John Dessauer Investments, Inc.

Transcription

1 John Dessauer Investments, Inc. John Dessauer s market review and update as of Wednesday May 9, Voters in France have chosen the first socialist president in 17 years. Their message is clear. They do not like austerity. They want economic growth. That is sound economic thinking. Growth is the only long term solution for France s enormous government debts and high unemployment. However, the new French President, like many other politicians, has been long on promising attractive goals and short on providing details to achieve the goals. Stocks went down on the news from Europe. That looks like a knee-jerk reaction. France has limited options because of the country s enormous government debts. The new President will have to satisfy the bond markets or else France will face rising interest rates and difficulty borrowing. France has changed Presidents, but that does not change the underlying economic realities. Do not panic. Do not follow the selling crowd. Remember Alan Greenspan? He was chairman of the U.S. Federal Reserve from 1987 to One of his more famous comments was about stocks being overvalued in the late 1990s. On December 5, 1996 in a speech for the American Enterprise Institute he said: Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset

2 values, which become subject to unexpected and prolonged contractions as they have in Japan over the last decade? Investors around the world focused on two words, irrational exuberance. Stocks immediately went down after that speech, but they later when on to higher highs before finally collapsing, in what we now know as the dot-com bubble. Alan Greenspan s 1996 stock market analysis was a bit early but turned out to be correct. Greenspan has retired from the Federal Reserve, but is still actively following economies and markets. Earlier this month at a Bloomberg Washington Summit he said: Stocks are very cheap. Being right in 1996 does not guarantee that he is right today. However, here is a man who has studied financial trends for decades and is an expert on markets. At the least, his remarks must be taken seriously. Greenspan s optimism is based on: a very low price-earnings ratio. The S&P 500 stock index trades at 14.3 times reported earnings from its companies, or 13% below the average since Another stock market valuation method is to compare the earnings yield on stocks to the yield on Treasury securities. This valuation method shows stocks to be the cheapest ever, relative to government debt. That is partly due to the very low interest rates on government debt, but also because corporate profits have been growing at double digit rates the last couple of years. Investors may be worried, but Greenspan thinks corporate profits will keep growing. He said: There is no place for earnings to grow except into stock prices. Corporate profits have been growing in spite of high economic uncertainty, a European government debt crisis and slowing growth in China. We hope for a major change in policy direction in Washington, a sound and sensible resolution to the looming

3 massive fiscal cliff and a credible government deficit reduction plan. I don t know if he was asked about any of these issues, but I feel certain that if asked, he would say that the worst case is unlikely and that anything less will be positive for corporate profits and stock prices. After the financial crisis and recession we have been through, I think that will turn out to be the case. Our best strategy is to stay invested in financially strong companies BP, NYSE, BP, $40.89, reported a 13.6% drop in first quarter profits. Revenue was up 9.3%, but downstream businesses, including refining and petrochemicals, were soft. Morningstar s analysts say this is: simply short term noise and does not reflect the company s long-term recovery story. BP is still working to recover from the Gulf oil spill. Asset sales continue. There are negotiations to settle claims arising from the spill. However, government imposed penalties and fines remain an open issue. The stock is cheap. Standard & Poor s has a $8.04 per ADR earnings estimate for this year. At $40.89 the stock trades at 5.1 times that estimate. The long-term average P/E is 10. In other words, BP s stock price would have to double to simply get back to a normal P/E. The dividend has been raised to $1.92 a year, for a yield of 4.7%. I expect the dividend will be raised again. While not without risk, I rate BP a buy. Cheesecake Factory, NASDAQ, CAKE, $32.20, reported first quarter profits that were better than analysts expected. Earnings per share were $0.37, a penny better than expected and 9% better than the opening quarter of Sales at $435.8 million were 4% better than 2011, but slightly below analysts expectations. Same-store sales rose 2.6% at Cheesecake Factory restaurants, and 0.3% at Grand Lux Café restaurants. Cheesecake Factory bought back almost 1.4 million shares at a cost of $40.9 million

4 during the quarter. For this quarter management says earnings will be $0.47-$0.49 a share. Analysts expect the actual results to be at the high end of the range. For all of 2012 the range of estimates is $1.83-$1.90 a share. The long-term average P/E is 18 indicating a stock price target of $33-$34. Argus Research has a stock price target of $36. My advice is to buy Cheesecake Factory below $30. Pfizer, NYSE, PFE, $22.50, is very busy developing new drugs, selling assets and streamlining the company. Recently, Pfizer announced the sale of its infant nutrition business to Nestle for $11.9 billion. Management is in the process of deciding how best to spin off the company s animal health unit. A combination of public offering and share swap looks like the best bet. In the first quarter, excluding items, Pfizer reported earnings of $0.58 a share, $0.02 better than analysts expected. For the full year 2012 management s guidance is $2.14-$2.24 a share. Morningstar, among others, expects the actual results to beat the guidance. In the pipeline there are two drugs - one a blood thinner and another for arthritis - which look like potential blockbusters. The long term average P/E is 13. Assuming 2012 earnings of $2.25 indicates a twelve month stock price target of $30. Pfizer has plenty of excess cash and is likely to use it to buy back shares. That will enhance per share earnings. The dividend has been raised. The annual rate is now $0.88, for a yield of 3.9%. Pfizer is a buy. Quote of the day: "When politicians say, "spread the wealth," translate that as "concentrate the power," because that is the only way they can spread the wealth. And once they get the power concentrated, they can do anything else they want to, as people have discovered -- often to their horror -- in countries around the world." Thomas Sowell

5 I will have the next market review and up date for you one week from today, on Wednesday May 16, All the best, John Dessauer May 2012