U.S. Stocks Advance on Earnings, BHP's Bid for Potash Corp.

U.S. stocks rose, sending the Standard & Poor’s 500 Index to its biggest gain in two weeks, following higher-than-estimated earnings and BHP Billiton Ltd’s $39 billion bid for Potash Corp. of Saskatchewan Inc.

Wal-Mart Stores Inc. climbed 1.2 percent and Home Depot Inc. jumped 3.4 percent as both retailers raised their full-year earnings forecasts. Potash led a rally in fertilizer shares, surging 28 percent, after rejecting the unsolicited takeover offer from BHP. Johnson & Johnson gained 2.1 percent after Warren Buffett’s Berkshire Hathaway Inc. increased its stake in the company.

The S&P 500 climbed 1.2 percent to 1,092.54 at 4 p.m. in New York. The Dow Jones Industrial Average increased 103.84 points, or 1 percent, to 10,405.85.

“Stocks look cheap,” said Jeff Saut, the chief investment strategist at Raymond James & Associates, which manages $235 billion in St. Petersburg, Florida. “Earnings look really good. The consumer is in better shape than the headlines would suggest. Corporations are flush with cash and it’s cheaper to buy assets than to build them. There’s not a whole lot of downside for stocks. We may challenge the highs for the year.”

All 10 industries in the S&P 500 rallied more than 0.7 percent today. The stock index fell 11 percent through yesterday since climbing to a 2010 high of 1,217.28 on April 23. The retreat dragged the gauge’s valuation to less than 13 times forecast profit of its companies, near an almost 16-month low of 12.5 on July 2.

Economic Data

Stocks gained today after industrial production in the U.S. rose 1 percent in July, double the median economist forecast. Wholesale costs in the U.S. increased in July for the first time in four months, signaling slower growth is not resulting in deflation. The producer price index increased 0.2 percent and a measure excluding food and energy costs climbed 0.3 percent, more than projected and the biggest gain since January.

Government data also showed a smaller-than-estimated increase in housing starts and a slump in building permits to the lowest level in more than a year. Work began on 546,000 houses at an annual rate last month, fewer than the 560,000 median estimate of economists surveyed by Bloomberg News and up 1.7 percent from June. Building permits dropped 3.1 percent.

“There will be a continuing bull market,” Templeton Asset Management Ltd.’s Mark Mobius said in a Bloomberg Television interview. The global economic recovery is “well in place” and may accelerate as growth in developing nations counters a slowing pickup in Japan and the U.S., he said.

Outside U.S.

Wal-Mart rose 1.2 percent to $51.02. The world’s largest retailer reported a faster profit gain than analysts estimated as growth abroad helped make up for sales declines in the U.S. The company also said earnings will be as much as $4.05 a share this year, compared with an earlier top range of $4.

Home Depot gained 3.4 percent to $28.31. The biggest home- improvement retailer posted 2.1 percent more second-quarter earnings than analysts projected.

Agilent Technologies Inc. had the largest gain in the S&P 500, rising 7.8 percent to $29.28. The world’s biggest maker of scientific-testing equipment boosted its full-year forecast after third-quarter earnings exceeded analysts’ predictions.

Profit topped estimates at 75 percent of the 444 companies in the S&P 500 that reported since July 12, according to data compiled by Bloomberg. Earnings for S&P 500 companies may rise 36 percent in 2010 and 16 percent in 2011, the largest two-year advance since the period ended in 1995, according to the average analyst projections compiled by Bloomberg.

‘Substantially Undervalues’

A gauge of raw-materials producers had the biggest gain in the S&P 500 among 10 industries, rising 2.3 percent. Potash Corp., the world’s largest fertilizer producer, rejected the takeover proposal from BHP, saying it was “grossly inadequate,” and adopted a shareholder rights plan as a defense.

Potash Corp. jumped 28 percent to $143.17. Fertilizer stocks have more room to rally on better-than-expected near-term demand and strong price momentum, Goldman Sachs Group Inc. analyst Robert Koort said in a note today. The firm also raised CF Industries Holdings Inc., the world’s second-largest producer of nitrogen fertilizer, to “conviction buy” from “neutral”.

Mosaic Co., North America’s second-largest fertilizer producer, gained 8.7 percent to $55.60. CF Industries climbed 4.7 percent to $88.53.

$6 Billion Deal

Pactiv Corp. jumped 5.4 percent to $32.58. The maker of Hefty trash bags agreed to be bought by Reynolds Group Holdings Ltd. in a transaction valued at about $6 billion.

Global takeovers have totaled $1.22 trillion so far this year, up 17 percent from the same time last year, according to data compiled by Bloomberg.

“BHP’s bid for Potash signals that we may be at beginning of a big wave of mergers and acquisitions, which can help support the market,” said Tom Wirth, senior investment officer for Chemung Canal Trust Co., which manages $1.6 billion in Elmira, New York. “It’s a matter of confidence and investors wanting to put their money back into stocks again.”

Johnson & Johnson gained 2.1 percent to $59.22. Buffett’s Berkshire Hathaway repurchased shares sold in the financial crisis to fund investments in firms including Goldman Sachs Group Inc. Berkshire increased its stake by 73 percent to 41.3 million shares from 23.9 million on March 31, according to a regulatory filing yesterday listing the company’s U.S. equity holdings at the end of the second quarter.

Relative Value

Investors should favor stocks over bonds, according to a gauge based on the relative value of the two asset classes which correctly signaled the rally in equities that began in March last year.

The gap between the earnings yield of the S&P 500 and the 10-year Treasury yield, adjusted for historical volatility, was minus 0.32 in July compared with positive 1.26 in May, according to Shore Capital. A negative reading is bullish for stocks, while a positive one suggests bonds are more attractive.

“Equities are no longer overvalued, as they were at the start of the year,” Gerard Lane, a London-based strategist at Shore Capital, said in an interview. “Given the rapid decline in government bond yields, based on trend earnings this signal is suggesting a switch from bonds to equities.”

The Chicago Board Options Exchange Volatility Index, derived from prices investors pay to protect against losses in the S&P 500, fell 6.8 percent, the most since July 20, to 24.33. The VIX is down from this year’s closing high of 45.79 on May 20.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net.

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