It’s Nice to Float on the Autumn Air

by Richard Band | October 5, 2012 9:54 am

What a pretty bubble this is getting to be!  Earnings growth has stalled, August factory orders plunged[1] at the fastest rate in three years, Spain may have to ask for a mega-bailout any day now, China’s industrial machine is wheezing—but the U.S. stock market just keeps forging ahead.

The S&P 500 index tacked on 10 points Thursday[2], for its second-highest close since December 2007.  Gold came along for the ride, with the active December contract up $16.70 an ounce to settle at $1,796.50.

Fireman Ben Bernanke is pumping liquidity (newly created money) into the financial system like crazy.  So investors are inclined to believe the sky’s the limit for risk assets, at least for now.

And who are we to disagree?  Any rational person could have seen that the stock mania of the 1990s had become vastly overextended by 1997 or even sooner.  (Alan Greenspan complained of “irrational exuberance” in December 1996!)  However, the frenzy continued through 1998, 1999 and early 2000, reaching ever greater heights of madness.

In fact, the advance stopped only when prices had risen far enough to ensure that virtually everyone playing the game would lose their shirts in the subsequent collapse.

Fortunately, things haven’t gotten quite so far out of hand this time, not yet anyway.  As a result, it’s still possible to find a few stocks that offer reasonable prospects of a double-digit return in the year ahead.  As long as that’s the case,  I’ll continue to recommend buying — sparingly and selectively.

Intel (NASDAQ:INTC[3]) heads the list, with its rich 4% dividend yield.  On Wednesday, an analyst at Stifel Nicolaus[4] backed my contention (see Tuesday’s blog) that INTC will eventually gain a significant foothold in mobile computing.

From today’s level, I project that the the world’s largest semiconductor maker will produce a total return of 20% or more in the next 12 months.

In our main model portfolio, Occidental Petroleum (NYSE:OXY[5]) looks cheap at less than 12X forward earnings and a 2.5% yield.  OXY, an extremely disciplined capital allocator, has more than doubled its dividend in the past five years.

From here, I figure the stock will generate a total return of 20%-30% in the year ahead.  Note, however, that OXY’s share price tends to bounce around a lot more than INTC does.  Keep this volatility in mind when you decide how many dollars to allocate to OXY.

P.S.  Predictably, Thursday’s stock rally triggered a drop in safe-haven Treasury prices (T-bond yields rose).  We’ll again buy iShares Barclays 20+ Year Treasury Bond Fund (NYSE:TLT[6]) as a hedge for our stock holdings on a pullback to $121 or less.  See p. 4 of the October newsletter for more.

Endnotes:
  1. August factory orders plunged: http://online.wsj.com/article/SB10000872396390443768804578036161601971252.html
  2. Thursday: http://investorplace.com/2012/10/thursdays-ip-market-recap-rf-zion-infa-aci-anr-thc-unh/
  3. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  4. analyst at Stifel Nicolaus: http://blogs.barrons.com/techtraderdaily/2012/10/03/intels-process-lead-will-make-strides-in-mobile-says-stifel/
  5. OXY: http://studio-5.financialcontent.com/investplace/quote?Symbol=OXY
  6. TLT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TLT

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