Wyatt Research Week in Review: July 12-18

During a week in which mankind caught its first glimpse of the icy mountains of Pluto, the happenings of Wall Street were grounded in the hard numbers of company earnings.
In what was unofficially the second week of second-quarter earnings season, investors heard from such Dow darlings as General Electric (NYSE: GE), Johnson & Johnson (NYSE:JNJ) and Intel (NASDAQ: INTC), as well as banking behemoths JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC), Bank of America (NYSE: BAC), Citigroup (NYSE: C) and Goldman Sachs (NYSE: GS).
I don’t have space to discuss all the results of that slew of heavy hitters, so I’ll touch on just one company: Google (NASDAQ: GOOGL).
On Thursday, the undisputed search engine champion reported second-quarter net income of $3.93 billion, up from $3.35 billion the year prior. Revenue of $17.73 billion rose 11% year-over-year. Both the top and bottom lines easily surpassed analyst expectations. Shares surged Friday on the news, with Google’s Class A stock reaching an all-time intraday high of $703.
It marked the first earnings report for new Chief Financial Officer Ruth Porat, who assumed the CFO role in May after a 28-year career at Morgan Stanley (NYSE: MS).
One of the questions many investors had pondered since Porat came aboard is if her Wall Street background would spur Google to return some of the $70 billion in cash and marketable securities on its balance sheet to shareholders. During the Thursday earnings call, Porat was asked by Mark Mahaney of RBC Capital Markets if Google will potentially introduce a dividend or share repurchase program in the “next few years.”
“The way I view any assessment of a return of capital,” Porat replied, “is really in the context of maximizing stakeholder value over the medium to long term.” She went on to state that it’s “premature” to try to gauge whether or how capital returns fits in with capital expenditures and M&A.
So, while Porat left the door open for a dividend and/or share repurchase plan, don’t expect it to come soon. For the time being, her focus appears to be on disciplined revenue growth and expense management.
Here are some of my favorite articles from the week:
Africa: Investing’s Final Frontier – It is the last ground-floor investment opportunity left on Earth. And yet, all but the most adventurous of investors are even aware of it. But Africa is finally starting to get the notice of some big players. One of the largest U.S. pension funds – the New York Common Retirement Fund – plans to invest as much as 3% of its portfolio in Africa over the next five years. That translates to about $5 billion. But what about African investments for the average investor?
REITs Are Heating Up Again – The Federal Open Market Committee recently started downplaying the idea of increasing interest rates this year, which is good news for REITs. What’s more, even as rates rise, it’s hard to see a mass exodus from REITs happening, especially when the industry is still offering dividend yields that are close to double the average S&P 500 dividend yield and 10-year Treasury yield.
Don’t Get Blown Up in This High-Yield Income Minefield – The business model captivates: Borrow at a low rate, lend at a higher rate. Then take whatever income is earned on the spread and distribute it to shareholders. When mastered, the model generates reliable high-yield income. And a few select business development companies have mastered the model.
The Savvy Strategy Behind P&G’s Beauty Brands SaleProcter & Gamble (NYSE: PG) made big news recently when it announced that it will sell several dozen beauty brands to Coty Inc. (NYSE: COTY) for a cool $12.5 billion. The makeover could be just what the consumer staples giant needs to resuscitate its stock price, which is down 10% year-to-date.
Pentair: The Next Serial Acquirer – After losing its very public battle to break up DuPont (NYSE: DD) into multiple companies, activist hedge fund Trian Fund Management LP and its CEO, Nelson Peltz, are trying a different tact with a different company. This time the target is U.K.-domiciled Pentair PLC (NYSE: PNR), a manufacturer of pumps and valves. Trian co-founder Ed Garden even took to CNBC’s airwaves to urge Pentair to use its tax advantages to make acquisitions in this very fragmented industry.
Drink Up This Must-Have Water Stock – Water is a precious resource that humans can’t live without. So it stands to reason that a diversified portfolio should contain a high-quality water stock. Along those lines, one of the purest and most underrated plays on water is the water utility companies.
The Unique Utility Stock That Spins Sea Water Into Cash – Continuing the water utility theme, this company develops and operates desalination plants that convert sea water into fresh water through reverse osmosis. And since it’s headquartered in the Cayman Islands, it has a competitive advantage in the Caribbean market, where drinkable water is preciously scarce.
The Next Bull Market – The S&P 500 index has entered the third longest bull market in U.S. market history. But the charge upward has slowed down dramatically over the past eight months. Since the beginning of November 2014, the S&P has pushed higher roughly 5%, and most of those gains came in the last two months of 2014. But Wyatt Research options expert Andy Crowder thinks a new bull market in volatility is approaching, and he’s devised a strategy for making consistent profits while the market is trading sideways.
Have a great weekend!

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