Credit: Shutterstock photoThe market appeared to be bouncing back early in the day, even as we were greeted with news that the Japanese Yen is at the strongest level versus dollar since World War II. Unfortunately the early buying gave way to more profit-taking as the averages closed near the lows of the day. It appears there is more work to be done in the indices before things can stabilize and volatility isn't a daily market focus for investors. In my opinion, valuations in some areas (cyclical, industrial, and momentum names) are not factoring in enough of an economic slowdown.
Perhaps the biggest story in the market today was the dive in Hewlett-Packard ( HPQ ) shares (down 20%). Ironically, fellow PC maker Dell ( DELL ) shares closed slightly higher, even as the PC sector is clearly a tough business to be in (H-P is spinning off its struggling PC business ). Anyone who has been in the markets for a while probably remembers the head-scratching move the company made years ago to acquire low-end PC maker Compaq. Consolidation almost never makes a good enough reason for an acquisition, regardless of the "cost synergies" proclaimed by management. Who knows, maybe H-P will rename the spin-off Compaq for old times' sake!
Meanwhile, shares of Intuit ( INTU ) gained 8% following the company's earnings results and announcement of its first ever dividend . Similar to the excitement over Cisco ( CSCO ) debuting their dividend recently, the amount of the payout (around 1.25%) isn't nearly enticing enough for investors seeking income.
How Much "Value" is There in Beaten-up Names?
The business media is once again rushing to interrupt their regularly scheduled evening programing with special coverage of the stock market's turmoil. There's just something magical about ratings when the you-know-what hits the fan, isn't there? Funny enough, many of the market pundits dropping by with sound bytes are some of the same "experts" that were giving out some top notch advice about finding "value" in the market even as trouble was obviously lurking. Let's look at two specific "value" stocks we continue to hear about in the mainstream business media.
Here's what I wrote just two days ago regarding Hewlett Packard in our newsletter:
"In the tech space, we see Hewlett-Packard ( HPQ ) and Dell ( DELL ) trying to ride out the Apple innovation storm, and at some point will need to identify new areas of growth. Get ready for numerous articles about the hidden 'value' of what those shares could be worth, as analysts love to pen those types of speculative pieces. I guarantee that any plan for these companies will include cost-cutting initiatives, but at the end of the day, they will be hard-pressed to point out where the clear growth drivers will come from. If it's not in-house innovation, then acquisitions must be done and done right (which is a very, very difficult task)."
Now just two days later, we have the announcement from HPQ about shutting down divisions (including the much-promoted tablet PC that just shipped last month!) and spinning off their PC unit. How would you like to be a customer who bought the HP tablet, knowing the company is already shelving the product? Analysts have been out in force this morning cutting estimates and fleeing for the exits. We were never quite sure where the value was in HPQ. Certainly from a dividend standpoint, there was none to be found.
Now let's look at the other recent "value" play that even Donald Trump of all people has been excited about: none other than Bank of America ( BAC ). This morning, we heard word that BAC plans to slash an additional 3,500 jobs, but the number rise as high as 10,000. Honestly, I see BAC's fortunes playing out in a similar fashion to competitor Citigroup ( C ). Once Citigroup shares fell under $5 and struggled to make any gains, the company decided to do a 1-for-10 reverse stock split. We can easily see BAC follow this example. Unfortunately, the usual outcome of a reverse split is that the shares eventually beginning dripping down once again (Citigroup shares at the time of the split in May 2011 we at $44 - the stock closed today at $26.77). At the end of the day, it's not just the number on the stock tape that matters. Rather, the odds of success rely on investor confidence that a business can recover.
Companies can stick around for a while through cost-cutting measures, but at some point, the core businesses must begin making money again. The lack of revenue/profit growth is what worries me about the many start-ups who've secured big funding recently - particularly the copycat start-ups which often become the 4th or 5th best option in an over-hyped space. Many entrepreneurs never quite grasp the idea of making money sooner than later. Press releases, magazine articles, and interviews on tech blogs can only get you so far. But if your users aren't buying, what is the life expectancy of your business? Once the venture capital/angel funding runs out, it's time to pay the piper.
Our Strategy Moving Forward and a Preview of Next Week
We sent out a quick 1-minute survey to a number of Dividend.com Premium subscribers yesterday afternoon as we consider potential new business drivers for Dividend.com. As we weigh the possibilities of what more we can bring to the table as far as our market analysis and expertise goes, we will continue to be laser-focused on our industry-leading DARS™ Ratings on the over 1,600 dividend stocks we cover. Anyone who subscribes to our service can tell you that we don't just sit idle when ratings changes are warranted. We still shake our heads at the lack of urgency at competing services/brokerages. Often times, their calls are made after far too much damage is done to a company's shares. You can bet that at Dividend.com, we'll continue to bring you the best coverage possible, regardless of the current market environment.
Looking ahead to next week, quarterly earnings will continue to trickle in as continue to see how well corporate America did in the second calendar quarter. Watch for earnings results from the likes of HJ Heinz ( HNZ ), Applied Materials ( AMAT ), and Hormel Foods ( HRL ), just to name a few.
Be sure to catch up with our latest watchlist updates this weekend on Dividend.com Premium , including reports on earnings/story stocks, analyst upgrades/downgrades, dividend ETFs, and much more. And as always, you can view our current recommendations on our industry-leading "Best Dividend Stocks" List .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
