"Modestly positive" -- that's the prognosis from Standard & Poor's for the stock market for the balance of the year, says Joseph Lisanti, editor of S&P newsletter The Outlook. "We had a little bit of a sell-off earlier this month, but stocks seem to be recovering nicely," Lisanti continues. S&P expects its Standard & Poor's 500-stock index to climb to 1270 by yearend (it closed Aug. 12 at 1230).
Lisanti notes that market performance in July was the best for that month since 1997, and better than two-thirds of the comparable months since 1928. However, S&P currently recommends that investors overweight only two market sectors in their portfolios: consumer-discretionary and information-technology.
As general advice to investors now, Lisanti suggests paying attention to dividend-paying stocks, as more and more companies increase their payouts. He points out that "since 1926, more than 41% of the total return of the S&P 500 has been from dividends reinvested."
These were among the comments Lisanti made in an investing chat presented Aug. 9 by BusinessWeek Online and Standard & Poor's on America Online, in response to questions from the audience and from Jack Dierdorff of BW Online. Edited excerpts from this chat follow. AOL subscribers can find a full transcript at aol.businessweek.com/chats by clicking on "Recent Chat Transcripts."
(Joseph Lisanti has no ownership interest in or affiliation with any of the companies under discussion in this chat except as noted.)
Q: Joe, how does the market weather look to S&P? Do you see any direction?
A:Well, we believe the market is looking fairly good. July was the best July since 1997, and better than two-thirds of all Julys since 1928. We had a little bit of a selloff earlier this month, but stocks seem to be recovering nicely. We are still optimistic that the year will end on a modestly positive note, with the S&P 500 climbing to 1270.
Q: How about consumer stocks? What's your opinion on Anheuser-Busch (BUD )?
A:We currently rank BUD 3 STARS (hold). We remain concerned by weak domestic sales and sliding market share. But we do expect sequential improvement in retail sales because of new marketing strategies. We see market-share declines leveling off in the third quarter.
Q: How does Merck (MRK ) look to you now?
A:We have a 3-STARS (hold) opinion on Merck. In the second quarter, Merck's operating earnings per share dropped 22%, and sales fell 9%. The company did benefit from stringent cost controls and higher income from a joint venture with Schering-Plough (SGP ).
We are, of course, concerned by the 4,100 Vioxx suits that have been filed, but Merck feels its $675 million reserve is appropriate for now. Given the risks, we would not add to positions in Merck.
Q: Do you think health-care stocks will do well for the rest of the year? If so, which do you recommend?
A:We currently advise a market-weight position in health care. Among the industries in health care, we particularly like managed care, including Aetna (AET ) and WellPoint (WLP ), both of which are ranked 5 STARS (strong buy).
In the health-care services area, we like Covance (CVD ), which is a contract research organization. It's also ranked 5-STARS (strong buy). Among hospitals, we like Community Health Systems (CYH ) and Triad Hospitals (TRI ) -- both of them are also ranked 5 STARS.
Q: If health care is only market-weight, what sector seems ready to take off?
A:Right now, we have an overweight recommendation on only two of the sectors in the S&P 500 -- consumer-discretionary and information-technology. We believe that consumer purchases will remain the driving force in the economy. We particularly like computer and electronics retailing, and homebuilding.
We believe information technology should rebound after underperforming for several years. We particularly like home-entertainment software and application software.
Q: What's the opinion on Bank of America (BAC )? It has been hit hard recently -- what will make it go back up?
A:We still have a strong buy recommendation on Bank of America. We think that the stock may have been hit because of a narrowing spread between borrowing costs and lending rates. In addition, the company faced a difficult trading environment. These factors were partly offset by strong credit-card and sService-fee results. We see solid fundamentals and continue to believe Bank of America will achieve strong growth when market conditions improve.
Q: Speaking of the tech sector, what are your thoughts on Intel (INTC )?
A:We currently rank Intel 3 STARS (hold). Although the shares are trading below historical norms on the basis of p-e and price-to-sales ratios, we believe the discount is warranted, given our expectation of a more moderate pace of semiconductor industry growth in 2005.
Q: And also in tech -- what is your opinion of Qualcomm (QCOM )?
A:First a disclosure: I own shares of QCOM. Our analyst has a 4-STARS (buy) recommendation on the shares. We think the company may have hit bottom in the June quarter, with sales 1% lower quarter-over-quarter as chipset shipments declined.
Despite some delays in the third-generation rollout of the latest version of the company's proprietary-code division multiple-access technology, we believe QCOM will benefit over time. Our 12-month target price is $45.
Q: What is your latest addition to the 5-STAR (strong-buy) list?
A:Our most recent addition to the strong buy list is Hartford Financial Services Group (HIG ). We think the strong performance this insurer had in the second quarter has positioned it for continued earnings gains in 2005 and 2006. Another recent 5-STARS addition is PETsMART (PETM ). This pet-supply retailer's stock has declined since early July, and its valuation now looks more attractive to us.
Q: Do you see Sirius Satellite Radio (SIRI ) merging with its rival XM Satellite Radio (XMSR ) in the future?
A:We rank both Sirius and XM as 3 STARS (hold). We have no knowledge of any merger talks between the two rivals, but rank each satellite-radio provider 3 STARS because the companies are years away from profitability.
Q: In light of the troubles at United (UALAQ ), Delta Air Lines (DAL ), and other airlines, will other stocks such as Boeing (BA ) suffer?
A:Airlines certainly have had their problems. But Boeing has seen a 20% rebound in jetliner sales. We believe the new CEO, Jim McNerney, will be able to transform Boeing's mature jetliner and military-hardware products into platforms that can post higher-margin recurring earnings streams from services. Even so, we think Boeing's current prospects are reflected in the share price.
Q: You're bullish on consumer spending -- thoughts on Home Depot (HD )?
A:We currently have a 4-STARS (buy) recommendation on the shares of Home Depot. Last month, the company said it plans to acquire nationally held company National Waterworks Holdings, the country's leading distributor of water and waste-water transmission equipment.
Home Depot said it is paying less than one times sales, which would mean a total cost of under $1.5 billion. The proposed deal, subject to needed approvals, is expected to add slightly to earnings. We see it having little effect on Home Depot's sales and earnings.
We see earnings in fiscal 2006 (ending January) of $2.60 per share, rising to $2.95 in fiscal 2007. We see margins widening slightly, benefiting from a great proportion of private-label brands and upscale merchandise in the sales mix. We believe the company continues to benefit from strong consumer interest in home makeovers.
Q: Outlook on Tyson Foods (TSN )?
A:Tyson Foods is ranked 4 STARS (buy). We believe the company will benefit from strengthening international demand for meat. We expect international bans on U.S. beef to be lifted by the middle of fiscal 2006 (ending September).
The company continues to focus its strategy on expanding its more profitable value-added product offerings. We expect these products to exceed 40% of sales in fiscal 2006. Our 12-month target price on the shares is $21.
Q: Over into industrials -- what about Alcoa (AA )?
A:We have a 4-STARS (buy) opinion on the shares of Alcoa. Even though we have cut our 2005 earnings estimate to $1.80 from $1.90 because of our belief that lower prices for aluminum and rising raw material costs will offset cost-cutting efforts, we are keeping our $2.31-per-share earnings estimate for 2006 because we expect a rebound in aluminum prices and some moderation of raw material costs.
In addition, we do expect Alcoa to post higher sales next year. Our 12-month target price remains $33.
Q: Do you think everyone should have some gold now?
A:S&P does not factor gold into its asset-allocation model. So I can't comment on our opinion on gold as an investment. We do, however, follow gold-mining stocks. And we currently have buy recommendations (4 STARS) on both Barrick Gold (ABX ) and Newmont Mining (NEM ).
While the price of gold could remain under downward pressure from the current strength in the U.S. dollar, we believe that selected gold stocks are attractive because they have discounted the weakness in the gold price.
Q: So what is the S&P allocation model currently?
A:Currently, we recommend 50% in U.S. equities, 15% in foreign stocks, 20% in short- to intermediate-term bonds, and 15% in cash.
Q: Any final words of wisdom for investors now, Joe?
A:We think investors should continue to pay attention to dividends -- and more and more companies are increasing them. Few investors realize that since 1926 more than 41% of the total return of the S&P 500 has been from dividends reinvested.
Edited by Jack Dierdorff