Sure, it's a terrific, company. But sorry, it doesn't fit the profile. Do you know how many times I have heard that dictum in the last few days? I think it's behind a lot of the action I am seeing in this market. And, candidly, I don't know how long it will last but it could still be in its relative infancy.
What does it mean to "fit the profile?" It means that the company has to be a direct beneficiary of the new tax law and it must come from a cohort that is under-loved by Wall Street.
So what stocks meet that criteria? The answer? The craziest ones, that's what. Let me give you a classic example. Take the stock of the steel company Nucor (NUE) , which happens to be the best of the lot of a very beleaguered group.
Nucor's stock has been a very tough position to handle in 2017, rising only 7% for the year and spending a lot of time well below that. My charitable trust owns the stock and we have been advising members of the actionalertsplus.com club that it could be a rocky road but, basically, you had to hold your nose and own it because it will eventually come back in favor.
Last Thursday, before the bell, Nucor gave you an update on its fourth quarter and told you that it was going to earn 50 cents to 55 cents a share. Now mind you, Nucor had already guided that the company would report slightly down numbers from its previous quarter when it gave you a 79 cent gain. This preannouncement marked the third consecutive quarter that the company lowered estimates. Can you imagine any tech company doing that? Any pharmaceutical company doing that?
But what happened to the stock? It went down a little bit of course. A number cut will always cause that. The shocking thing, though, was that the decline lasted only for about a blink of an eye. Even if you look hard at the chart you'd have a hard time seeing the dip.
Today Nucor's stock actually traded above where it was before the preannouncement. That's right, above. How come? Because it fit the profile, that's why. That's right, it is a company that can do much better if the economy grows, and it is a 31% effective taxpayer so it stands to make a ton more money under the new slashed corporate tax. Plus, Nucor will also be the beneficiary of what the president wants to do on trade, namely force the Chinese to stop dumping steel here. We expect that the Commerce Department could crack down on China as soon as next month.
So, Nucor, the company that couldn't shoot straight when it comes to earnings estimates has gone from hated to loved in one week's time. It is a classic example of what portfolio managers are clamoring for, a high quality cyclical that hasn't already moved up dramatically. I now think the darned thing could go to $70 simply if it caught up with the rest of the market.
What else fits the profile? How about Federal Express (FDX) . Last night Fedex reported and the company said it would raise its forecast substantially, well above what Wall Street is looking for, when the bill becomes law as it did today. Now, unlike Nucor, Fedex is already doing well and the numbers it gave you for the previous quarter were flat out fantastic. How could it not be given all the e-commerce that's being done? The company also made it clear that business will get even better with the new tax regimen. Not only that, but it also made it clear that it will buy a lot more plant and equipment given that the new tax bill also gives companies much more favorable accounting treatment on any large purchases of plant and equipment that they make. I bet they will buy a bevy of planes to meet burgeoning demand and to take advantage of the tax breaks on heavy capital equipment.
I know people are perennially worried about how Amazon's (AMZN) plans could impact the company. But Fedex answered that objection by saying that no one customer is more than three percent of its business.
So Fedex does well with lower taxes, with better accounting treatment and with the world heating up. That makes it a total winner so no wonder it rallied three percent in today's session.
What else fits the profile? How about the banks? You can pick any one you want. I am partial to Citigroup (C) which is owned by my charitable trust. Why? Because it's going to be a beneficiary of a much lower tax rate and the gradual rising of short-term interest rates. Plus, longer rates have gone up giving the company a bigger spread between the meager amount it pays you on your account and the much higher amount it will charge to borrowers.
Even more, a little recognized change in the tax law has created an anomaly where it's cheaper for international industrials to borrow money overseas and deduct the interest against gains in those countries versus deducting that interest here. That's terrific for banks with worldwide tentacles like Citigroup or, say Goldman Sachs (GS) , which can act as international for domestic borrowers that need to take advantage of a better tax regimen for interest rate deductions that you can now get here.
I think earnings estimates will rise substantially now for the banking group, which is historically cheap versus the rest of the market.
Boy do the bank stocks fit the profile.
No wonder they just won't quit going higher.
So what doesn't fit you might ask? I would argue that big international tech sure doesn't. An Alphabet (GOOGL) or an Amazon may have billions that can be brought home under the new repatriation rules. But they use a lot of that money overseas and even need it there. Plus, fund managers right now don't want companies that do well no matter what kind of economic growth-slow or fast-that we have. Portfolio managers want companies that are going to have much larger earnings gains year over year than they would if the bill weren't signed into law. Alphabet, Amazon and their fellow FANG travelers aren't necessarily losers under the tax law, and I wouldn't sell them, but you have to understand that they have suddenly gone out of fashion on the Wall Street runway.
What else doesn't fit the profile? The big global drug stocks are being thrown out left and right. Brutal. That's because the pharmaceutical companies aren't going to do much better with or without reform. But then there's a company like Centene (CNC) which we had on Mad Money last week which is all domestic and has a 38% tax rate, the highest you can have. Centene will make a fortune for its shareholders even if it stands still.
Now, I know there are plenty of people who insist that these gains are already in the stock market and it isn't worth it to chase shares now that they have gone up so much.
Here's what I have to say to you if you believe these jeremiads: please sell your stocks so people who haven't had a chance to buy shares get a nice price break.
What makes me so confident? First, even as recently as a month ago most investors did not think this bill would pass. Second, the world is doing so much better than it was not that long ago that the big industrials will probably report upside surprises without reform and can only be expected to guide up huge when they do announce earnings. Finally, the stocks of companies that are roaring aren't particularly all that loved right now. Sure the stock of Boeing's (BA) flying and Wall Street has fallen in love with Caterpillar's (CAT) shares. But I took a look, for example at the stock of the great industrial Emerson (EMR) after I saw that its orders for the last three months are up 20%. Wow!
Now if you hit the stock up you will see it is already at its 52-week-high. However, when I looked at how Wall Street analysts are positioned on the name there are seven buys but fourteen holds. What happens when those holds turn into buys which is what I expect because Emerson's earnings estimates are now way too low.
So, you may feel like you've missed it. And I am not going to say that you haven't let a bunch of trains, especially the drugs and techs lines, leave the station without you. Nevertheless, I am saying that there're still plenty of other stocks that fit the profile and are ready to make another move. I only just wish that the current holders find my thinking preposterous and give us one more chance to buy them at a discount before they recharge and go higher again.