|Written by Rob Goldman
This week, we highlight an interesting investment category that could literally pay big dividends and a fast-moving sector with a great GARP/value pick. Speaking of picks, our profiled Guide stocks for the past 3 weeks are up an average of 14%!
DON’T FALL FOR THIS TRAP
Things aren’t what they seem.
Friday’s jobs report was downright terrible, but the sky is not falling. The economy may be improving in certain circles but overall, growth isn’t exactly stellar. The poor jobs report might mean we get a reprieve on a rate hike until after the election. However, it could result in more frequent and sharper increases.
When I lift up the hood on the jobs report, key characteristics point to stagnant job growth period, which keeps stocks in check; either down or in a narrow range. Here’s why.
Economists were forecasting 150,000 new jobs. Schmucks. I guess they forgot about the 35,000 striking Verizon (NYSE—VZ) workers. It made the number look worse than it actually is. We have also reached a trough in the unemployment rate. It needs time to settle. The rotten retail market is not helping this cause. Moreover, with summer season upon us we may find summer workers (i.e., students) may find difficulty obtaining work.
Let’s not forget what I call the accelerator/capability gap. A lot of openings in tech and high-end (but not management) jobs have not been filled for months as our ever-increasing tech progression has outpaced the capabilities of prospective workers in high tech and related industries. So, no workers to fill those jobs, while the rest of the unemployed are stuck between adding proficiency for new work, or waiting for something in their sweet spot.
For summer, expect low job growth and little stock action.
The Stock Market Today
As Yogi Berra would say, “it’s déjà vu all over again.” The Russell 2000 Index was again the star index last week and there is no indication that aside from some potholes, the road is pretty clear ahead in the near term. I chuckle when I hear market strategists predicting what it will take to get the DJIA to the 20,000 mark, which would be a more than 10% gain. The hell with that. That is an all-time high and then some and would be hard to reach. A 10% gain in the small cap stock index still doesn’t even take it to its 52 week high!
Stock with small, you will have a ball. To be even more specific, semis are in the early part of what feels and smells like one of their patented runs. We kinda felt this way when we published the most recent edition of The 30-30 Report. Two of the three profiled stocks 3 weeks ago are in the semi space and they are up an average of 18% very quickly. Many are long on cash, enjoying increasing margins and still trade at attractive P/E multiples.
It looks like our call on small bank stocks in March may have been premature. Although the lone profile, Bank of California (NASDAQ—BANC—$19.98) is up 25%, if interest rates don’t rise anytime soon, this segment could languish for a few months.
Great info, insights, and hard-hitting stories make up this week’s Say What? feature...
The Wall Street Journal
I thought this has escalated quickly.
I will let you be the judge of that.
No irony that a company named Sprint is going broke “slowly”? Stock has sucked for years.
The New York Post
Ugly...but maybe we should take an alternative posture.
I have been getting more and more info from abroad than I care to divulge.
AAII Sentiment Survey (figures rounded)
I wish I could speak with the respondents to these polls/surveys today. My guess is that the news found in Friday’s jobs report would modify these original responses. For both groups to go markedly bullish is a little too much if you ask me. But, then again, I am cautiously optimistic with a touch of Debbie Downer for the near term. It will be interesting to see what happens with big dividend payers over the coming weeks/months. In a rising interest rate environment, big dividend paying stocks tend to experience selling as investors seek a guaranteed return with less principal risk inherent in bonds than equities. If the rate hikes are delayed, perhaps the fact that annual dividend yields for Russell 2000 stocks are up an average of 14% from a year ago, make them attractive today.
Big Gains Ahead For This Semi Stock
Our last three stock profiles are up, one more than 20%. Can we strike gold a 4th time? We think so.
Tower Semiconductor Ltd. (NASDAQ— TSEM—$13.05—NR) is a global specialty foundry leader. TowerJazz manufactures integrated circuits, offering a broad range of customizable process technologies including: SiGe, BiCMOS, mixed-signal/CMOS, RF CMOS, CMOS image sensor, integrated power management (BCD and 700V), and MEMS. Semi stocks are on the rise and TSEM has joined the party in recent weeks after crushing 1Q16 EPS estimates on a non-GAAP basis.
Wall Street consensus currently forecasts a 28% jump in revenue to the $1.2 billion mark, with EPS of $1.98, which is a big drop in EPS from last year. However, at current levels, the stock trades under 8x this year’s EPS. This is not so unusual during trough periods and during industry spikes, the stock can trade as much as 12x EPS.
We target $17, which is a 23% rise and matches the 52-week high. With the recent April book-to-bill posting a 22% rise over March, the wind is at TSEM’s back. Plus, when the stock busts through the 200 DMA of $13.09, it could give the stock a short term boost.
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