There is a big battle brewing between the bulls and the bears. Inverted yield curves, sub-par manufacturing ISM, and slowing job growth have the bears circling. Those very same low interest rates, a robust consumer and plentiful jobs keep the bull herd going. The American consumer is two thirds of US GDP but 17% of the global economy. Their actions can cover over slower manufacturing (11%) of the economy for some time, though not forever.
Tengler Wealth Management is still moderately bullish on large, U.S. companies (even the multinationals selectively despite the strong dollar). However, we expect volatility to continue through September and perhaps October depending on where the president comes down on China—I want to run as the tough guy on China or I want to run on getting the very best deal ever with China—because this is driving volatility at this point, not the Fed, in my view.
We had been recommending the consumer discretionary stocks (which we have begun trimming: SBUX, HD, MCD and COST). We now like the stocks listed below which we already owned but are adding to. Though hiring may be slowing we take heart in the Milwaukee PMI which shows blue collar employment at an expansionary 57.0 versus white collar employment at 41.1. Blue collar employment is a leading indicator.
I am worried about CEO confidence waning (due to trade), lack of capex spending which drives productivity 18-24 months out and improving productivity allows wages to grow without destroying corporate margins. We are encouraged that high quality companies are issuing debt to buy equipment (UAL) and stock buybacks (AAPL) among others. Both are good for stocks.
But companies still need to spend on the cloud and security so I have three software names that will benefit from the strength in the services sector and software spending:
- MSFT’s Azure cloud business is growing at 60+% year over year. Margins are exceptional and the company pays $1.84 per share dividend for a yield of just under 1.4% which has been growing 10.5% annually. The company has been taking share from AMZN’s AWS and is the leading provider in hybrid cloud.
- PANW is a network security company which has historically provided firewalls to the enterprise customer. They are transitioning the company to cloud security and are growing the top line at 22%. No dividend. This is a three to five-year investment, more volatile than the dividend paying MSFT but still attractive on our valuation work.
- AVGO: Though primarily a chip company Broadcom recently announced the purchase of Symantec’s enterprise assets and recently closed the purchase of Computer Associates—where almost all of 2H sales growth will be produced. Despite significant exposure to China, AVGO is increasingly transforming from a chip company to a multiple solution provider via software and security. The stock yields 3.6% and is growing at 56% annually over the last five years. Despite being consistently underestimated the stock has returned almost 30% annually for the last five years versus 10.5% annually for the SPX.
Disclosures: Nancy Tengler & Tengler Wealth Management owns all the stocks mentioned.