The best value stocks in the world
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Associate Editor
David Stevenson Feb 07, 2011
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On Friday, at 1.30pm our time, global financial markets froze.
Why? Because it was time for the US Employment Report, also known as the 'non-farm' payrolls number. This shows how many new jobs have been created in the States in the previous month.
As I've noted before, stock traders always get very excited about it, because it's seen as showing where the US economy is heading. And that's key to markets everywhere.
But as so often happens when there's a manic focus on one individual stat, it rarely provides all the answers the market wants. So then much more time is then spent trying to decipher the numbers.
Yet while everyone's poring over the entrails of the jobs data, a far more important trend is being ignored. If you want to make money in the market, this one really is worth watching. Here's why…
Job figures can't help us much with our portfolios
The US non-farm payrolls report for January was confusing. Many fewer jobs were created than had been expected. But the country's overall jobless rate dropped from 9.4% to 9%. Cue many conflicting interpretations from both bulls and bears.
To be honest, I haven't spent too long trying to work it all out, for two reasons. First, these were just one month's figures, and distorted by bad weather at that. They're not a long-term trend. And second, non-farm payrolls get so heavily revised later on, we'll almost certainly find the real figures are very different to what's just been reported.
So frankly, the job figures can't tell us much that'll help us with our portfolios. However, there is something happening in the States that really does matter to investors.
US stocks are back in favour
Do you remember when we were told Chinese shares would take over the world? Or at least top the list of the biggest firms on the planet? It wasn't so long ago. Yet now it's all change. The US is top dog again.
In 2008, only eight of the 25 largest firms in the world were American. But with the Chinese market having a tough time lately, and US shares on a roll since March 2009, says Bloomberg data, 15 of the top 25 names are now from the States.
Why's this so important? Because in stock markets, money follows money. In recent years there's been huge global growth in index tracker-style funds (exchange-traded funds – ETFs – being one example).
The managers of these portfolios must match them against benchmark indices. So if the latter are now dominated by US stocks, much of the new cash coming into tracker funds must be applied to buying more of these shares. In turn, that's likely to push prices higher.
Now clearly, we're talking about liquidity-driven markets here. If equity fund cash inflows grind to a halt, all bets could be off. But for the moment, while there's plenty of money around, this is another reason why big US blue chips look relatively appealing.
In fact, it adds to an already strong case for such stocks. As we note in this week's MoneyWeek magazine cover story, developed markets may well fare better than their emerging cousins for the moment. And within mainstream markets, high quality large caps look the safest place to be. (I'll not repeat our case as subscribers can read the story here. If you're not already a subscriber, get your first three copies free here.)
Further, there's still good value to be found, as I noted last December. While the top US stocks have returned to the global pole position size-wise, within the blue chip ranks one sector has fallen "strikingly out of favour", according to fund manager John Hussman.
If this stock isn't worth buying, then what is?
'Consumer staple' companies, such as food and drink makers, are more stable businesses than most. So they've historically been given above average valuations by the market. Yet the sector has now fallen to its lowest relative book value compared with US cyclical stocks since Bloomberg started compiling the numbers in 1993. And there's a dedicated ETF – the Consumer Staples Select Sector SPDR Fund (NYSE: XLP) – that invests across the range of US consumer staple companies.
Moving onto an individual stock – one particular US blue chip in a related area, and with a $170bn market cap, is still amazing value. Johnson & Johnson (NYSE: JNJ) gets nearly two-thirds of revenues from healthcare products. It has a portfolio of household names. It also has a great track record. Earnings per share have grown for 26 years running, including at 11.5% a year over the last decade. The dividend has been hiked for 48 years in a row. As of end September 2010, there was no net debt – in fact J&J had $10bn of net cash.
Looking forward, net profits are set to rise by at least 6% a year until 2013. Yet this share sells on a forecast 2011 p/e of just 12.5. That's got to be good value. Even better, the prospective yield is 3.8%, which is expected to rise to 4% in 2012. For a US stock, that's a way above average return.
If J&J isn't worth buying, I don't know what is. And it's likely to be much more profitable than trying to work out those non-farm figures.
Update on French Connection
Finally, a quick update on French Connection (LSE: FCCN). This was just about our best performing Money Morning stock tip in 2010: A risky punt on the high street. And now we hear that pre-tax profits should be least £6.8m in the 12 months to 31 January.
This is well ahead of City forecasts, as well as previous hints from the company that last year's profits would be between £2.6m and £5.1m. What's more, it's a massive improvement on the previous year's £25m losses – so French Connection's restructuring plan has clearly turned the business around.
The market was euphoric, marking the shares up by 30% in two days. So they're now up by 180% on our tip price of just over a year ago. That's pricing in quite a lot of good news. While there could still be more upside as analysts upgrade their forecasts, this looks a good time for remaining holders to take advantage – and lock in a very juicy profit.
Our recommended article for today
Last year was a turbulent one for investors. With fears over everything from sovereign debt to commodity bubbles to China's economic growth, 2011 will be no less eventful. So where should you be investing now? MoneyWeek’s roundtable experts give their tips.
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