After moving mostly sideways since mid-March, the Dow Jones Industrial Average and the S&P 500 hit new closing highs nearly every day once the earnings season started. With record highs during that time, many analysts have suggested that it’s time to take a step back and let the stock market cool a bit.
While companies report their earnings during all-time highs, if the results disappoint, the temptation to lock up gains may be hard for investors to resist. Also keep in mind that across-the-board government spending cuts totaling $85 billion took effect via furloughs, job cuts and lost contracts in the defense sector.
The strong numbers also raise the possibility of the Federal Reserve’s quantitative easing program coming to an end. Thirty-five of 45 analysts anticipate that the Fed will end its current round of buying $85 billion a month in assets to keep borrowing rates down and boost the economy.
Stocks are no longer cheap. With average price/earnings ratios in line with long-term norms, stocks could be vulnerable if results suggest that profit margins are retreating from recent record highs.
While a near-term pullback should come as no surprise, the Dow remains firmly in the bullish camp, with quality stocks at good prices. It may be time to short some of the longs in the portfolio.
Two Town Crier “50” stocks made headlines last week.
• NVIDIA Corp. (NVDA; $12.90) gave its shareholders some good news last week when officials announced that the company planned to return $1 billion in cash to shareholders this year, including $100 million in shares being repurchased this quarter.
CEO Jen-Hsun Huang said sales of NVIDIA’s Tegra processor for mobile devices would remain flat this year, and the company plans to concentrate on chips for smartphones and tablets.
The Santa Clara-based company is suffering because consumers are purchasing tablets and smartphones instead of personal computers. With a market capitalization of $8 billion, NVIDIA has been diversifying beyond graphics for PCs.
Global PC sales declined 14 percent in the first three months of the year, the steepest drop in 20 years of record keeping. Buyers appear to prefer tablets – or at least steer away from Microsoft Corp.’s new Windows 8 system.
Huang said the company has sacrificed some Tegra sales to focus on integrating Long-Term Evolution features on upcoming versions, making them compatible with high-end carrier networks.
Analysts continue to downgrade the stock to a hold or market-perform. The high target price for NVIDIA is $18, the median $14.
• Facebook Inc. (FB; $26.61) shares rose last week on the news that General Motors plans to resume advertising on the social networking site.
Shares are currently approximately $10 below last spring’s initial public offering of $38. They have risen no higher than $38.23 per share, and dropped as low as $17.72.
On the media’s radar, Facebook’s IPO left founder Mark Zuckerberg owing as much as $1.1 billion in federal and state taxes. Thousands of Facebook employees also face steep tax bills because of their IPO windfalls. Many of those shares are now on the market to cover investors’ tax bills.
Another challenge Facebook confronts is demographics. Many market watchers predict that youth will migrate to other sites such as Twitter and Google.
Numerous analysts still suggest an upgrade to buy for Facebook stock, while others recommend a hold or a neutral. The mean price target is $33.20, with a high target of $40.