Earnings growth you can Depend on
When so much seems so wrong to so many, why would any rightthinking soul own stocks? Everyone “knows” they’re too pricey. What would pull them up? A tractor!
Out back on my firm’s Washington State campus they were weed-whacking and uncovered a 1926 Farmall, an International Harvester model that revolutionized row-crop farming. Thanks to tiny, sharp-turning front wheels that meandered through rows nimbly, the Farmall turned a simple idea into big productivity gains, one of many that funneled us from half our labor in agriculture when my grandpa was young to under 1.5% now—while output grew vastly. While 1926 feels primitive, it’s just 24 years pre-my-time. Pretty new!
Technology deployers keep boosting productivity via clever ideas. Moore’s Law, Kryder’s Law, the Shannon-hartley Theorem, Koomey’s Law and DNA technology all whiz along. Dreamers will fashion Farmall-like twists to spur upward- driving earnings growth. I’ve no clue who develops what or when long term. But it will happen. Bank on it.
If we buy out a good firm at 14 times stable earnings we get 7.1% forever (1/14)—reinvestable into growth at deferrable cap gains rates. Or we can lend lousy firms long-term cash at 5.9% pre-income-tax. What’s better? The buyout, of course. Compounding that spread be- long and should respond to Chinese acceleration. It’s a great growth firm valued like a slow-growth one.
In the same suit globally is Alphabet (goog, 739), a.k.a. Google, which has done poorly of late with disappointing ad volume growth. That should be more than offset ahead by rising mobile pricing tied to value added from “location targeting.” Be careful: Big brother is watching. Big Brother sells at 18 times my 2017 earnings estimate.
Long-term readers know I urge being overweight big drug stocks through this bull market’s life. merck (mrk, 59) should be ripe for another run. Consensus earnings estimates for 2017 of $3.70 are flat and too low. Expect positive surprise early on tied to its seven “under review” pipeline drugs, particularly in cancer and hepatitis. I think it should sell at a P/E of 20 by early 2017.
There are so many reasons to dislike Oregon-based sports and footwear giant nike (nke, 57)— I love it. Overexposure to China! Easyentry industry! The emotion of Phil Knight’s departure! High saturation of developed markets! It goes on endlessly. But overseas Nike should surprise on the upside, earnings, too, even in China and emerging markets. And hence 22 times consensus earnings expectations for the May 2017 fiscal year should be blown away—blowing the stock up—in a good way.
If conservative, you will like Fox News. If liberal, the bulk of Fox’s other TV programing, like cable channel Nat Geo Wild. If nonideological, its movies—classic old hits or new ones—like X-men: Apocalypse. But as an investor you’ll like owning it all and more via twenty-first century fox (fox, 28) at 13 times my June 2017 fiscal year earnings estimate.
Roger Ailes’ departure notwithstanding, expect growth to resume, succession management to get a honeymoon and the stock to be a blockbuster.
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