Wed11262014

Business & Real Estate

Stock market suffers June swoon

The stock market continues to struggle in June, with investors fearing that the Federal Reserve could begin scaling back its aggressive stimulus program. Compounding the anxiety, consumer sentiment is on the wane.

Many investors ignore three key variables when evaluating the health of a bull market: earnings, interest rates and valuations. All three are beginning to look negative.

The bearish view carries some weight. The sudden jump in 10-year Treasury bond yields to 2.2 percent – up from 1.6 percent in early May – has surprised investors and put pressure on defensive stocks with bondlike returns in light of the economy’s strength. In addition, a surprise hike in mortgage rates (4.15 percent last week) threatens to slow a refinancing boom that delivered strong profits for banks over the past few years.

The market’s continued upward climb is likely to become narrower and choppier in the second half of 2013, but stocks still look better than cash or bonds. While it could be harder to make money in U.S. stocks in the second half of the year, many analysts think it is still too early to sell.

It is worth noting that many analysts consider the full-year targets for the Dow and the S&P comparably bearish, and predict a 15 percent decline from current levels to 12,969 and 1348, respectively.

Two Town Crier “50” stocks made the news last week.

• Safeway Inc. (SWY; $24.24) announced last week that it plans to sell its Canadian Safeway operations to food retailer Sobeys for $5.8 billion. The deal includes 213 Safeway markets, 52 fuel stations, 10 liquor stores and four distribution centers.

Safeway plans to use the money to repay $2 billion of its debt. The company will use the bulk of the remainder to purchase shares.

Zacks Equity Research reports that Safeway will be left with $0.8 billion of authorization to buy back shares, and shareholders should anticipate attractive returns in the near future.

The Pleasanton-based company operates stores under its own name as well as the Vons chain in Southern California and Tom Thumb in Texas. Locally, a new super Safeway recently opened at The Village at San Antonio Center in Mountain View, and a new podium-style store in Los Altos is scheduled for construction this summer.

Safeway’s upgrade and downgrade history has not been ideal for investors, with most analysts calling the stock “underweight” and recommending a hold. The mean target price is $24.07, with a high of $30.

• Hewlett-Packard Co. (HPQ; $25.13) reported an increase in share price last week, even as the Dow declined.

In a CNBC segment June 12, CEO Meg Whitman reported that the company’s turnaround is proceeding ahead of schedule. While admitting that HP has a long way to go before digging itself entirely out of the hole, Whitman said revenue growth is possible this year. Since December, the company’s growth has added more than $20 billion in value to shareholders.

HP faces the challenge of identifying growth opportunities when consumers appear less inclined to purchase its computers and printers. Sales of all product lines declined last quarter, but the company is building up non-PC divisions such as cloud computing and servers.

Among Forbes Magazine analysts, one deems HP stock a buy, with five others recommending that investors sell their shares. Other analysts suggest holding the stock.

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