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

Google Scares the Bears Away -- Now What?

By David Brown, Chief Market Strategist, Sabrient Systems

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 in the market’s outlook. One of the last major Q2 earnings announcements came from Lowe’s (LOW) today when the company not only announced weaker earnings but reduced their forward guidance as well. Nor did today's economic news help.  The Empire State Manufacturing Index revealed 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 undoubtedly 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 that valuations are better than they’ve been some time. Indeed, the forward P/E figure that we mentioned last week, 6.3, is now 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. In the past week it increased an additional 30%.  That was caused in part by the fall in stock prices, but also by the growth in upward revisions in next quarter’s earnings estimates.  Those 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 drop. 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% while 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, down -3.1% ; 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 at the market, 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 for your consideration:

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

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC.
Leaders in Investment Research
http://www.sabrient.com
Follow us on Twitter: http://Twitter.com/ScottMartindale

Full disclosure: The author personally holds KRO, and the Sabrient Investor’s Hedge and Earnings Busters virtual portfolios hold long positions in KRO, GGAL, and KEM.

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.