Farrell: A Little Economic News and Some Stocks
Chief Investment Officer, Soleil Securities
Economic news on Tuesday came early and left little impression. The news from overseas was actually more encouraging than the domestic variety. The German ZEW is a confidence measure that rose significantly from 39 to 56, its highest level since April of 2006. Since Germany is the largest player in the Euro zone it's worth noting. The UK inflation index was a touch below estimates but consumer prices rose a benign 1.8% for the last year.
Producer Prices in the US fell .9% last month and the headline PPI fell -6.8% for the last year. That headline could make you worry about deflation but the core PPI, taking out the volatile food and energy components, actually rose 2.6% for the year. The last months headline decline of -.9% was led by a fall of -10% in gasoline so that is why the core is the better number to look at. We know oil has upticked from last month's reading so best to always look at both measures. In any event, this report was not a market mover.
Nor was the report on housing starts. They came in a bit below the most recent round of guesses at 581,000. We have often said with the large inventory of existing homes for sale, and with an indefinable but large "shadow inventory" waiting to come back onto the market, new homes are not helpful to the overall.
A.J Rice of Soleil/Pomeroy Research has been so helpful on his stocks all year. He feels that the hospital management stocks, despite having seen moves of 100% in some cases, still have room for further appreciation. These companies fell precipitously at the beginning of the downturn due to the credit markets freezing up, the fear that recession would add to bad debts significantly, and worries over the form of a health care reformation. The credit markets have healed appreciably which is key to these highly leveraged companies. While the recession has added to bad debts, it isn't beyond the industries prior experience or their ability to cope. And the hospital management companies got to the dance floor early and eager and have negotiated well with both the White House and the Senate Finance Committee and have come up with proposals they can live with. A.J feels that the historic valuations of 6.5 to 9.5 EV/EBITDA are worthwhile price objectives. His three favorites are towards the lower end of that range. Community Health (buy-rated, last sale $30.25) is at 6.9 times EV/EBITDA: Health Management Associates (buy-rated, last sale $6.74) trades about 7.2 times: and Universal Health Services (buy-rated, last sale $58.50) is at 5.4 times.
Jeff Stein of Soleil/Stein Research reaffirmed his positive feelings about TJX (TJX, buy-rated, last sale $34.55.) The company reported a slightly better quarter than anticipated. It's worth noting that in this difficult financial environment, the company bought back 6.4 million shares for $194 million this past quarter and a total of 8 million shares for $237 million for the year so far. They have $234 million in net cash versus $315 in debt this time last year which is quite some turaround in a tough market. Jeff thinks the stock is worth a historical multiple of almost 17 times which gives him a target of $42. Both Jeff and A.J. have just issued reports. Call for a copy.