About Me 0011: People Making Money Net

S&P 500 profits are back to pre-crisis levels, but valuations are still low. Does this signal a buying opportunity?

Large American companies are beginning to look healthy again, although this has not been reflected in their stocks’ share prices. The S&P 500 companies are set to increase net income by 19% (13% up in the second quarter), according to Rita Nazareth and Lu Wang of Bloomberg. This is in step with the 6.9% average net income increases that S&P 500 companies have posted over the past 51 years.

Despite these profit improvements, S&P 500 shares appear undervalued by their price-earnings (P/E) ratios, indicating that investors have yet to snap up these well-performing stocks.

The overall S&P 500 index is trading at a P/E of 13.5 (based on projected earnings), which is almost 8% lower than the ratio's 5-year average.

Investors may still be hesitant about investing in stocks given the wobbly global economy. The Euro crisis has yet to be resolved, the debt ceiling is still a pressing issue in the US, China is making a concerted effort to slow down its rapidly expanding economy, employment data has been weak in the US, and the Federal Reserve has ended its bond-buying stimulus program (QE2).

“The fact that valuations have not returned to normal is simply that people are prejudiced against stocks… Earnings growth has been spectacular. People who are buying stocks today are buying an undervalued asset,” David Kelly, of JPMorgan told Bloomberg.

By contrast, Brian Jacobsen of Wells Fargo sees things in a slightly different light.

“Valuations are still at a discount because investors don’t just pay for the next quarter’s earnings…They pay for the whole trajectory of earnings going into the future. Though you can be optimistic about what will be reported for the quarter that just ended, it’s hard to get too excited about growth going forward,” Jacobsen told Bloomberg.

To help you with your own research, we compiled a list of S&P 500 companies undervalued by their P/E-Growth (PEG) ratios (PEG less than 1) that institutional investors have been buying up during the current quarter.

Hedge funds love these undervalued stocks--do you agree? Use this list as a starting point for your own research.

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List sorted by net shares bought by institutional investors as a percentage of the share float.

1. BlackRock, Inc. (BLK): Asset Management industry with a market cap of $35.84B. It has a PEG ratio of 0.89. In the current quarter, institutional investors have bought 31.3M shares (net), which represents 26.53% of the 117.97M share float.

2. First Solar, Inc. (FSLR): Semiconductor - Specialized industry with a market cap of $10.94B. It has a PEG ratio of 0.92. In the current quarter, institutional investors have bought 3.0M shares (net), which represents 5.11% of the 58.70M share float.

3. Hewlett-Packard Company (HPQ): Diversified Computer Systems industry with a market cap of $73.2B. It has a PEG ratio of 0.99. In the current quarter, institutional investors have bought 100.8M shares (net), which represents 4.87% of the 2.07B share float.

4. Citigroup, Inc. (C): Money Center Banks industry with a market cap of $116.21B. It has a PEG ratio of 0.87. In the current quarter, institutional investors have bought 139.2M shares (net), which represents 4.78% of the 2.91B share float.

5. Wells Fargo & Company (WFC): Money Center Banks industry with a market cap of $145.93B. It has a PEG ratio of 0.97. In the current quarter, institutional investors have bought 235.6M shares (net), which represents 4.77% of the 4.94B share float.

6. Microsoft Corporation (MSFT): Application Software industry with a market cap of $224.56B. It has a PEG ratio of 1.0. In the current quarter, institutional investors have bought 305.4M shares (net), which represents 4.09% of the 7.46B share float.

7. Staples, Inc. (SPLS): Specialty Retail, Other industry with a market cap of $10.89B. It has a PEG ratio of 0.84. In the current quarter, institutional investors have bought 21.9M shares (net), which represents 3.09% of the 707.97M share float.

8. Nasdaq OMX Group Inc. (NDAQ): Diversified Investments industry with a market cap of $4.26B. It has a PEG ratio of 0.79. In the current quarter, institutional investors have bought 3.1M shares (net), which represents 2.43% of the 127.48M share float.

9. Hartford Financial Services Group Inc. (HIG): Property & Casualty Insurance industry with a market cap of $11.18B. It has a PEG ratio of 0.88. In the current quarter, institutional investors have bought 8.3M shares (net), which represents 2.07% of the 401.04M share float.

10. Harman International Industries Inc. (HAR): Electronic Equipment industry with a market cap of $3.24B. It has a PEG ratio of 0.82. In the current quarter, institutional investors have bought 1.4M shares (net), which represents 2.01% of the 69.68M share float.

(List compiled by Andrew Dominguez)

The New York Times reports that the brilliant analysts at S&P have decided that if the banks that loaned all that money to Greece have to eat any losses, voluntarily or otherwise, S&P will call that a default. If they are correct, those who wrote protection credit default swaps (CDSs) on Greek debt would be forced to pay off on the losses incurred by buyers of protection. In an earlier article, In Greece, Some See a New Lehman, the NYT provided another scare article threatening catastrophe after a Greek default.

You’d think there was some kind of conspiracy to protect US and European banks and CDS protection writers from losses they richly deserve. I’m smelling Moral Hazard. Why should anyone care if they lose billions? These articles are designed to scare people, sort of the bankster version of those local TV teasers about lights showing crud on motel bed covers, trying to get you to watch their vapid talking heads.

As an opening shot, the NYT reports that European banks have been dumping Greek debt onto the European Central Bank and the IMF, which the NYT explains dumps the losses onto taxpayers. How that happens is a mystery to me. The ECB controls the Euro, and if anyone is worried about the IMF, central banks can print some money just for it. That is glib, but essentially correct, and it isn’t a catastrophe for anyone.

Second, a lot of US money market funds provide short term loans to European banks, which pay a somewhat higher interest rate that US banks, currently swollen with free cash from the Fed. We are supposed to be very afraid that European banks won’t repay that short-term debt. That warning came weeks ago, and the Fed has put contingency plans in place for this unlikely outcome. These loans are short-term, and at least some of it is repurchase agreements, meaning that the loans are collateralized in full. That isn’t a catastrophe, either. And if money market funds lose money, people will leave that industry and put their money back in US banks, which sucks, but again, not a catastrophe. And I bet there are trial lawyers who can bludgeon the money market fund managers into making people whole.

The third fright is credit default swaps. If S&P is right about the default, it will trigger money movements. The analyst Kash at The Street Light provides a very rough estimate of US CDS exposure on Greek debt of $35 billion, but that doesn’t seem to cover all the CDSs laid off on hedge funds and insurance companies. Maybe that will be a problem, but I’m sure it matters only to the losers, and not the winners. JPMorgan Chase has a pile of CDSs on Greek debt, no doubt, but it may have both long and short CDSs, so who knows if it has any net exposure. A lot of those CDSs are collateralized, which will mitigate any problems. Anyway, a little excitement is good for them.

Kash estimates that direct creditors, those holding Greek bonds, would eat 70% of the losses, and protection CDS writers would eat the rest. The total amount of Greek debt is about $480 billion. If holders of Greek debt eat say $120 billion, about 25% of the losses, CDS protection writers would pay off $36 billion. That isn’t a catastrophe. It’s fun for all of us to watch the gamblers pay off, or go whining to their new Tea Party friends for a bailout.

Why would we rob any of them of their just desserts? Especially when it is so obvious that the intent of the banksters is the actual destruction of the Greek government, to be replaced by the first true corporatacracy. The nation that gave rise to democracy can lead into the brave new corporate future.

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About Me 0011

Wednesday, August 3, 2011

People Making Money Net

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