US SHARES: UPDATE ON CURRENT RECOMMENDATIONS: JUNE 2023
19th June 2023
The recently completed technical analysis of the stocks in the S & P 100 index, found that 61 had a bullish outlook, and 25 a bearish outlook. That is a hefty margin in favour of a bullish outlook, and confirms that the current upward trend is broadly based. The number of stocks reviewed has fallen from 100 at inception on December 2019, to 86 today, due mainly to the delisting of corporations that have been acquired.
This update of the US stocks recommended in December 2022 is well timed, as they have underperformed the market (see below), and it may be time to make some changes.
However, back in December 2022, the stock market trend was downwards. As a result, most of the stocks selected had defensive characteristics. Subsequently on 1st February 2023, with the S & P 500 index trading at 4,043 we changed our Overall Market Trend indicator from bearish to bullish. That forecast has worked out well to date, with the index now at 4,409.
Inevitably, a portfolio of stocks with mostly defensive characteristics, will underperform in a bull market ie when the trend is upwards. On a rare occassion, one will unearth a stock that has defensive qualities, and yet it often outperforms the market also during an upward trend. Microsoft currently trading at $346.62 up 42% since our continuing recommendation in December 2022 appears to be in that category. Why is it so strong? Probably because it is believed to have a very strong Artificial Intelligence (AI) operation. That sector is currently 'hot' because many commentators believe it to have rapid growth potential.
AI could be the foundation stone for another technology boom. Or it could be over-hyped. There is no way of knowing at this time, which view will prove to be correct. But if the latter view prevails, then Microsoft's cash mountain on its balance sheet should provide it with downside protection.
The other recommendations in December 2022 are underperforming to various degrees. It may be too early to dump all of them, but the change in the overall market trend from bearish to bullish, needs to be reflected in our current recommendations.
Walmart +9%
Colgate Palmolive n/c
Lockheed Martin -4.7%
Northrop Grumman -13.5%
Union Pacific -2.6%
Berkshire Hathaway 'B' +13%
Procter & Gamble -0.6%
Morgan Stanley +1.4%
S & P 100 index +20%
Texas Instruments +4.25%
NASDAQ 100 +34%
Of the above stocks, the charts for two of them, Northrop Gruman and Union Pacific have turned bearish, so I recommend that they be sold. The charts for all of the other remain bullish, and that of Procter & Gamble is very bullish per my recent technical review. Therefore, I think it is best to continue to hold these at this time.
Replace the above two stocks in the portfolio with two stocks that achieved a very bullish rating per my technical review. There are quite a number to choose from, as a total of 11 stocks have very bullish charts.
A review of these 11 stocks with very bullish charts reveals that investors are anticipating rapid earnings growth in two sectors:- AI in the tech sector, and new drug products in the pharmaceutical sector.
In the Artificial Initelligence (AI) sector, Apple is preferred over Oracle as the latter looks over-bought. Apple is trading on a trailing twelve months (ttm) P/E of 31 and a dividend yield of 0.5%. Oracle is trading on a ttm P/E of 41 and dividend yield of 1.3%.
In the pharma sector, Merck narrowly gets the nod over Eli Lilly. Both can boost earnings per share by continuing their share buyback and cancellation programme, but while Eli Lilly has a lower debt to equity ratio than Merck, the latter has a greater cash cushion on its balance sheet. That will support its trailing twelve months P/E ratio of 21 times earnings, and dividend yield of 2.67%. In contrast, Eli Lilly clocks in at 71 and 1%, indicating that investors have high expectations for its new Alzheimer's drug. Those of us with long memories remember how that turned out for Elan back around 2005. Perhaps it will be different this time, but the risk factor looks too high for comfort.