Last week, the Dow Jones Industrial Average rose over 368 points, or 1.6%, to 22,773, its fourth consecutive week of gains. The NASDAQ Composite Index gained 1.5% to 6,590 – also a record high – while the S&P 500 index moved higher by 1.2% to 2,549. The gains were on the heels of a few economic reports: The Institute for Supply Management’s manufacturing index hit 60.8, its highest level since 2004; better-than-expected jobless claims; and strong durable goods orders. Friday’s weaker-than-expected payrolls report, however, was a negative, but could be explained away due to the hurricanes that hammered the country during September. Looking ahead to next week, September’s consumer-price-index data could provide more evidence of a not-too-hot, not-too-cold economy.
Realizing the goal of consistent 3% growth will be a challenge. A more immediate challenge, however, will be earnings reporting season, where expectations are modest, with the estimated gain in third-quarter profits for the S&P 500 companies now in the low single-digit percentage range. If recent history is a guide, the average will be exceeded. Given the market’s elevated valuations, such out-performance may be needed to sustain the latest rally. Global concerns also are in the forefront. These center on North Korea and its rising nuclear threat and destabilizing rhetoric also is periodically heard out of Iran and other international hot spots, all of which hold the potential to upset the Wall Street apple cart. Through it all, however, the bull market continues to persevere, with new record highs almost on a daily basis. How long and how far the bull will roam is uncertain, although the fundamentals remain sound, and that is always a good sign.
Harris Corp. (NYSE: HRS – $132.81) said it has received a $260 million order to develop an integrated tactical communications network as part of an undisclosed Asia-Pacific country’s modernization program. The order was received in the first quarter of fiscal 2018. The integrated network solution will include tactical radios, network planning, monitoring and routing software and other systems and technology from Harris and partnering companies. The solution will feature Harris’ Falcon III® AN/PRC-158 multi-channel manpack radios and vehicular amplifiers and provide voice and data services to tactical forces for line-of-sight and beyond-line-of-sight applications. “Harris is the incumbent tactical radio provider to the country, and this order is an important step in integrating Harris’ advanced products into their tactical communications network,” said Brendan O’Connell, president of the company’s Tactical Communications Systems business. “Our integrated solution will play a pivotal role in the customer’s continued modernization efforts.
I continue to like Harris for aggressive accounts. The shares, up over 45% in the past twelve months, also yield 1.73% at current levels, enhancing long-term total returns.
Applied Materials, Inc. (NASDAQ: AMAT – $52.08) announced a new share repurchase program authorizing up to an additional $3 billion in repurchases. As of the end of the company’s fiscal third quarter, about $995 million remained available under the prior authorization, as the company continues returning cash to shareholders. Applied also provided a new three-year financial outlook at its 2017 Analyst Day, saying it is targeting adjusted earnings per share of $5.08 for fiscal 2020 based on a $45 billion wafer fab equipment (WFE) market with increases in market share, gross margin, R&D investment and operating profit. The company also expects WFE spending in 2017 and 2018 combined to be $90 billion and display equipment spending to be $36 billion. The company’s services revenue is projected to reach $4.5 billion by 2020. The company said this will be driven by new technology inflections like artificial intelligence and “big data” that will increase demand for high-performance semiconductor processing and storage.
The company reported strong third quarter results in August and full-year earnings are expected at $3.20 ending October 2017 and $3.61 in fiscal 2018. The shares, at a new record high, can continue to be held for further capital gains.
More record highs for the major averages as Washington moves closer to a tax reform deal. The Russell 2000 and the S&PSmall Cap indexes were the star performers, climbing 2.7% and 3.3%, respectively, as tax reductions, if they ever come, will have a more favorable effect on smaller companies. While the Dow – up 0.25% – failed to post a record his week, the S&P 500 and the NASDAQ enjoyed new high ground. However, the Dow Jones Industrials finished the month of September with a respectable gain of 2.1%, led by large industrial names like Caterpillar and Boeing. JPMorgan Chase also chipped in for the month with a gain of 5%. For the past five trading sessions, all but utilities were in positive territory with energy, financials and technology in the lead. Transports were also sought after with a weekly advance of nearly 2.2%. And oil moved into bullish territory as West Texas sweet crude settled at its highest level since May at $51.67/bbl.
The GOP tax plan calls for reducing the number of individual tax rates to three: 12%, 25% and 35%; doubling the standard deduction; eliminating the estate tax, the alternative minimum tax and the deductions for state and local taxes. It would also cut the corporate tax rate from 35% to 20%. If this plan eventually passes the House and Senate, however, is still in question, but it appears to have the backing of the White House.
With the market’s price/earnings ratio above its five-year average, a solid third quarter earnings performance may well be needed to maintain the bullish momentum. Even if tax reform fails to get passed, the outlook for corporate America remains strong with estimates for upcoming earning’s growth for the S&P 500 holding at 4.2%. And 10% growth is possible for 2018, even under the current tax rules. Conclusion: The market is indeed extended. But in the absence of compelling reasons to sell, there could still be a path to higher prices and dividend increases will help spur decent total returns, as well.
Here is the answer to last week’s trivia question: The largest stock exchange in Canada is? Montreal Stock Exchange, NASDAQ Canada, Toronto Stock Exchange or Canadian Securities Exchange? Answer: The Toronto Stock Exchange, a division of TMX Group, and is the ninth largest in the world.
Today’s Trivia Question: Alphabet, Inc. (formerly Google) was originally incorporated in Menlo Park, CA on September 4, 1998. The company went public on August 19 of what year? 1999, 2002, 2004 or 2007.
Electronics manufacturer Jabil Circuit, Inc. (NYSE: JBL – $28.81) reported fourth quarter adjusted net revenue of $5.0 billion and fiscal year net revenue of $19.1 billion. For the fourth quarter, adjusted operating income was $191.5 million and earnings per share was $0.64 vs. $0.28 a year ago and three cents better than consensus. For fiscal year 2017, adjusted income was $667 million equal to earnings per share of $2.11 compared to fiscal 2016’s $1.55. Looking ahead, the company anticipates fiscal first quarter earnings to be in the range of $0.65 to $0.91 per share, and revenue to be $5.25 billion to $5.75 billion. Analysts, however, had projected $0.84 of per share earnings on $5.41 billion in revenue. The company plans to deliver full-year adjusted earnings per share of $2.60 in 2018 and $3.00 in 2019 remains on track. The Street has been forecasting $2.58 in 2018 and $2.83 per share for 2019. The St. Petersburg, Florida-based company is continuing its restructuring plans by reducing headcount, and looks to lower manufacturing overhead further by consolidating into lower-cost regions. If successful, the company aims to achieve $70 million to $90 million of annual expense removal by fiscal 2019 and share buybacks will also help provide decent returns to shareholders. Positions can be maintained for continued, albeit speculative, long-term growth.
The ALPS Sector Dividend Dogs ETF (NYSE: SDOG – $44.05) declared a third quarter distribution on September 20, 2017 in the amount of $0.36749 per share. Annualizing this payout, the fund distributes $1.47 per share, equal to a yield of 3.3% at current levels. The dividend is payable on September 27, 2017 to shareholders of record on September 22, 2017. The payout is slightly below last quarter’s dividend of $0.37915. I continue to like SDOG for conservative diversification for income-seeking investors. Including distributions, the ETF has provided a 52-week total return of 10.2%.
The Board of Directors of JPMorgan Chase & Co. (NYSE: JPM – $93.88) declared a quarterly dividend of $0.56 per share, a 12% increase from the prior quarterly dividend of $.50 per share. The new annualized rate for shareholders is now $2.24 and equal to 2.4% at current levels. The fourth quarter dividend – the second increase this year – is payable on October 31, 2017, to stockholders of record at the close of business on October 6, 2017. Shares of JPM can continue to be held in a well-diversified aggressive account for decent long-term total returns.
Electrical equipment, power grid and robotics company ABB, Ltd. (NYSE: ABB – $24.74) said it will acquire General Electric’s global electrification solutions business GE Industrial Solutions (GEIS) for $2.6 billion. GEIS, which posted revenue of $2.7 billion in 2016, will be integrated into ABB’s Electrification Products division, which manufactures and installs components for low and medium voltage electrical systems. The acquisition expands ABB’s access to the North American market through deep customer relationships, large installed base and extensive distribution networks. The combination has the potential to save ABB around $200 million a year in cost synergies within five years. As part of the agreement, the companies will establish a long-term, strategic supply relationship for GEIS products and ABB products that GE sources today. ABB believes the deal will be accretive to earnings in year one. The Zurich-based company also said it will put the previously announced share buyback program on hold because of the transaction, which it expects to close in the first half of 2018.
Long-term appreciation potential for shares of ABB is decent, given the significant earnings growth that is likely in the coming years and the 3.1% dividend yield should enhance the total return for investors willing to wait this one out.
Equities were little changed this past week and ended mostly on a mixed note with lower than average volume. The Dow Industrials moved up 81 points or about 0.4%, but the S&P 500 was virtually flat and the NASDAQ retreated 0.33%. Small cap stocks were the clear winners with the Russell 2000 and the S&P SmallCap Indexes higher by 1.3% and 1.6%, respectively. The major market sectors also traded in opposite directions with half gaining ground while the others ended in the red. Telecom stocks were the market leaders this past week with a nearly 4% pop on average followed by energy as crude prices topped $50/bbl. Defensive plays were on the losing side, especially utilities that gave back 2.7%. Transportation stocks, however, gained some ground as airlines slowly recovered from recent weather-related events.
On Wednesday, the Federal Reserve kept short-term interest rates alone with the prospect of one more increase by the end of the year. Low inflation and a weakening of GDP forecasts played key roles in the decision. The central bank, however, confirmed its promise to shrink its $4.5 trillion balance sheet by buying back bonds issued during the financial crisis. In Washington, wrangling over healthcare and tax reform remain in the headlines as well as infrastructure spending, but still no resolutions. And North Korea and the White House continued their war of words as more missile strikes appear to be looming. Despite this wild card, market fundamentals remain supportive and additional records could well be set. However, the easy money has been made and the road to higher stock prices may be bumpy as valuations continue to climb.
Next up for investors will be third-quarter earnings season, which will kick into gear shortly. Expectations are for modest gains, as the bulls strive to sustain the high earning’s multiples. Recent profit performances have been strong, which has helped extend this historic market run. On Wednesday, we will get fourth quarter results from aggressive choice Jabil Circuit with analyst estimates of $0.62 per share, well up from last year’s $0.28.
Here is the answer to last week’s trivia question: Weber-Stephen Products, maker of the iconic Weber-brand barbecue grills, is? Owned by BDT Capital Partners; Family Owned; a division of Whirlpool Corp.; Publicly Traded on the NASDAQ under the symbol WEBR. Answer: Founded in 1893 and family owned until 2010, Weber-Stephen is now a part of BDT Capital Partners.
Today’s Trivia Question: The largest stock exchange in Canada is? Montreal Stock Exchange, NASDAQ Canada, Toronto Stock Exchange or Canadian Securities Exchange.
Intel Corp. (NASDAQ: INTC – $37.26) announced a collaboration with Alphabet’s Waymo self-driving unit, saying it had worked with the company during the design of its computer platform to allow autonomous cars to process information in real-time. The world’s largest computer chipmaker said its Intel-based technologies for sensor processing, general compute and connectivity were used in the Chrysler Pacifica hybrid minivans Waymo has used since 2015 to test its self-driving system. Intel, which announced the $15 billion acquisition of autonomous vision company Mobileye in March, is pushing to expand in self-driving vehicles, a fast-growing industry, across a variety of business models. A collaboration with Waymo, considered by many industry experts to be at the forefront of autonomous technology, adds to its portfolio.
The company also said that to drive artificial intelligence (AI) innovation, it has invested in startups like Mighty AI, Data Robot and Lumiata through its Intel Capital portfolio. Intel has committed more than $1 billion in companies that are helping to advance AI spanning technology, research and development and partnerships with business, government, academia and community groups. Intel believes such investments will drive innovation which will advance research on cancer, Parkinson’s disease and brain disorders; helping to find missing children; and furthering scientific efforts in climate change, space exploration and oceanic research.
Shares of INTC remain a solid choice for conservative income investors willing to participate in the semiconductor industry. Intel’s size, diversified portfolio, wide global footprint and strong leadership give it an advantage on the competition. A solid dividend yield of nearly 3% provides for above-average total return potential and increases to the payout are highly likely and well covered by strong cash flow.