Not much was said after the Federal Reserve held its monthly meeting May 21, but investors were pleased. They rallied to boost the Dow Jones industrial average more than 1 percent, the Nasdaq approximately 0.9 percent and the S&P 500 an estimated 0.8 percent. This type of activity before the three-day Memorial Day holiday is very positive, particularly given that investors are still concerned about a correction.
What pleased investors is that the Fed minutes didn’t address when the Fed will begin raising rates and gave no indication of the future of its monthly asset buying. The bond-buying stimulus program will likely be phased out by the end of the year.
On any given day, countless issues pressure the market to head higher or lower. That lack of certainty makes it difficult to predict market moves, but the increase last week still predicted a bullish posture for stock prices.
The primary trend is still bullish, with the Dow Jones industrial and transportation averages reaching all-time highs this month. With that direction, we continue to go long and hold an equity position in short-term bond funds as a reserve.
Two Town Crier “50” stocks are in the news.
• Microsoft Corp. (MSFT; $40.11) unveiled its new Surface Pro tablet May 20, prompting the stock to rise. The Surface Pro 3 boasts a 12-inch screen, larger than the previous Surface at 10.6 inches.
Five models will hit the market this summer, ranging in price from $799 to $1,949, but orders will be taken immediately. Microsoft’s market share is 2 percent, as Apple controls more than a third of the tablet market. Microsoft faces increased competition from Samsung Electronics as well, which plans to debut a larger Android tablet aimed at professionals.
Although the Surface RT and the Surface 2 are well equipped and competitively priced, they cannot run software written for traditional PCs. The Surface Pro 3 is likely to confuse sales of other Windows devices, including those sold by Hewlett-Packard Co. With the latest Microsoft move, HP CEO Meg Whitman declared Microsoft a competitor and noted that she wants to limit any dependence on the Microsoft operating system.
Microsoft stock is up nearly 25 percent since August, more than double the 11 percent return for the S&P 500. The current rally began after longtime CEO Steve Ballmer announced his retirement.
The Street rates Microsoft stock a buy based on the convergence of positive investment measures, which should help shares outperform the majority of stocks. Microsoft’s debt-to-equity ratio is very low at 0.26, and below the industry average. Deutsche Bank upgraded the stock from a hold to a buy.
The mean target price for Microsoft stock is $42.50, with a high of $50. The company pays a dividend of $1.12, a 2.8 percent yield.
• IBM Corp. (IBM; $185.86) revenues declined 5 percent in 2013 and are expected to drop another 1 percent this year.
In its April earnings report, revenues barely grew and net earnings dropped 21 percent. After the earnings release, shares quickly lost approximately $8, or 4 percent. The reason: The company faces a number of challenges, including a major decline in the mainframe business, increasing competition and global pricing pressure.
IBM touted its new security software May 21, which should thwart threats at the weakest line, the endpoint for laptops and desktops most susceptible to malware. The software is the latest offering in the company’s Threat Protection System. In addition, new IBM cloud technology has been placed in the hands of senior decision makers.
Numerous brokers have recommended IBM stock as a strong buy. Deutsche Bank recently deemed it a hold.
The mean target price is $195, with a high of $225. The dividend yield is 2.40 percent, or $4.40 per share.
Clyde Noel is a Los Altos Hills resident and longtime investor in stocks. Disclosure: He owns Microsoft and IBM stock.