Blame the current stock market downturn on the Kiplinger Letter. In its July 25 business edition, Kiplinger said to prepare for a 10-20 percent stock market drop – and last Thursday and Friday the Dow Jones industrial average plummeted 387 points.
It didn’t come as a surprise – a correction was overdue, because the last one occurred nearly 34 months ago. Investors may want to sit on a correction but take a hard look at the portfolio to ensure that they can withstand the coming shock.
To top that off, over the past 25 years, stocks have experienced their worst month in August – and we got a preview of the trend on the first and second days in August. Selling is ongoing, with a long laundry list of reasons that include troubles in the Middle East, the employment cost index, fears of inflation and the earlier-than-expected Federal Reserve rate hike.
The muted price action comes despite corporate profits that have been pretty solid. According to Thomson Reuters, the percentage of companies increasing revenue and profits is running above historical averages.
One sign of a tired stock market is the failure of stocks to respond to good corporate profit news, and recent price action bears watching as the flow of announcements continues in coming weeks. One analyst said, “If you are too nervous to sleep tonight, you are too long on stocks, so trim some gains.”
Presently, I am still holding 95 percent of my portfolio in equities and making no changes.
Two Town Crier “50” stocks made news last week.
• Linkedln Corp. (LNKD; $202.56) shares increased 7.51 percent in after-hours trading Thursday after the professional networking company reported its second-quarter earnings, and shares continued to rise.
Linkedln’s second-quarter revenues increased 46.8 percent year-over-year to $533.9 million, which surpassed the Zacks consensus estimate of $512 million and beat management’s guided range of $500 million to $505 million.
The results came after better-than-expected quarterly reports from Twitter Inc. and Facebook Inc., two competing social media companies. LinkedIn experienced a 13 percent year-over-year increase in unique visiting members and a 22 percent increase in member page views in the quarter.
Linkedln differs from Facebook and Twitter, which make most of their money from advertising. Linkedln relies mainly on its “talent solutions” business for revenue, charging businesses and headhunters that use the site to find job candidates.
For the current quarter, the Mountain View-based company is forecasting adjusted earnings of 44 cents per share and revenue of $543 million to $547 million. The increased revenue outlook for the year prompted a rise in the stock price late last week.
As of Thursday’s closing, Linkedln shares have declined 17 percent to $180.64 since the beginning of the year. The stock has declined $32.36, or 11 percent, in the past 12 months.
The upgrade and downgrade history for Linkedln stock has been in the market perform or equal weight category, with a median price of $225 and a high of $280.
• Applied Materials Inc. (AMAT; $21.11) stock had a rough week, falling nearly 9 percent. The company will report quarterly earnings Aug. 14. The share price is up 20 percent year-to-date.
Applied Materials has a market cap of $27.8 billion, and last week the company refiled an application with China’s Ministry of Commerce seeking approval of its takeover of Tokyo Electron.
Applied Materials agreed last September to purchase Tokyo Electron for $9.39 billion in stock. It is not unusual for companies to refile approval applications to allow more time for the review process. Both companies manufacture machines that are used in the process of making silicon chips.
TheStreet Ratings team rates Applied Materials stock a buy, with a score of B+. The analysis mentioned that the company’s revenue growth came in higher than the industry average of 2.9 percent. The debt-to-equity ratio is very low, currently below the industry average. The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500.
Of 21 brokerages following the company, six have recommended a strong buy, with no sell recommendations. The median target price for stock is $25, with a high of $30.
Clyde Noel is a Los Altos Hills resident and longtime investor in stocks. Disclosure: He owns shares in Applied Materials.