Whether you are a bull or a bear, we are currently in a dangerous bubble period in the stock market, and now could be the time to consider doing a little selling for cash or shorting some better issues.
Solid earnings from good companies have countered the strife in Ukraine and the Middle East, keeping the major averages near all-time highs. But shares of small and mid-sized companies have been under pressure and tend to be sensitive to unexpected events.
If the market confuses you, especially when it dropped more than 153 points Friday, consider the following defensive areas.
• Utilities: A defensive area that provides some protection.
• Health care: The population is increasing and aging, putting health-care companies in demand.
• Energy: With the global situation in upheaval, world conflicts will keep prices high and influence energy stocks.
The Town Crier “50” stocks come under this area of concern, but I am making no moves as long as solid earnings reports continue to impress. There are no reasons to be antsy.
Two Town Crier “50” stocks are in the news.
• Yahoo Inc. (YHOO; $35.97) reported its second-quarter earnings, with revenues at $1.04 billion, below consensus estimates. Earnings of 37 cents per share were also below analysts’ expectations of 38 cents. Yahoo now predicts its revenue to total between $1.02 billion and $1.06 billion for the third quarter.
In an effort to boost its mobile-ad game, Yahoo announced last week that it acquired analytics firm Flurry Inc. The plan is to increase the mobile-ad business via better apps and more personal ads. The purchase price is reported to be approximately $300 million.
Flurry has a wealth of information about smartphone use. Used by approximately 170,000 developers globally, Flurry tracks app activity on more than 1.4 billion devices. Together, Yahoo and Flurry will be able to reach new audiences more effectively and gain insights into desktop and mobile users.
Yahoo faces intense competition from Facebook Inc. and Google Inc., which are monopolizing the display-ads business. Yahoo stock has taken a beating this year, dropping 18 percent so far in 2014. With further competition from Facebook, it will be difficult for Yahoo to get back on track with a profitable third quarter.
According to the New York Times, Yahoo, once the top seller of display ads in the U.S., is projected to drop to a 6 percent market share and will find the going difficult in the display-ad market.
The upgrade and downgrade history rates Yahoo stock a fair value. Out of 21 brokers, most recommend a hold, with only four deeming it a strong buy. The median target price for the stock is $39, with a high of $47.
• Microsoft Corp. ($44.21: MFST) is becoming one of the leaders in cloud-computing services because it has the necessary infrastructure in place to take on Amazon.com Inc. Credit should go to Microsoft CEO Satya Nadella, whose tenure is receiving positive reaction from analysts and investors.
Response to the company’s fiscal fourth-quarter earnings report was positive, even though results missed analysts’ estimates. Microsoft reported earnings of $4.6 billion, or 55 cents per share, on revenue of $23.4 billion. During the period a year ago, Microsoft earned $4.97 billion, or 59 cents a share, on $19.9 billion in sales.
Microsoft’s results did not include analysts’ forecast earnings because of the recent acquisition of Nokia Inc.’s devices and service business in April. Microsoft reported $1.99 billion in revenue from Nokia but was responsible for an operating loss of $692 million.
Microsoft’s main software business exceeded estimates, largely due to strength in Internet-based cloud programs and corporate computer applications.
Analyst Brent Thill of UBS AG in San Francisco is upbeat about Microsoft’s playbook and raised the price target on its stock from $46 per share to $50. Thill noted that under Nadella’s leadership, Microsoft is taking more positive steps in product innovation and cost controls and will become more efficient in driving revenue at lower costs.
Clyde Noel is a Los Altos Hills resident and longtime investor in stocks. Disclosure: He owns shares in Microsoft.