Spent the weekend in New Orleans. Saw a lot of nice people. Almost to a person, people asked me what makes me positive about a market where so many things seem to be going wrong, and with earnings season around the bend won't I be disappointed with what I hear? Today's a good day to tackle the question.
Candidly, because I was with my fabulous daughter, I wasn't able to give anyone an in-depth answer. My apologies. But had I had a chance, here's what I would have said: The action is dictating my attitude, the action that has so many stocks hitting new highs in the last week alone, something that tends not to happen right before you fall off a cliff.
I want you just to consider the members of this esteemed group of stocks just from last week. First, we have the consumer packaged-goods stocks. I would say they are too numerous to mention, but that's an intellectual shortcut. Listen to these names: Estee Lauder (EL), Kimberly Clark (KMB), Coca-Cola (KO), Church & Dwight (CHD), Altria (MO), PepsiCo (PEP), Tyson (TSN), ConAgra (CAG), Constellation Brands (STZ), Colgate-Palmolive (CL), General Mills (GIS), Johnson & Johnson (JNJ), Kellogg (K), McCormick (MKC) and Molson (TAP).
What do all of these companies have in common? They take raw commodities and they make them into something -- refine them, package them and sell them both here and overseas. Many have good dividends, but not all.
What does it mean to see such a concentration of high-level companies like that? First, it says raw costs for all ingredients, everything from wheat to hops, to surfactant to toothpaste whitener, are calm and behaved. Second, all packaging must be going down in price, everything from the plastic derivative bag that you find cereal in to the box itself or to the plastic or paperboard containers these products come in. Third, distribution costs have to be at a very big low, and that's oil and gas speaking. Finally, because so many of these companies sell overseas, this grouping tells me the dollar has peaked vs. our trading partners and these companies are going to do quite well in the second half when the currency comparisons truly get easier. In short, you can't get a better series of stocks on a new-high list at this stage of the economic cycle.
I know some of you are thinking, wait a second, aren't all of these stocks indicative of a slowdown in the economy? Isn't this a recession speaking? I think that's the old way of looking at things. These companies have battled inflation for years. They have raised prices consistently. I think what it says is they are about to have an explosion in gross margins and earnings that will be far better than people think possible. That's what this concentration is really saying.
What makes me so sure? How about other members of the new-high list. If things are so weak, what the heck is Automatic Data Processing (ADP) doing on the new-high list? I have been around long enough to know that stock hits a new high only when employment is getting better at bigger companies, when there is hiring. That's not a sign of recession.
Or how about Sherwin-Williams (SHW), Vulcan Materials (VMC) and Home Depot (HD)? When you get the No. 1 paint company, the No. 1 maker of stones for new roads, particularly housing developments, and the No. 1 retailer for home improvement on the 52-week-high list, you have to question any slowdown thesis. It's the opposite when you see these. You say you have a robust housing market.
Now I know not much retail is on the new-high list, but don't you think that stands to reason given the colossus that Amazon (AMZN) is? Home Depot pretty much can't be Amazoned. But how about Ulta (ULTA), the cosmetics retailer? It was added to the S&P 500 the other day, but it was breaking out anyway. I think that's a positive sign of consumer discretionary spending, although given the prevalence of cellphones, you almost have to make yourself up every time you leave your house. (Amazon is part of TheStreet's Growth Seeker portfolio.)
I do think, though, that the presence of Darden (DRI), owner of Olive Garden, and Sysco (SYY), the nation's largest supplier to restaurants, shows you the consumer's going out and spending. Although they are also staying at home, hence the inclusion of Domino's (DPZ) on the list. Hmm, pizza and a Coors or a Corona, what's not to like about that new-high combination?
But what, you might say, about the industrials? Where are they? I think this is a case where the best ones, the ones with nothing to do with oil and gas, are indicative of worldwide strength, namely Illinois Tool Works (ITW) and 3M (MMM). Those two are emblematic of the entire gamut of industrial applications, save energy.
How about tech? This is a tough one because the two that are rising to the occasion are the best in the biz, the newly coronated semiconductor kings of Nvidia (NVDA), for graphics, and Broadcom (AVGO), for communications. I think these two happen to be doing exceptionally well, but the fact is they are on the list and it beckons other techs to make it, too.
Health care doesn't show up much, but what does show up is very positive, namely the medical device companies that are making a difference and aren't in the cross hairs of politicians, companies like Boston Scientific (BSX), CR Bard (BCR), Edwards Lifesciences (EW), Intuitive Surgical (ISRG) and Stryker (SYK), all of which deal with saving lives and limbs. I think it's a good enough group to make a positive statement about health care in an era where so many drug stocks are flat on their butts because of the political debate.
How about the financials? Tough group. We know the banks are in for it when they start reporting this week. In fact, everyone knows it to the point that when the analysts cut numbers, I think they go down and then come back again.
But the insurers? They are all on the list, with the biggest, Chubb (CB) and Travelers (TRV), being the most obvious. I love it when insurers predominate because they do well in a low-inflation environment. If the Fed looked at stocks, it would think twice about raising rates when these babies are on the list. Why mess with stopping inflation when the insurance stocks are saying there is none?
Then there's defense, both Lockheed (LMT) and Northrop (NOC). They are signals that there is demand worldwide for American armaments. It matters, it's a big industry for us. Sure, I wish there were more aerospace on the list, but these two tell me their time will come. (PepsiCo and Lockheed are part of TheStreet's Action Alerts PLUS portfolio.)
Finally, there are indeed too many utility companies to mention here and that, too, impresses me. Normally, again, that would be a sign of low growth going to recession. But I think that's a bad read: It's much more of a statement that the Fed isn't going to raise rates any time soon. That's fertile ground for many more stocks to rally in the future.
Where are the oils, and the transports? Sadly absent. Where are more industrials? When we see their earnings and match their prospects with a weaker dollar, I think many will join Illinois Tool and 3M.
Here's how I ultimately look at it: When so many dislike the market, you can't expect all the good stocks you like to be on the new-high list. But when you see this distribution, you know the leadership is there. Others will follow. Not in a straight line. But history says this list, with these kinds of stocks on it, will expand, not contract from here.
There, fellow travelers in New Orleans, that would have been the mouthful you would have gotten if the jazz weren't that sweet, the sun not that strong , and my daughter not as fabulous as she is during a great weekend in one of the most fabulous cities on Earth.