We always hear that safety never takes a vacation. You have to put safety first.
But what if safety changes? What if what's prudent becomes reckless and what's reckless morphs into being what's the least dangerous option?
That, my friends, is the definition of this market.
Right now we seem to be at the beginning of what may be the first worldwide economic expansion we have had since the 1990s.
When I say worldwide, I am not talking about how China's strong and it's helping us all along. I am not talking about how the 770 million people who live in the eurozone are, at last, getting their act together and their economy is humming. I'm not talk about how the United States is the engine of the world's growth. And I am certainly not talking about how the BRICs are driving the bus, the acronym for Brazil, Russia, India and China.
No, I am talking about the whole world doing better and how we have to come to terms with that because when the whole world's doing better, what passes for safety in the stock market can be the most dangerous and vice versa.
Let me give you a few examples of what I mean, of what kind of stocks do well in what's known as a synchronized economic expansion and what looks safe but can end up causing you to lose a lot more money than you ever could imagine.
Let's start with Union Pacific (UNP) . This morning the giant railroad reported a quarter that showed good strength across almost all product categories despite the terrible storm damage that occurred in one of its critical markets, Texas. Costs are coming down. Labor inflation is very low and demand is red-hot, so hot that it said it needs new capacity between Texas and Chicago. It's pretty clear that had there been no weather issues this could have been the strongest quarter this railroad might have printed in years.
In short, it's Union Pacific's time. In response, the stock of the company shot up five points. I happen to love the management of Union Pacific very much and they did a fantastic job navigating the storm damage. But yesterday Norfolk Southern (NSC) reported a terrific quarter and its stock rallied three dollars today.
These companies are doing terrifically.
Why? Because they have more business than they can handle. That's not been that way for years and years.
The other day Caterpillar (CAT) , the gigantic machinery company, gave you its report card and it was breathtaking. There's demand across the board not just here but around the world. I have waited for Caterpillar to report a quarter this strong for 30 years. Sure, Cat had a good run at the end of the last decade. But that strength was almost entirely China. This time it's strength around the world. In all of its categories of earth movers and trucks and engines. The company's stock has been a miraculous performer, mostly because it has reduced employment and taken out costs, but now we see what happens when orders come through. This stock is now up 48% for the year, an extraordinary performance. It's breathtaking.
How about 3M (MMM) . For years 3M has been able to power itself higher through self-help -- trimming here, nipping and tucking there and generally trying to do better than the growth of the globe. Now the company's multiple order books are on fire around the globe. The company, which was founded in 1902, arguably could be having one of its strongest years in history. Not only that, but once again, the growth is global. You can go anywhere in the world that 3M sells products and you can see numbers that are rather extraordinary. I am dazzled by the performance of this company and its stock, which soared from $220 to $237 in the two days after it reported before giving up a few points in profit-taking today. It's 3M's time.
This morning DowDuPont (DWDP) , the company being formed by the merger of these two fabulous materials companies, announced preliminary results for the combined companies as they get ready to finalize their merger. I knew the entities were doing well, as we own the stock for the charitable trust which you can follow along at Action Alerts PLUS club site. But I didn't know how strong until I saw a 55 cent number. I thought it would earn 41 cents. And why were the earnings so fabulous? Did they fire a lot of people? Was there a big currency gain? Did they book some gain we didn't know about?
Nope. Nope and Nope. The reason cited? Consumer demand. In other words, business is booming.
That's been the story with so many industrial companies this quarter. We have an actual boom going and these enterprises, whittled lean by so many layoffs necessitated by years and years in the wilderness are making gobs of money around the globe in what's known as a synchronized economic expansion.
Now, how about the other side? How about the so-called safety stocks? This morning Celgene (CELG) , the gigantic biotech, reports what looks to be a pretty good number but one of its key drugs, Otezla for psoriatic arthritis, missed estimates and other drug sales weren't strong enough to make up for it so the company shaded down numbers. The result? The market took a meat axe to Celgene's stock, which fell $23 or 19%. One drug. One line item. And pure carnage.
This morning Bristol-Myers Squibb (BMY) , the sainted Bristol-Myers, one of the greatest pharmaceutical companies on earth, gave you pretty good, not awesome, but pretty good numbers for some of its key cancer drugs. It also reported some obstacles to an important potential new drug that might be needed to offset the price competition in the cancer drug field. In response, the stock got hammered, tumbling almost five percent. Bristol-Myers!
Last week Procter & Gamble (PG) reported a quarter with 1% growth. It did a lot of back-patting considering. Then again personal care products have become a brutal battleground, especially with the millennials who seem to lack any brand consciousness other than value. The stock managed to lift today but not before it fell from $93 to $86. I wonder if Nelson Peltz, who wants a seat on the board of the company and may have lost in a very narrow election -- the final tally isn't available --would have won if the vote had come out after those numbers. Yeah, they were that weak.
Hershey (HSY) , the chocolate company, gave you a decent quarter today. At least it looked it. But the gross margin, what it made after all of its costs, downticked, in what might be because of a more competitive environment at the supermarket. The stock got slammed down four.
Now, step back for a second. A generation of investors has been taught that companies that need worldwide growth are dinosaurs because there isn't any worldwide growth anymore. Just fits and starts and recessions, great or otherwise. So investors huddled in the stocks of companies that tended to do well no matter what. Better to be safe in a Bristol or a Hershey or a Celgene than be sorry in a 3M or a Union Pacific or Norfolk Southern or Caterpillar.
The latter were always too risky. There's always something going wrong. The former are sleep-at-night stocks.
Now, though, we are in a new era, one we haven't seen for decades with economic expansion breaking out everywhere.
You know what happens when this Northern Lights-like scenario occurs? What was dangerous is now safe, what was safe is now risky, where if the company beats expectations, as, say PepsiCo (PEP) did not that long ago, its stock just goes down a little and if it fails to meet expectations? The stock guillotine.
Most people do not know or understand this new world. Fortunately I am old enough to remember when it happened last, in the late 1980s and early 1990s.
What do you do in this scenario? My suggestion? Recognize that risk is, like beauty, in the eye of the beholder and right now what's risky is what used to let you sleep at night, the foods, the drugs, the health cares. And what's rewarding? The companies with managers who pruned and cut and tucked and nipped their way to the land of milk and honey, and, at last, they are finally here, making fortunes for all who made it through the desert, crossed the River Jordan and got to the promised land.