Sometimes I wish I could write a Fed memo, one meant for the rich, out of touch top dogs, to explain to them what's really happening in the economy as expressed by stock performance.
I don't work for the Fed. So that's not going to happen.
But what I can do is give them the memo that they should be getting instead of the pseudo-science they are relying on, plus all of their anecdotal contacts who create their worldview.
That's why we are going to analyze the best and worst of the Dow in 2018, so we can make sense of what happened -- they need that -- and actually inform our decision making -- that's for our readers alone, as I presume the Fed heads don't invest.
The best-performing stock in the Dow since Jay Powell lowered the boom by talking about how great everything is, would be the stock of Procter & Gamble (PG) , up 10%. Do you know what it takes to have a company this big be the lead-off hitter in the amazing game that is the stock market?
Okay, I will tell you what it takes. First, you need a company that produces a product that is used even in a slowdown. If you examine the products Procter makes, you will see very little economic sensitivity. Procter doesn't have a ton -- and what it does have can withstand price increases without much elasticity.
More important, Procter has a culture dedicated to improvement, one that got rocked by the proxy fight that landed Nelson Peltz on the board, a shocking circumstance that the P&G people figured out meant that they aren't immune from challenges. I think that P&G got religion that it wasn't enough to have divisions do middling, as so many were. They had to start taking share AND growing revenue. It happened last quarter. It is why the stock took off.
Now, though, there's more to it. P&G has become the darling because:
1. Its raw costs are coming down, notably because they are linked to energy, as the packaging always costs more than the ingredients themselves. There's been a crash of every energy derivative, which means that gross margins are going higher.
2. The company's products do well even in a slowdown; and
3. It's starting to figure out how to sell in emerging markets that have been left to Unilever (UN) .
You put that altogether with the 3% yield from a company that has a better balance sheet than the U.S., and you have a stock that Jay Powell has created to outperform. Call P&G the Fed Special, especially now that the aggregate figures for both the U.S. and the world are falling apart.
Merck (MRK) can repeat How do I know this? Because Bristol-Myers Squibb (BMY) doesn't pay $74 billion to buy Celgene (CELG) if it can't. That's right, Merck is riding the Keytruda anti-cancer wave all the way to the bank. You still have a 3% yield with a rock solid balance sheet, although the 17x earnings figure may be hard to struggle with... except that Merck's got a garden angel at the Fed, which makes it so there's a trampoline effect.
Buy it on weakness.
McDonald's (MCD) , even after last year's decent run, remains a favorite. Why? Because it is about to become one of the great technology stocks of all time now that Steve Easterbrook is able to pick and choose what works from around the world. This guy is so smart and he has won over the franchisees. The stock's been stuck in a holding pattern but, like Dollar Tree (DLTR) , which I praised yesterday, McDonald's has the Fed dynamic scoped out -- what company does better than McDonald's during a Fed-mandated slowdown?
I can't name one. What a windfall.
I am tired of Verizon (VZ) going higher. But it is still five points from its high and is slated to go from the 4% to the 3% yield, as have all of the other utilities with decent balance sheets. This stock is a one-stop-shop for those who want to own a recession-proof equity with no China exposure. Normally, if inflation is eroding purchasing power and we have a real labor shortage, this one should be deadly. But labor is tight only when it is needed. Verizon doesn't need it.
Still a buy.
Finally, I would like to give the world a Coke because Coca-Cola (KO) is a cheap stock that shouldn't have been hit at all in the last few weeks. A 3.3% yield, an acceleration in growth, a youthful, invigorated leader in James Quincy, who can surf the surge in unemployment the Fed wants? What more can you ask for?
Okay, now the bottom five.
Apple's (AAPL) the worst. What hasn't been said about Apple that still needs to be said? How about that its products are the envy of the world and that those who don't like the company's stock tend to be telling their friends about it via an iPhone. Is Apple right here? No. It has China issues. It has raw cost issues. It has price point issues.
But despite all of that, it has one thing going for it that others don't: an ecosystem that is tough to divorce yourself from. That's the consumer packaged goods subscription element I love so much that doesn't get the respect it should, because Apple is known as a cellphone company that doesn't innovate -- like anyone's really innovating anymore.
Still, a preannouncement means you must wait at least 30 days before you would buy it because what company would bother to preannounce if it thought things were about to get better? Talk to me in thirty days.
Goldman Sachs (GS) has become ridiculous. Oh we don't know it now. We hate it. I scream, you scream we all scream about how much we hate Goldman Sachs.
The truth is that Goldman's one of the greatest wealth creators of all time. There's a ton of smart people there right now trying to figure out how to make as much money as possible. There's the Malaysian scandal, which has to run its course. There's a franchise that is unassailable.
But it is a finance company -- and those don't do well right now because no one even knows what Tangible Book Value means, which is what you would get if you closed Goldman. You would get about twenty dollars more than it sells for.
Just wait. It will make you a ton of money. But patience, in this market, is not a virtue. It's a mistake to sell; it's correct to buy.
IBM (IBM) ? How about we declare it to be a 5.5% bond with warrants that give you upside if Red Hat works out for them? I don't know how else to put it. That's what I think IBM is, a good bond. I like bonds in a world where the 10-year is at 2.5%. Red Hat, if applied correctly, so to speak, is a windfall for IBM -- and yet it is priced as a liability. It has been wrong to buy IBM forever. Let's see what Red Hat does for them and decide. On the fence.
How ridiculous is it that United Technologies (UTX) is the fourth worst-performing stock in the Dow. That's nuts. It is about to split into three terrific companies: elevators, climate controls and aerospace. All have gigantic revenue streams after they are sold, so you get two businesses in one. I think the company is worth 30% more than it is selling for. But fair warning, so is DowDuPont (DWDP) because of its breakup -- and that's been a nightmare of underperformance since the trade wars started in earnest.
Finally there is Exxon Mobil (XOM) . If you ever told me I could buy one of the best, most conservatively managed companies in the book with a 4.75% yield, I would tell you that's not possible. But Exxon is now an accidentally high-yielding company in a group that can't be given away. I think that Exxon actually makes sense here, because I feel that oil is bottoming -- remember I thought it was topping in the $60s. If that's the case, you should buy Exxon right now.
In all these cases, you can see how hard it would be to send the Dow down to humbling levels. Many have already been humbled. Many are buys. Every time I am told 2019 will be horrible, I think about how the end of 2018 was horrendous and brought stocks down to pretty tempting levels, provided that you want to own, not rent, stocks for the duration of the Fed's attempts to throw people out of work so they can be put to work again at lower wages.