Rarely have I seen such a case of the haves and the have-nots. It is at once the best of times -- if you own the banks and the techs and the industrials -- and the worst of times -- if you own the drug stocks, the consumer packaged goods and anything retail. This dichotomy plays out virtually every day and demands close scrutiny.
Take today. Citi (C) slaps a sell -- a sell -- on Macy's (M) and J.C. Penney (JCP) and, if I may translate, talks about their inability to come up with lasting strategies that differentiate themselves from the pack. Sure, there was nothing that I would regard as revelatory about either. But there's an element of Sartre's No Exit, yep, a total existential drama where you have to wonder what's to become of these retailers. Penney is withering. Citi says it cut expenses to the point where it needs to be added back. The merchandise is not distinguished and the home goods have lower gross margins. There seems to be no way out.
Macy's? One word: dividend. Macy's stock has been hanging on because of its 7% yield. The balance sheet's not bad, so it seems like a reasonable gambit to buy it and hold it. But Citigroup says Macy's needs the optionality to cut it. If that's the case, then there's not a lot of reason to own it. Just a few years ago when Macy's was at $70, there was talk about the possibility of selling off real estate to bring out value. Now it feels almost too late. I thought the report was too dire and that CEO Jeff Gennette deserves a little more of a honeymoon than this -- I mean, the guy's been at the helm for barely eight months. But this report made it sound like the clock is ticking.
Now, on the other side? There's Amazon (AMZN) , which reported an amazing number last week, accelerating revenue, and it's almost as if Amazon is a country within itself -- it's got the best tech, the best selection, the best prices and the best delivery. Heck, it has the best space program.
Sure, Home Depot (HD) can go head to head. So can Walmart (WMT) and maybe Costco (COST) . But have you seen the destruction in the drugstore space in anticipation of Amazon maybe going in hard against them? CVS (CVS) is scrambling to merge with any entity in healthcare to get an edge. Yet, the truth is we all want Amazon to get in because we hate going to these counters where the neighborhood pharmacist has been replaced by a clerk of whom, if you ask a question, you are wasting your breath.
Then there's Merck (MRK) . We used to call it St. Merck because it could do no wrong. No more. Now it seems it can do no right as it pulled a combination drug therapy for lung cancer using its novel Keytruda drug. Many of us thought Keytruda would beat out Bristol-Myers (BMY) in head-to-head competition for all sorts of cancer indications and it still can, but this was a real body blow because Merck doesn't have such a robust pipeline that it can handle this disappointment.
It's not as bad as Celgene (CELG) , which disappointed in sales for one drug and proceeded to drop from $137 to $97 a share in a couple of days. But it's also a total change in how people perceive Merck as a growth stock. It's enduring its sixth day of declines. Unlike Macy's, the dividend's not in question. Doesn't matter, though; what kind of protection does a 3%-and-change yield give you? Darn thing sells at 14 times earnings. So much for sainthood.
Yet as low a price to earnings multiple as that is Gilead GILD, which sells at eight times earnings, an extraordinary multiple shrinkage because of a slowdown in its hepatitis-C market. This stock was a darling for so long, but it is now regarded as the ultimate value trap.
Contrast that with Alphabet (GOOGL) . When this company reported we heard it, too, showed growth acceleration in its core business, search and advertising. Maybe Wall Street is beginning to figure out what the advertisers figured out ages ago: When you go to Google to look something up, you are often going to buy something and that's exactly when Google makes the most money. It's a cash register!
But this was also the quarter where you realized this miraculous company with $100 billion in cash is serious about making money off driverless cars and drones. There's no pipedream. One of these moonshots is going to pay off.
Or how about the Apple (AAPL) complex? We heard this weekend that Apple's having trouble meeting demand for the iPhone X. Wait, we heard last week it is struggling with weak sales. No matter, the fact is that Apple reports this week and the stock's been running into the quarter of late. All-time high today. I say watch not for the phone but for the service revenue. I know Samsung is literally giving away what Apple charges for. But if this service stream can produce revenues that look like they might soon be equal to that of a Fortune 75 company instead of one that's a Fortune 100, you could be talking about $38 billion with the highest profit margins on Earth.
And don't forget Nvidia (NVDA) , another all-time high, although I would say the news that the Nintendo Switch game is selling so well is the main reason for today's run as Nintendo revised up orders last night to meet demand.
Four months ago, the stock of Kimberly Clark (KMB) stood at $133. What's happened since then? It delivered a pretty good quarter, beat the estimates, but it doesn't have the revenue growth people want. (Apple, Broadcom, Nvidia, Citigroup and Alphabet are part of TheStreet's Action Alerts PLUS portfolio.)
But Caterpillar (CAT) does. So does Boeing (BA) . Hence why those two Dow stocks are doing so well. Remember, we tend to view the consumer packaged-goods companies as a little bit of alchemy because they buy back stock and they are spotted good quarters simply because people are always going to blow their nose. Caterpillar and Boeing are about explosive sales, and that's what portfolio managers really love.
Have you looked at the stock of Kraft Heinz (KHC) ? This company's a vehicle for acquisition and rationalization. But you know what it forgot? Food that's good for you. Oh sure, every company has something natural or organic. Still, though, Kraft singles? Jell-O? Velveeta? Oscar Mayer? Ore-Ida? Do you think those brands resonate outside senior living facilities?
Then compare those stocks with those of the banks. Big and small, they are so stable, so solid that it might not even matter who is named Fed chief this week, something that many believe will be watershed. I think the president goes mainstream with Jay Powell, a terrific non-ideologue who could be a fabulous steady hand. No matter, he's going to raise rates and the banks will just keep doing better and better while they remain historically inexpensive. I like every bank stock except Wells Fargo (WFC) , which is still problematic.
What can I say? You stroll in the wrong aisle of the stock market, you could end up being eaten by a bear. You get in the right one? You're riding the bull as it tramples through the consumer-product aisles, all of which need to start charging a lot less and getting a lot fresher if they ever hope to grow again. Good luck.