We continue with our update on developments in a number of stocks we recommended in the past quarter.
In aggregate, while we saw many favorable business developments at a number of these names, it was a very difficult quarter for long-only stock-picking. We continue to like these securities despite jerky starts (along with the market), and in many respects we view recent choppiness as a good opportunity to build positions that should be successful in the intermediate term.
Emerson (EMR) $45.40: Industrial stocks have continued to struggle in recent weeks on fears of a slowing European economy, as well as its subsequent impact on the U.S. in particular and the global economy in general.
While business is slowing on the margin, we are still seeing a gradual recovering economy in the U.S. and worldwide ex-Europe. We expect a re-acceleration once the worst-case fears of a European implosion are off the table.
Last week, Emerson management said it saw sales coming in at the low end of their prior range for the quarter. It also sized the negative impact of a strengthening dollar for the quarter and for the balance of the year. It's important to note that the company did reaffirm earnings guidance for the year. Emerson seems to be navigating a difficult environment in good form. At 13.51x earnings and a 3.7% yield, we like the stock a lot and continue to add to the position at these levels.
Wells Fargo (WFC) $33.55: While low interest rates are a negative for the banking group and for this stock in particular, news flow over the past few weeks and months is clearly pointing to an upturn in the housing market. Activity is on the rise in that space, prices are bottoming, certain markets are starting to show growth and mortgage origination is starting to pick up. This moves housing from a headwind to a tailwind for the overall banking group, and Wells Fargo should be a significant beneficiary of this improvement. The stock has held up well in a poor environment for financial names, but we believe that it still has strong gains ahead.
JPMorgan Chase (JPM) $36.28: Prior to last Thursday's New York Times article about losses reaching the $9 billion level on the chief investment office derivative, it looked liked things were moving in a favorable direction. CEO Jamie Dimon was well-spoken in his Senate testimony and seemed much more confident in his understanding and sizing of the problem than he was on the original conference call. That confidence seemed to grow a week later when Dimon gave his testimony at the House of Representatives. In that testimony, he said JPMorgan would be very profitable this quarter.
The company also recently announced that it would be giving a financial update on the financial status of the derivative trade in the upcoming second-quarter earnings report. In the past two weeks, moreover, CNBC noted that inside sources said JPMorgan was 65% to 70% through with unwinding the trade.
However, this continues to be a pretty dynamic issue and there are many unknowns. Our line-in-the-sand call was made at $33.93. As of Monday's close, the stock is higher based on what appeared to be a sizing-up of the problem and a move forward. While we continue to closely monitor developments, we believe JPMorgan will get through this. We also believe it should not have an impact on its earnings power or financial strength and that, short of a new issue coming to light, the regulatory pushback stemming from this loss will be less than what was originally feared.
We continue to like JPMorgan stock at this level and expect much better things in the price over the next three to nine months.
Dell (DELL) $12.39: Dell had a disappointing quarter in terms of sales, earnings and execution, and this gave bears more ammunition on their negative call. While Dell's recovery has been spotty -- the company continues to take three steps forward and two steps back -- it's moving in the right direction as far as repositioning is concerned. Further, Dell is still earning a lot of money and generating a lot of cash. The company is paying attention to shareholders and buying back a great deal of stock, and it recently initiated a sizeable dividend -- one that, from the current stock levels, pays investors a 2.7% yield while they wait.
We believe Dell is doing the right things with its business model. We believe that, with the stock at $12 as it holds $5 per share in net cash, the shares are simply way too cheap. At current levels, it's selling for 6.7x earnings. Amazingly, if you factor in the cash on its books, and its expected earnings power over the next four years, the company would be able to buy 100% of its stock back over that time. While that is not likely to happen, it does shine a light on the extreme disconnect between Dell's business success and the stock price.