Weekly Market Wrap 8-24-12

Rethink Wealth with Jay Peroni

Market volume has been light with little in the news cycle, yet stocks have put together modest gains for much of August. This past week we saw conflicting comments from the Fed and no new solutions in Europe.

The Quantitative Easing Dance Continues

Will the Fed take action of not? They keep dancing around the issue. On Wednesday, the Fed seemed ready to take significant action to prop up the economy as released in their minutes:

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

Then just a day later, St. Louis Fed chief James Bullard told CNBC:

“I do think that the minutes are a bit stale, because we have some data since then that has been somewhat stronger,” This seemed to indicate the Fed is putting the brakes on any new stimulus as Bullard currently opposes new bond buys. In light of the uncertainty, “will they or won’t they take action” stocks lost ground. Yet a rise in the euro (reaching a seven-week high) along with good gains in gold and commodity prices, QE3 could still be on its way soon.

The Looming Fiscal Cliff of 2013 Is Back on Investor’s Radar

• · The deficit shrinks to about $641 billion in fiscal year 2013 (or 4.0% of GDP), almost $500 billion less than the shortfall in 2012.
• · The fiscal tightening leads to a recession.

We did some a few “alternative fiscal scenarios” projected:

1. All expiring tax provisions are extended indefinitely, except the payroll tax reduction.

2. The AMT is indexed for inflation after 2011.

3. Medicare’s payment rates for physicians’ services are held constant at their current level.

4. Automatic spending reductions required by the Budget Control Act, which are set to take effect in January 2013, do not occur.

CBO projections

• Deficit of $1 trillion
• GDP growth continues

The current law shows some nasty consequences highlighting the need for spending, tax, and entitlement reform. Will Congress get the message? I’m not holding my breath on that one!

Which Sectors are in Favor?

Over the past month (July 25-Aug. 22):

Winners

Technology +9.9%

Energy +6.5%

Financials +6.4%

Losers

Utilities -1.1%

Health care +2.3%

Consumer staples +2.6%

The S&P 500 Index is up 5.7% during the same period.

Oil’s still on a Roll

Oil prices continue to push higher. Energy stocks have rallied, but consumers are feeling the pinch again. Since July when retail gasoline prices bottomed at $3.36 per gallon they have now climbed for seven consecutive weeks to end the week at $3.74 per gallon.

• Cheapest gas: $3.54/gallon in the Rocky Mountain Region
• Most expensive gas: $4.00/gallon on the West Coast

What’s causing the rise?

North Sea issues, worries about Iran, expectations of new Fed and ECB measures, as well as refinery outages and problems in the U.S. have all contributed to rising prices.

Housing Markets Still Showing Signs of Life

• Existing home sales increased 2.3% in July to an annualized rate of 4.47 million units.
• The National Association of Realtors is concerned about a lack of inventory amid increased buyer interest. Thus they are calling for more foreclosures to hit the market.
• New home sales grew by 3.6% in July (annualized pace of 372,000), which is the highest rate in over two years.
• Luxury homebuilder Toll Brothers reported “They are enjoying the most sustained demand they’ve experienced in over five years” according to their Aug. 22nd earnings press release.
• The FHFA Home Price Index jumped 1.8% in Q2 from Q1, the best gain since Q4 2005.
• Record low mortgage rates, gradual gains in the economy, and pent-up demand are all playing a positive role. Sellers are benefiting from a relative lack of competition.

Unemployment Picture Continues to Be Murky

Weekly unemployment claims rose 4,000 to 372,000, the highest reading in five weeks. The four-week moving average increased 3,750 to 368,000.These numbers signal continued uncertainty in the economy and job market and provide more ammo for the Fed to consider stimulus.

Eurozone, China and Germany: Manufacturing Slowdown!

As a reminder, any reading below 50 suggests trouble ahead:

• The preliminary HSBC China Manufacturing Purchasing Managers Index fell to a nine-month low in August, dropping from July’s 49.3 to 47.8.
• The preliminary composite eurozone PMI inched up from July’s 46.5 to 46.6
• Germany’s flash Composite PMI came in at 47.0 (47.5 in July), a 38-month low.

IDEA OF THE WEEK:

This Recession-Resistant Stock Should See Tremendous Growth Ahead

This often overlooked industry serves 93% of Americans each month. And this one stock is perfectly positioned for incredible gains.

As the presidential election cycle heats up, everyone starts paying more attention to the economy’s overall health. And according to recent nationwide USA Today/Gallup polls, most voters say their finances haven’t improved during the past four years. The truth is most families are still cautious with their spending and this trend doesn’t seem to be changing anytime soon.

During the lean times, it is smart for investors to look for recession-resistant stocks. With consumers saving more of their hard-earned cash, spotting where they are spending can often be a key to success. There are obvious places (food, energy and health care), but there are also some amazing overlooked opportunities.

As I pour through hundreds of stock reports and ideas each week, I’m consistently reminded of a business that’s right in front of me each day, no matter which city I’m in or where life may take me.

Operating in a $32 billion industry, this type of company has more than 61,269 retail operations in the United States alone. Even though this type of business is so obvious, many investors fail to see the potential gains.

Consumers have continued to eat out, even in a shaky economy. Instead of fancy meals, however, they have opted for casual dining, with tight budgets in mind. You have most likely visited this type of restaurant during the past month or have ordered delivery of this highly-demanded food.

Pizza restaurants are a popular place for families in good times and bad. Pizza restaurant growth continues to outpace overall restaurant growth, with pizzerias representing 17% of all restaurants in the United States. Believe it or not, 93% of Americans eat at least one pizza a month, with two-thirds ordering pizza for a casual evening with friends or family. On average, each American consumes about 46 slices or 23 pounds of pizza per year.

Most pizzeria’s are local mom-and-pop shops, so there is only three major pure-play publicly-traded pizza stocks – Dominoes (NYSE: DPZ), Papa John’s International (NASDAQ: PZZA) and Pizza Inn Holdings (NASDAQ: PZZI). Of course, there is Yum Brands (NYSE: YUM), which carries the Pizza Hut brand, but that’s not a pure-play stock — the company also owns KFC and Taco Bell, among others.

Of the major pizza stocks, one stock stands out as my favorite because of expansion plans, its disciplined strategy and commitment to shareholder value — Papa John’s International (NASDAQ: PZZA).

How it all started…

Papa John’s International was founded in 1985 in Louisville, Ky. As a high school student working at a local pizza pub in Jeffersonville, Ind., Papa John’s Founder John Schnatter felt there was something missing from national pizza chains — a superior-quality traditional pizza delivered right to the customer’s door. From day one, Schnatter refused to sway from that commitment to quality. It worked, and people loved his pizza.

Today, more than 25 years later, this major pizza retailer owns or franchises more than 3,500 restaurants in all 50 U.S. states and 29 countries. In addition, it has major expansion plans to open 25 new stores in the U.K., taking its total number of outlets to 200 in the U.K. by the end of 2012.

One key differentiator has been its commitment to fresh (never frozen) ingredients, convenient ordering, friendly and helpful staff and efficient delivery to keep customers coming back. With the added convenience of online ordering using a computer, mobile app and text-messaging, customers can now place “plan ahead” orders for future delivery.

Its innovative technology for “plan ahead” orders and rapid expansion plans alone make Papa John’s an attractive investment opportunity. But when you look at the stock’s fundamentals, you can really see how this is a no-brainer investment…

The fundamentals

This stock has great upside potential as they have low debt (around $181 million in total liabilities) and strong cash flow ($113 million) in this tough economic environment. In the second quarter of the year, the company brought in $318 million in revenue, about $12 million more than expected, an increase of 8.5% from previous year. Management is continuing to buy back shares and franchises, which should greatly benefit shareholders.

Additionally, the price-to-earnings (P/E) ratio is low at 15.4 compared with 19.9 for the industry average. Papa John’s reported second-quarter 2012 adjusted earnings of 61 cents a share, which topped last year’s 47 cents. The company has now delivered positive earnings surprises for four straight quarters with an average beat of 16.2%.

Risks to Consider: Though Papa John’s has seen tremendous growth during the past five years, the rising cost of ingredients is driving up consumer pizza prices. This could reduce demand and profitability. Pizza is a highly competitive industry and changes in consumer preferences could affect future sales.

Take Action: I have been looking for a good pizza stock for some time and Papa John’s Pizza (NASDAQ: PZZA) has always been a favorite of mine. The stock is attractively priced right now and should see tremendous growth ahead. It’s a great buy under $55 a share. The stock should hit $65 a share in the next 12-18 months.

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Weekly Market Wrap 8-24-12