Tuesday, July 21, 2009

Daily Wrapup For July 21st

Last night's Asian rally failed to carry over to North America, except initially. Although the three averages were up at the beginning of the day, in line with the futures, the opening gain fizzled early on in the day. The Dow spent the day well above the other averages because of large leaps in two Dow stocks. Both were long-term residents of the Low P/E Bin. The first is Merck, which gained 6.12% on the strength of better than expected 2Q earnings. The second is Caterpillar. CAT's results so energized the stock, it was up by more than 10% as of market's open. Its gain was moderated as the day went on, but it was the story stock of the day. Not bad for a company whose 2Q '09 earnings were 66% below 2Q '08's. It and Merck also made for a stellar day for the "Dogs of the Dow" strategy. Their performance also kept the Dow out of a loss position for half of the day. All the averages managed to mount a rally at the end, leaving none of them in a loss position at the end of regular trading.

As the markets rose, so did the boundary P/E for the lowest quintile: it increased to 10.52 from yesterday's 10.46. The S&P's dividend rate stayed the same at 2.88%. When ETFs and stocks with market cap of less than 500M were eliminated, as well as ones with greater than 10% yield, the Low P/E Bin was left with ninety stocks: the same as yesterday. Here are the changes in the Bin, as dash-listed below:

- BP Prudhoe Bay Royalty Trust
- Financial Federal Corporation

- Merck & Co., Inc.
- Caterpillar Inc.

BP Prudhoe got back in the Bin because its yield decreased below 10%. Financial Federal is a new Arrival, and it got in because of P/E compression meeting a rising lowest-quintile cut-off. It offers factoring, leasing and lending services primarily to construction- and road-related industries. Perhaps comparisons to more troubled companies have been made, but Financial Federal's financial statements don't show a commonality. It did, however, experience a modest EPS decline in Q3 of FY '09 with respect to the same quarter a year ago.

Both Departures got out because of P/E expansion. As noted in the top paragraph, both Merck and Caterpillar shot up today. Merck's 12-month trailing EPSs rose slightly, from $2.79 to $2.80. Caterpillar's, on the other hand, dropped from $4.02 to $3.00. Merck got out solely due to the rise in its price, while Caterpillar got out due both to stock gain and 12-month-trailing EPS drop.

That's all for today's Wrapup. Thanks for reading, and may your own Dogs leap up.

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