Ignoring the S&P Can Boost Profits

Posted: Nov 04, 2011 12:01 AM

One of my readers asked me to comment about “where the S&P is going”.  

You know what?  It’s going to bounce around.

I guess the answer to that question is important if you buy index futures, but I buy stocks.

Market index trends don’t affect whether I buy stocks, because there are always good stocks to buy: profitable companies with good chart patterns.

But index trends affect which stocks I buy, which chart patterns I look for, and whether I’m going to hold the stock for two months or two years.

I recently gave readers a list of stocks that I was waiting to buy at lower prices.  The markets dipped this week, so I bought Microsoft, Intel and Target.  Kroger also reached my “buy” price, but I reconsidered on that one.  

There seemed to be more profit potential in the others.

I didn’t already own technology stocks, so my purchase of Microsoft and Intel didn’t overweight my portfolio–an important risk consideration. The only other industry where I own more than one stock is oilwell services & equipment. Curiously, I haven’t owned any oil companies all year.  None of them caught my eye.  Let’s review a few here.

Exxon Mobil Corporation (XOM, $78.86) is Big Oil with a global reach. They racked up $341 billion in 2010 sales, and $30 billion in 2010 profit.  Earnings per share (EPS) are projected to finish 2011 up 37.5%, which is an excellent increase, but then they flatten out to -2% and +5% in fiscal years 2012 and 2013.  The price earnings ratio (PE) is 9 and the dividend yield is 2.38%.

Exxon Mobil Corporation Stock Chart

Exxon Mobil Corporation Stock Chart by YCharts

Does that make Exxon a good investment?  Well, I wouldn’t embrace the flat projected earnings, but no doubt the PE and dividend are attractive from a “value stock” point of view. The thing is, I can buy companies with good earnings growth which fall in the “value stock” category, so there’s no motivation for me to buy a company which isn’t projecting consistent annual growth.

The projected earnings (EPS) patterns at Chevron Corporation (CVX) are similar: up a lot this year, then flat for two years. At BP PLC (BP) they’re even worse.

For now, I’ll skirt Big Oil and stick with oilwell services & equipment.

Readers should consult their investment and tax advisors to determine suitability, risk and taxation

Crista Huff, Goodfellow, LLC