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Farrell: What a Sendoff

Published: Monday, 3 Aug 2009 | 9:37 AM ET

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By: Vince Farrell

Vince Farrell
CNBC Contributor

That was the week that was ...

It was quite a week to finish quite a month. The major averages were all up about 8% for the month of July and some of the economic news announced last week was even good enough to support the move. Durable goods orders looked poor at first blush but after pulling the numbers apart there were a few encouraging stats. Most prominent was a category called "non-defense capital goods." It is a proxy for investment spending and was up a healthy 4.3%. The Case-Shiller Home Price Index was off 17% year-over-year but actually showed a month-on-month gain of 0.5%, the first gain in a few years

After a poor to middling 2-year and 5-year Treasury auction, Thursday's very enthusiastic auction of 7-year notes surprised everyone and the bond market finished the week on a decent note despite some $200 billion in offerings. There are no auctions this week, so the bond market has a chance to absorb all of what was offered. Q2 GDP was a better-than-expected -1%, but Q1 was revised down. While GDP was a touch better, the performance of some of the separate components reminds us we have a ways to go. Personal consumption expenditures were off 1.2%, which shows the effect of rising unemployment and falling home values. Gross private domestic expenditures were off 2.64%, which subtracted 0.83% from GDP and shows how dependent we are on government spending which added 1.12% to the total. Inventories were down a wicked $141 billion, and that clipped 83 basis points off GDP. Someday final demand will show signs of life and the inventory rebuild will be fun to watch.

The Chicago Purchasing Managers Index was also announced on Friday and was still on the contractionary side of the equation at 43.4, but compared to last month's 39.9, it looked OK. The new orders component of the report rose to 48 from 41.6. If the Chicago area can do moderately well under the circumstances that existed, the cash for clunkers expansion can only help since this area is heavily dependent on the auto industry.

Some stocks we highlighted in a positive vein this past week were Ciena (CIEN-rated Buy by Soleil/Elevate Research), Big Lots (BIG-rated Buy by Soleil/Stein Research), Plum Creek (PCL-rated Buy by Soleil/Torma Research) and Deltic (DEL-rated Buy by Soleil/Torma Research). Dan Cummins was cautious on Salesforce.com (CRM-rated Hold by Soleil/Lime Rock Research). At roughly 18 times the consensus S&P earnings estimate for this year, the market looks reasonably to fully valued. It is impressive how the market manages to stay up. Certainly when the Chinese market faded big-time during the week, that could have flowed into our markets, but it didn't. We still feel we are a bit ahead of ourselves, and a 10% correction would not be a surprise to me, and would ultimately be healthy. But having the market go up is also health-boosting.

Another name to add to the list of interesting stocks comes from A. J. Rice, our hospital/health care analyst. AmerisourceBergen (ABC-rated Buy by Soleil/Pomeroy Research); ABC's last sale price was $19.72; 52-week range of $22-$13; almost $6 billion market cap. A.J. logically feels that generic drugs will be widely used under any government health care program (ABC's core business) as people with previously undiagnosed diabetes, high cholesterol, and hypertension start to see a primary care physician. Estimates for this calendar year are $1.69 and $1.87 next CY. That's only 10.5 times next year. The company generated $398 million in cash flow in this year's third quarter and bought back $94 million in stock. Debt is a very reasonable 30% of capitalization, and A.J feels that ABC's growth rate could approach 20% before too long. To buy that potential growth for about 10 times makes sense to me.

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