Will Cyclical Stocks Be the Next to Soar?

Tech led last week's rally; this week, cyclicals expected to post strong earnings

     

Last week’s market action was simply stunning, as wave after wave of better-than-anticipated corporate earnings lifted the Dow by over 300 points in the three days after Monday’s scary 140-point drop. At 12,506, the Dow is now at its highest level since June 2008, while the tech-heavy Nasdaq did even better last week, rising 2% versus 1.3% for the Dow and S&P 500. The Nasdaq was led by earnings reports from Intel (NASDAQ: INTC), Apple (NASDAQ: AAPL), F-5 Networks (NASDAQ: FFIV) and Qualcomm (NASDAQ: QCOM), among others. Are cyclical stocks next to rise?

2 Best Investments in a Weak-Dollar Scenario

The two best investments in a weak U.S. dollar environment are commodities — since they are universally priced in U.S. dollars — and multinational stocks, which reap windfall profits from being paid or priced in appreciating foreign currencies.

Let’s take stocks first. Last quarter’s stellar corporate earnings were fueled by stronger-than-expected sales, upbeat company guidance and a weak U.S. dollar, which boosts the earnings of many multinational companies. Since the average technology company is multinational in scope, they benefit from a weak dollar. Last week, we saw better-than-expected earnings from semiconductors like Intel, cloud computing like VMware (NYSE: VWM) and networking firms like F5 Networks.

Interestingly, the analyst community was expecting Apple’s operating margins to decline in the first quarter, but after Apple posted better-than-expected sales and earnings, the stock rose 7.1%.

Last week’s rally was mostly about tech stocks, but this week we may see a rise in cyclical stocks — such as BorgWarner Inc. (NYSE: BWA), Caterpillar (NYSE: CAT) and Cummins Inc. (NYSE: CM) are all expected to post strong earnings. Of the 137 S&P 500 companies that have reported first-quarter earnings so far, 75% have beaten forecasts, while just 14% have missed their projections. In addition, 69% beat their revenue forecasts, according to Thomson Reuters.

Among Dow stocks, General Electric (NYSE: GM) earned 31 cents per diluted share last quarter, almost double its 17-cent earnings of a year earlier. AT&T (NYSE: T) increased first-quarter profits 39%, while competitor Verizon Communications (NYSE: VZ) more than tripled its quarterly profits, rising from 16 cents in last year’s first quarter to 51 cents this year.

The other oasis in a weak U.S. dollar environment is commodities, so it is not surprising that gold is now over $1,500 per ounce and crude oil prices are over $112 per barrel, despite repeated reports of a glut of crude oil. So far in April, crude oil prices are up about 5% after rising 10% in March. Last week, I was in Houston, where I was told that the massive crude oil storage facility in Cushing, Okla., is essentially full, and until a new pipeline is completed, it will be hard to get Cushing’s oil to refineries.

On Wednesday, the Energy Information Administration (EIA) reported that crude oil inventories fell by 2.3 million barrels in the latest week — a big surprise, since analysts were expecting crude oil inventories to rise by 1.6 million barrels. The EIA also reported that gasoline stockpiles fell by 1.6 million barrels. If inventories continue to tighten, I expect oil prices to remain firm throughout the summer driving season.

 
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