Wed10222014

Business & Real Estate

Fed will move cautiously on rates

Another closing high for the S&P 500 and Dow Jones industrial average, within 1 percent of all-time highs, is not what investors expected for August. Historically, August has been an underperforming month.

A bullish trend has been reconfirmed, and the August lows will no longer represent significant points.

“U.S. labor markets remain hampered by the effects of the Great Recession, and the Federal Reserve should move cautiously in determining when interest rates should rise,” Federal Reserve Chairwoman Janet Yellen said Friday in defense of her policy.

Most economists doubt that the Fed will raise rates before mid-2015, and when it does, it will act gradually.

For now, investors should watch the averages, look for buying and selling opportunities one stock at a time and maintain a nearly fully invested portfolio.

Two Town Crier “50” companies made headlines last week.

• Hewlett-Packard Co. (HPQ; $37.16) released its third-quarter financial results last week, with the surprise increase in revenue pleasing investors.

Third-quarter net revenue of $27.6 billion rose 1 percent from the same quarter the prior year, and diluted net earnings per shares of 89 cents increased 3 percent from the prior year’s quarter.

HP offers a wide range of products, but its biggest single source of income came from personal computer sales, which grew nearly 12 percent in the third quarter. However, Wall Street investors hold a mixed view for the future of PCs.

TheStreet’s Jim Cramer said he was impressed with HP’s cash-flow generation and ability to make acquisitions and go on the offense. Other analysts believe that PC growth has peaked and will deter HP’s ability to grow over a longer period.

The company’s strengths are evident in numerous areas besides its stock-price performance. However, several analysts report weaknesses related to operating cash flow and poor profit margins. HP stock shot up nearly 100 percent in 2013 and is up another 28 percent this year. It might never match the growth of the past, but it won’t disappear from the market.

The stock’s upgrade and downgrade history has varied, but recently numerous analysts have deemed the stock a buy. The median target price is $37.40, with a high of $43.40. The dividend yield is 1.9 percent at 64 cents per share.

• Apple Inc. (AAPL; $101.52), the world’s most valuable company, established a record intraday stock price Aug. 20 of $101.09 but closed at $100.58 the following day. That bullish price reflects a positive outlook for the future of the iPhone 6.

Apple’s previous closing price totaled $100.30 after adjusting for the recent 7-for-1 stock split. Shares have risen since the company released the iPhone 5 in September 2012, and the stock has jumped more than 25 percent in 2014.

In Apple’s recently concluded third quarter, iPhone unit sales rose 13 percent year-over-year to 35.2 million. Revenues climbed to $19.75 billion, up 9 percent from the previous year’s quarter.

In a recent Morgan Stanley comment, analyst Katy Huberty predicted that Apple stock would rise to $120 within a year as investors receive a better picture of the company’s growth potential. If her expectations of a larger-screen iPhone 6 prove correct, Apple’s sales could rise again. Huberty also predicted that Apple would release the iWatch in October and sell as many as 60 million of the wearable devices at $300 a watch.

Forty-five brokers upgraded Apple stock to overweight, strong buy or buy, with a new target high of $139. The dividend yield is 2.1 percent at $1.88 per share.

Clyde Noel is a Los Altos Hills resident and longtime investor in stocks.

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