the needs of long-term growth along with the need to deliver a proper flow of cash. So far, things have worked out over time on that count.
The big question now is: What about the future outlook? What the company says about this subject will probably end up driving the stock's reaction. The global marketplace is headed for a slowdown. Consumers are tightening their belts. Will they reach for generic brands and ignore the brand equity of the products in P&G's vast portfolio? P&G is going to have become aggressive about promoting its stuff. The company will want to make sure that people still feel their getting value for their dollar. That dollar, after all, goes farther with a generic equivalent. From my viewpoint, I think there is still value to be had from name brands. Even during a recession, I'll buy better quality items. Just yesterday I happened to pick up one of P&G's family members -- Bounty paper towels. It was on sale, but I'm sure there was a generic lurking around the corner that was cheaper. I didn't even bother looking for it. Sure, I do buy some generics, but I don't necessarily become obsessed with them.
P&G wasn't that far from the 52-week low at Monday's close. I wouldn't be setting up an earnings trade ahead of it because of all the uncertainty, but holders of the stock should fare reasonably well come the middle of the week (P&G did fine the last time).
Disclosure: I don't own any company mentioned; positions can change at any time.
Consumer-products company Kimberly-Clark (NYSE: KMB) was the latest company to see its stock placed on the chopping block. That's been happening a lot these days. The shares tumbled over 7% on Wednesday and closed at $57.22. While 7% is bad enough, it actually feels worse to say that the stock lost $4.45 per share on the session. When it comes to businesses that sell popular brands to consumers, shedding $4 per share is just awful. Especially for a stock that should be a defensive name, a proverbial port in the even more proverbial storm.
Kimberly-Clark posted an adjusted profit of $1.02 per share Wednesday morning, which was a penny better than analyst expectations. The article also states that the company is suffering from a shifting exchange-rate environment and competition from private-label products. That latter point is really going to be a problem for businesses such as Procter & Gamble (NYSE: PG), Clorox (NYSE: CLX), and Colgate-Palmolive (NYSE: CL). At some point, many will probably reach for generic items as opposed to name-brand counterparts.
This doesn't mean that companies who use big brands as their main ammunition for long-term growth should be avoided. Indeed, a company that can figure out how to strike a prosperous balance between the premium it can charge for its name products and the willingness of consumers to pay it will oftentimes do well in tough markets. Kraft (NYSE: KFT) had success with this during the previous quarter. Price increases were able to power results. Kimberly-Clark is going to be severely challenged in terms of maintaining margins and keeping up a proper level of marketing spending. Everyone's going after the consumer's wallet these days, so breaking out from the pack is a requisite undertaking.
U.S. stock futures were lower Wednesday morning, indicating stocks may have a second day of declines. As money markets worldwide continue improving, attention has shifted to corporate earnings and concerns are growing how a global slowdown would slow them. Asian markets closed sharply lower and European stocks tumbled at the open as well. Meanwhile, oil veered below $70 a barrel again despite a probably OPEC production cut on fears the U.S. economy is headed into a sever recession that would crimp demand for oil. Today weekly crude inventories will be released.
Apple Inc. (NASDAQ: AAPL) is one company that is bucking the earnings trend. The consumer electronics giant reported results after the close Tuesday, surprising the Street with higher earnings as all three product categories showed improvement. Specifically it sold far more iPhones than expected, actually outselling market-leading BlackBerry from Research in Motion Ltd (NASDAQ: RIMM). The company, known for always lowballing estimates, gave a weak outlook that didn't affect investors sentiment much. AAPL shares, which jumped nearly 13% in after-hours trading, are up nearly 8% this morning in pre-market trade. Analysts liked in general iPhone sales with Calyon Securities upgrading Apple to Buy from Add, and Goldman Sachs recommending investors to buy shares. Still, UBS has downgraded Apple from Buy to Neutral.
Yahoo! Inc. (NASDAQ: YHOO)'s show, on the other hand, was quite different than Apple's. While the stock is also up in pre-market action -- 2.7% (it was up 7% in after-hours trade Tuesday afternoon) -- it is mainly due to the severe cost cuts the internet giant has announced during the dusmal earnings release. As it was saying profit plunged 64%, Yahoo! also said it is redcucing its workforce by 10% or some 1,500 employees.
Wall Street's optimism in last week's preview about the earnings of tech stocks wasn't misplaced, as there were many more positive surprises than negative ones among the stocks we looked at. This week will bring plenty more data for investors in and watchers of the sector to mull over. Apple Inc. (NASDAQ: AAPL), AT&T Inc. (NYSE: T), and Microsoft Corp. (NASDAQ: MSFT), for example, are expected by analysts surveyed by Thomson Financial to post modest earnings gains from a year ago, to $1.11 per share (on $8.1 billion in sales), $0.72 per share (on $31.3 billion in sales), and $0.47 per share (on $14.8 billion in sales) respectively. All three of these companies ended the week closer to their 52-week lows than highs, and analysts on average consider them each a buy.
Here's a look at some of the week's biggest expected earnings gainers and decliners in the sector:
Baidu.com Inc. (NASDAQ: BIDU): $1.25 per share (+44.0%) on revenues of $134.7 million (+103.2%)
Broadcom Corp. (NASDAQ: BRCM): $0.44 per share (+38.6%) on revenues of $1.3 billion (+33.8%)
QLogic Corp. (NASDAQ: QLGC): $0.31 per share (+29.0%) on revenues of $170.0 million (+21.2%)
FLIR Systems Inc. (NASDAQ: FLIR): $0.32 per share (+28.1%) on revenues of $275.2 million (+44.0%)
Juniper Networks Inc. (NASDAQ: JNPR): $0.30 per share (+26.7%) on revenues of $927.4 million (+26.2%)
Waters Corp. (NYSE: WAT): $0.75 per share (+17.3%) on revenues of $391.6 million (+11.1%)
U.S. stock futures turned higher Wednesday after the Federal Reserve, in a coordinated move with other central banks, cut rates by half a point to 1.5%, in an effort to help credit markets and boost financial markets. Before the rate cut, futures were lower as Wall Street was about to join global markets in a world-wide plunge that saw the Nikkei down 9.4% and European main markets down 5-6%. On the economic front, August pending home sales released later today might crimp the mood somewhat.
Alcoa Inc. (NYSE: AA) kicked off earnings season after the close Tuesday. The world's third-largest aluminum producer reported a 52% drop in third quarter profit as sharply lower aluminum prices and lower demand hurt results. AA shares are down 4% in pre-market trading.
American International Group Inc. (NYSE: AIG) -- in what could only be described as unbelievable nerve, days after the $85 billion federal bailout loan, AIG spent $440,000 on a posh California retreat for its executives that included spa treatments and much more. Lawmakers were enraged over the thousands of dollars AIG spent on executives even as the company was staving off bankruptcy. It seems it is morally bankrupt. AIG stock is recovering 5.4% this morning after the rate cut.
Societe Generale upgraded shares of Credit Suisse (NYSE: CS) to Buy from Sell as they believe the company is the European investment bank investors should own as sentiment gradually improves.
Societe Generale also raised Deutsche Bank (NYSE: DB) to Hold from Sell as they believe it has managed the credit crisis well and that the government bailout of the GSEs will improve investor sentiment.
Citigroup upgraded shares of Kimberly Clark (NYSE: KMB) to Buy from Hold as they expect the company to benefit from falling materials and energy prices. The firm raised their target to $71 from $60.
UST Inc (NYSE: UST) was lifted at Morgan Stanley to Equal Weight from Underweight.
Corning (NYSE: GLW) was upgraded to Overweight from Market Weight at Thomas Weisel.
Analyst downgrades:
Credit Suisse downgraded the U.S. Homebuilders sector to Market Weight from Overweight to reflect deteriorating traffic trends and higher valuations. In addition, the firm cut Toll Brothers (NYSE: TOL), Pulte Homes (NYSE: PHM), D.R. Horton (NYSE: DHI) and KB Home (NYSE: KBH) to Neutral from Outperform.
U.S. stock futures were higher Tuesday morning, pointing to a continuation of Monday's strong rally, albeit with more moderate gains, as the government takes over mortgage giants Fannie Mae and Freddie Mac. Investors will eye data on pending home sales and wholesale trade due at 10:00 a.m. today, and will also be interested in the OPEC meeting as oil resumed its decline.
Meanwhile, British natural gas producer BG Group PLC abandoned its hostile takeover bid for Origin Energy Ltd., Australia's second-largest power retailer, on Monday, after Origin announced a $7.9 billion coal seam liquefied natural gas joint venture with ConocoPhillips (NYSE: COP).
In what seems to be appropriate on a day housing data is on tap, Credit Suisse downgraded four U.S. homebuilders -- Toll Brothers (NYSE: TOL), Pulte Homes (NYSE: PHM), D.R. Horton (NYSE: DHI) and KB Home (NYSE: KBH) -- to Neutral from Outperform due to lower traffic and valuation. The broker also said home prices need to fall 9% further and credit availability must improve to spur sales and restore affordability.
Staying with analyst calls:
Procter & Gamble (NYSE: PG) was downgraded by Merrill Lynch to Neutral from Outperform, citing valuation.
Hewlett-Packard (NYSE: HPQ) was upgraded by Bernstein from Market Perform to Outperform.
Kimberly Clark (NYSE: KMB) was upgraded by Citigroup from Hold to Buy. The target prices was upped from $60 to $71.
eBay (NASDAQ: EBAY) was initiated by Stanford Research with Hold and $26 target price.
The Wall Street Journalreported that a panel of medical experts think Pfizer (NYSE: PFE)'sproposed osteoporosis drug should be restricted to women at high risk of fractures.
Procter & Gamble (NYSE: PG) reported its Q4 and full-year results on Tuesday. The numbers looked very good to me (save for one, which I'll get to). P&G was up over 3% on Tuesday. Granted, the Dow saw one heck of a rally yesterday, but even so, P&G deserved a bid just due to its blue-chip corporate performance.
Revenues for the quarter increased 10%, and adjusted earnings per diluted share jumped over 19% to $0.80. For the year, revenues increased 9% and adjusted earnings per diluted share rose 15% to $3.50. As I stated in my earnings preview from the other day, Wall Street was looking for adjusted earnings to be around $0.78 per share. So P&G beat by two pennies.
Of course, the earnings beat is nice, but cash flow is even nicer. In fact, management likes to evaluate itself by comparing its free cash flow to net earnings. P&G would like the so-called "free cash flow productivity" metric to equal at least 90%. Well, shareholders need not worry, since productivity in these terms was 96% for the quarter and 106% for the fiscal year. Free cash flow for the year expanded by 21%, and it was more than enough to power P&G's great dividend.
The company that brings you Ivory Soap, Procter & Gamble (NYSE: PG), is set to divulge its Q4 numbers on Tuesday. So, what should shareholders expect from this consumer-products behemoth?
Well, I don't think it's going to be much of a surprise. Data at Earnings.com suggest that analysts believe P&G will do $0.78 per share in terms of the bottom line. Management actually expects around that number, as well. A recent piece I wrote about P&G reiterating its guidance shows that between $0.76 and $.78 per share is the range being looked at. So, I think we'll see the top end of the range reported tomorrow. P&G has a solid recent history of slightly beating expectations. Perhaps there will be a beat, but it most likely won't be by more than a penny.
This will represent pretty decent performance in a market wracked by horrible inflationary pressures. Going back to Earnings.com, the previous year's bottom-line number was $0.67 per share, so P&G will be looking at good double-digit growth. The top line, by the way, should expand at least 8%. Volume data will also be important to look at so investors can get a handle on how successfully the company is cultivating price increases. P&G has a significant advantage over competitors since its line of products is so well-known and trusted. I mean, when it comes to things like Ivory Soap, many consumers will refuse to alter their brand loyalties even if they have to pay more at the pump. Yes, sales of generic products obviously do have a challenging impact, but as I found with Kraft's (NYSE: KFT) recent earnings report, brand equity is a selective advantage in the Darwinian landscape of supermarket shelves. It's also useful for protecting margins.
Rodman & Renshaw upgraded shares of Amgen (NASDAQ: AMGN) to Outperform from Market Perform following the positive top line results from the FREEDOM study. The firm established an $80 target. Jefferies upgraded shares to Buy from Hold following the positive top-line efficacy and safety results for Denosumab in PMO as they view it as a "big win." The firm raised their target to $71 from $47.
Best Buy (NYSE: BBY) was upgraded to Buy from Neutral at Banc of America.
Rowan Companies (NYSE: RDC) was lifted at JP Morgan to Neutral from Underweight.
Analyst downgrades:
Jesup & Lamont downgraded shares of Moog (NYSE: MOG.A) to Neutral from Buy on concerns of the company's high rate of R&D and its relative valuation. Keefe Bruyette downgraded shares of Federated Investors to Market Perform from Outperform following the company's lower than expected Q2 results and cut their target to $35.
Ryanair (NASDAQ: RYAAY) was cut to Hold from Buy at Citigroup.
Analyst initiations:
Morgan Joseph believes Amgen (NASDAQ: AMGN)'s positive FREEDOM trial results will have a profound and lasting impact on the company's growth but also on its scientific credibility. The firm initiated coverage with a Buy rating and $77 target.
Piper assumed Ctrip.com (NASDAQ: CTRP) with a Neutral rating and Epicor Software (NASDAQ: EPIC) with a Buy rating and $8 target.
Banc of America initiated Britannia Bulk (NYSE: DWT) with a Buy rating and $19 target.
"If you're going to stay invested, you should look to defensive sectors," explain Ron Rowland and Brandon Clay, who point to consumer staples as a top pick for the current market environment. .gif){kind=logo}
U.S. stock futures were lower Wednesday morning, indicating stocks may have a second day of declines. As money markets worldwide continue improving, attention has shifted to corporate earnings and concerns are growing how a global slowdown would slow them. 
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Procter & Gamble
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Waiting for the other shoe to drop: The looming credit crisis
Closing Bell: Dow down 7.7%; GE, YHOO, MS fall, PGI, MNT soar
Bet on T&A with J&J (JNJ)
