As with Coca-Cola, people were betting that Johnson & Johnson would screw it up. On the previous quarter's conference call, the company intimated that things might be slowing. But when we saw the quarter Tuesday morning, it was pretty breathtaking. And it wasn't all bottom line. The company gave you 10% pharmaceutical growth, 12% if you back out the currency, and that's a terrific performance. No wonder the stock took off, and I don't think it's done either. Yes, that's how strong the business is. I would use this profit-taking wave to buy the stock.
Then last night we got two quarters that were shockingly good, again bottom and top line -- Intel (INTC) and Yahoo! (YHOO). First, Intel, after disappointing over and over again, spending way too much with so little to show for it, actually delivered a quarter that showed the leverage of the investments. With just a little bit of revenue gain, you saw a very positive return compared with expectations.
Sometimes I think people just don't listen to the conference calls, because if they did, they would have heard that Intel is now the low-cost producer and is giving you chips that use much less battery power and chips that are ideal for big data storage. What's not to like? And the gross margins were guided higher, because the company no longer needs to spend as much, as the next-gen build-out is complete. Why didn't the stock jump? I think that's in part because people simply don't believe, as with Alcoa, that it was all that good or sustainable. I think it's the opposite, and the stock, with a 3.3% yield, is now in the classic growth camp. Yahoo! is bugging me, because people think the only thing going right is Alibaba. I have to admit, this minority stake that Yahoo! holds in Alibaba is probably going to be worth the whole of the company, maybe more. I say maybe more because I believe that people are valuing Yahoo! by valuing the company away from Alibaba as worth less than zero. I am not kidding, especially if Alibaba comes public with a valuation of $250 billion, certainly a possibility, because with 66% revenue growth, an unanticipated acceleration in revenue from the previous quarter, it's the fastest-growing large-capitalization company on earth.
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That 24% stake in a $250 billion company is worth a heck of a lot more than the $36 billion market cap of Yahoo!, even after taxes, and that is why I say that people are valuing the company as a dead-weight negative. But that's ridiculous, as this was a quarter that showed stabilization and even growth across many metrics, and I think it was obvious from this quarter that Marissa Mayer has given you a unique opportunity here. If Yahoo! monetizes its stake in Alibaba, it can shrink its float dramatically so that even a little bit of revenue growth will cause a gigantic amount of earnings per share to flow to the bottom line. I believe the stock is headed to the mid-$40s.
Now I know that seems problematic, in that both Bank of America and CSX (CSX) are reacting poorly to earnings. But I believe those reactions are short-sighted. Bank of America had a very positive acceleration in lending, one that would be much bigger for the bottom line if stubbornly low interest rates would just go higher. On the CSX call, we heard that 83% of its markets have favorable conditions and that the other markets are stable, including the all-important coal market. Pricing is weaker, and that's a true negative, but far be it from me to say that a company with heavy coal traffic shouldn't do better next quarter, given that coal was, in the words heard on the call, "a lot stronger" than the company anticipated. The CFO pointed out that he feels good about the top line, and added, "I would think that based on what you've seen here over the last few weeks where volumes are up double digits" that the next quarter is going to be better.
You can say that the sample is too small. You could conclude that we haven't even heard from whole sectors of the economy. But can we also stipulate that by this time last quarter, we were crying in our beer because both revenue and earnings were less than we anticipated? If the only stinker was JPMorgan, and I reiterate that that was the only one that truly delivered subpar top and bottom lines, then perhaps we need to recognize and even celebrate a positive change when we see one.
Surprises Among the Leaders
Posted at 1:12 P.M. EST on Thursday, April 17, 2014
Oils, utilities and a smattering of special situations. That's what has managed to climb the wall of worry to get to the S&P 500's 52-week high list.
I find this list pretty shocking. Consider that of the 28 new highs, 13 are utilities in some fashion. That's directly related to both the collapse in bond yields but also a belief that Federal Reserve Chair Janet Yellen is right and that this economy is not going anywhere soon.
You can't possibly make an earnings case for Wisconsin Energy (WEC) or Northeast Utilities (NU) or American Electric Power (AEP) or any of the others for that matter. You can make a consistent dividend case, though. These are all time-tested bond-market equivalents that reflect people reaching for yield.
When I say reach, I mean reach, because people are willing to buy Frontier Communications (FTR) and Windstream Holdings (WIN), two stuttering telecoms that are often talked about as problematic when it comes to those payouts.