Day: September 10, 2024

The big news recently concerned the August jobs report, which came in below expectations. The softness in the jobs market spooked investors, and market watchers are now looking to the Fed’s next meeting, and an anticipated cut in the key funds rate.

So, where does the stock market go from here? The overall trend of the past year remains bullish, and investors aren’t fleeing the market – yet. But the question remains, where should investors start putting their money? A recent report from Morgan Stanley’s chief US equity strategist, Mike Wilson, suggests buying stocks that show a combination of defensive positions and overall quality.

“Until the bond market starts to believe the Fed is no longer behind the curve (spread between 2-year yield and Fed Funds narrows), growth data reverses course and improves materially or additional policy stimulus is introduced, it will be difficult for equity markets to trade with a more risk on tone, in our view,” Wilson said. “This means valuations are likely to remain challenged for the overall index… In such an environment, quality + defensive equities should continue to show outperformance.”

The stock analysts at Morgan Stanley are following this lead, and pointing out solid defensive plays that should command investor attention going forward. We’ve used the database at TipRanks to look at the broader picture on two of these quality defensive stocks, so let’s take a dive into the details.

Johnson Controls (JCI)

We’ll start with Johnson Controls, maybe not a household name but a well-known player in the world of HVAC. Johnson Controls is a Fortune 500 name, boasts a market cap of almost $46 billion, and generated $26.8 billion in its fiscal year 2023, its most recent full fiscal year. The company has built its success on the basic necessity of the core service it provides: HVAC, fire control, and safety/security systems for commercial and office spaces.

Johnson Controls has been in business since 1885, when it was founded as an electric service provider. The company’s longevity is a distinct asset – this is a firm that knows how to adapt to changing times, and can show investors a long record of success. The company operates at a global scale, in more than 150 countries, and employs approximately 100,000 people. Johnson is known for integrating the latest technologies into its ‘smart building systems,’ including AI and machine learning, without forgetting the basics of the hands-on mechanical technology.

Earlier this summer, Johnson Controls made an important change, when it announced an agreement to sell off its Residential and Light Commercial HVAC business division. The buyer, Bosch, will acquire this segment of Johnson in a transaction valued at $8.1 billion; JCI’s consideration of the total comes to $6.7 billion. The move will turn Johnson Controls into a pure-play provider of ‘comprehensive solutions for commercial buildings.’

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Also in July of this year, Johnson Controls announced the pending retirement of CEO George Oliver after 7 years in the position. Oliver will remain at the helm until a replacement chief executive is appointed, and will continue as chairman of the Board of Directors.

Turning to the financial side, we find that Johnson Controls reported a top line of $7.2 billion in its last quarter, fiscal 3Q24. This figure was up a modest 1% year-over-year, but missed the forecast by $140 million. At the bottom line, the company reported an EPS of $1.14 in non-GAAP measures, beating the estimates by 6 cents per share.

For Morgan Stanley analyst Chris Snyder, the key here is this company’s solid position in its niche, and a sound outlook going forward. As he writes, “JCI portfolio transformation brings attractive risk-reward as the company is now a pureplay provider of commercial building solutions (HVAC, Controls, Fire & Safety) – resulting in a more durable business and providing a re-rating opportunity. We see ~30% pro-forma service mix and increased exposure to industrial mega-trends (Data Center, US Reshoring) pushing the equity into a more premium comp group. While our math pegs pro-forma F’26 EPS L-MSD below existing operations, this can be offset with relatively minor cost take (~4% of divested sales). What’s left is largely unchanged EPS for a high-quality business while JCI equity continues to trade at 2-3 turn discount vs the peer group.”

These comments support Snyder’s Overweight (Buy) rating on the stock, and his price target, of $85, indicates an upside of 24% for the year ahead. (To watch Snyder’s track record, click here)

This stock sports a Moderate Buy rating from the Street’s analysts, based on 13 reviews that include 7 Buys and 6 Holds. The shares are priced at $68.60 and the $75.92 average price target implies a one-year upside potential of almost 11%. (See JCI stock forecast)

General Dynamics (GD)

The second stock we’ll look at here is General Dynamics, an aerospace and technology manufacturing company – and one of the major defense contractors working in the US economy. General Dynamics was founded in 1893 and focused on the development of submarines as the Holland Torpedo Boat Company; it provided the Navy’s first modern subs as early as 1900. Since then, it has only grown. It provided 80 submarines for the US Navy during the Second World War, and expanded into the aerospace industry after the war. It changed its name to General Dynamics in 1952, and since then, it has built a reputation as an innovator, with a hand in the development of the F-111 strike aircraft and, later, developing and building the wildly successful F-16 fighter.

Today, General Dynamics operates through four business divisions: Aerospace, Marine Systems, Combat Systems, and Technologies. The company’s highest profile products today come from the Marine Systems division, where the Bath Iron Works and the Electric Boat segments produce, respectively, the Navy’s Arleigh Burke-class destroyers and its nuclear-powered submarines. In addition, the Aerospace division includes the famous Gulfstream jets.

In recent months, General Dynamics has secured several important contracts, showing how the company remains relevant to the defense industry. It started the month of August by announcing a $174 million contract for retrofit, repair, and support of the US Army’s Stryker vehicles, and followed this later in the month with a $1.32 billion contract modification that allows it to purchase ‘long lead time’ materials for the Virginia-class nuclear submarine program. And, in early September, GD secured a $491 million modification to an Air Force contract, for the Proliferated Warfighter Space Architecture Ground Management and Integration program, ongoing in Huntsville, Alabama and Grand Forks, North Dakota.

General Dynamics last reported earnings results for 2Q24, and in that quarter, top line revenues came to $12 billion – up 18% from the prior-year period and beating expectations by $500 million. The bottom line EPS figure of $3.26, while up more than 20% year-over-year, missed the forecast by 7 cents per share.

On the balance sheet, General Dynamics finished the quarter with $1.4 billion in cash on hand – after paying out $389 million in total dividends, repurchasing $34 million worth of stock, and investing $201 million in capital expenditures. Looking forward, the company can lean on a $91.3 billion work backlog.

Kristine Liwag, one of Morgan Stanley’s 5-star analysts, covers this defense giant, and in her coverage she notes that the company has plenty of strengths: “We see GD with a premier balance sheet and strong prospects for capital return upside. A refreshed line-up of new Gulfstream aircraft coupled with strong demand for GD’s defense products (e.g., ammo, ground vehicles) together present strong earnings growth potential… We see GD entering a unique period of margin acceleration.”

To quantify her stance, Liwag rates GD shares as Overweight (Buy), and her $345 price target indicates room for a 14.5% gain in the next 12 months. (To watch Liwag’s track record, click here)

This stock has earned a Strong Buy consensus rating from the analysts, with the 16 recent recommendations breaking down to 13 Buys and 3 Holds. The stock’s $301.56 trading price and $329.13 average target price together suggest an upside of 9% by this time next year. (See GD stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

(Bloomberg) — A rally in the world’s biggest technology companies lifted stocks, countering a slew of cautious comments from American bank executives that sent financial shares tumbling.

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Tesla Inc. led gains in megacaps. Oracle Corp. hit an all-time high. JPMorgan Chase & Co. sank more than 5% after tempering its earnings optimism. Bank of America Corp. said investment-banking results will come in lower than some on Wall Street expected. Earlier this week, Goldman Sachs Group Inc. signaled its trading unit is on course to drop 10% from the prior year. Ally Financial Inc. flagged intensifying credit deterioration among its borrowers.

Traders also weighed election risks ahead of the first debate between former President Donald Trump and Vice President Kamala Harris. The match-up promises more clarity for investors who’ve already spent months parsing campaign-trail language around tax proposals, tariff projections, government spending plans and policies on energy, electric vehicles, health care and more.

In the run-up to the consumer price index, a 22V Research survey showed that 56% of respondents believe that core inflation is on a “Fed-friendly glide path”. Meantime, the share of investors expecting a recession has stayed elevated. Roughly 48% of investors surveyed expect the reaction to CPI to be “mixed/negligible,” 32% said “risk-on” and only 20% “risk-off.”

“Given the market’s aggressive expectations for Fed rate cuts, a hotter reading should lead to downside volatility,” said Sameer Samana at Wells Fargo Investment Institute. “A cooler print has more two-way risk as it creates more room for the Fed to cut, but may also indicate the economy is slowing faster than anticipated.”

The S&P 500 rose 0.45%. The Nasdaq 100 added 0.9%. The Dow Jones Industrial Average fell 0.2%. A Bloomberg gauge of the “Magnificent Seven” megacaps jumped 1.5%. The Russell 2000 of small firms was little changed. The KBW Bank Index sank 1.8%.

Treasury 10-year yields dropped six basis points to 3.64%. Brent futures slid below $70 as oversupply fears deepened.

US equities are unlikely to slump 20% or more as the risk of a recession remains low against expected interest-rate cuts from the Fed, according to Goldman Sachs Group Inc. strategists.

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The team led by Christian Mueller-Glissmann said while stocks could decline into the year end — hurt by higher valuations, a mixed growth outlook and policy uncertainty — the odds of an outright bear market are slim as the economy is also in part being supported by a “healthy private sector.”

Moreover, a historical analysis by the strategists shows that declines of over 20% in the S&P 500 have become less frequent since the 1990s, driven by longer business cycles, lower macroeconomic volatility and “buffering” from central banks.

BofA’s clients were net buyers of $2.4 billion of US equities as the S&P 500 logged its worst week since March 2023, quantitative strategists led by Jill Carey Hall said Tuesday.

Eight of 11 sectors saw inflows last week — led by technology. Communication services received the second-biggest inflow, extending 23 weeks of gains. Clients ditched real estate, industrials and materials stocks.

“Expectations of easier monetary policy has created a positive backdrop for markets, but because tech stocks have become so overvalued, any market positivity is now seen more in the undervalued areas of the market, rather than the overvalued parts of the market,” said David Bahnsen at The Bahnsen Group. “ Many investors who have been focused on big tech are ignoring valuations, which is one of the most important metrics.”

Corporate Highlights:

• Tesla Inc. rallied on a bullish call from Deutsche Bank AG analysts.

• Apple Inc. lost its court fight over a €13 billion ($14.4 billion) Irish tax bill and Google lost its challenge over a €2.4 billion fine for abusing its market power, in a double boost to the European Union’s crackdown on Big Tech.

• Southwest Airlines Co. is requiring all of its pilots to undergo additional training at its Dallas base after a series of flight incidents this year triggered an enhanced safety review by US regulators.

• German carmakers are sinking deeper into a crisis undermining the future of the country’s most important industry, with BMW AG warning that profits will get hit by a costly brake problem and Volkswagen AG scrapping job protections that workers have enjoyed for three decades.

Key events this week:

• US CPI, Wednesday

• Japan PPI, Thursday

• ECB rate decision, Thursday

• US initial jobless claims, PPI, Thursday

• Eurozone industrial production, Friday

• Japan industrial production, Friday

• U. Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.45% as of 4 p.m. New York time

• The Nasdaq 100 rose 0.9%

• The Dow Jones Industrial Average fell 0.2%

• The MSCI World Index rose 0.2%

• Bloomberg Magnificent 7 Total Return Index rose 1.5%

• The Russell 2000 Index was little changed

• KBW Bank Index fell 1.8%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro was little changed at $1.1027

• The British pound was little changed at $1.3086

• The Japanese yen rose 0.6% to 142.31 per dollar

Cryptocurrencies

• Bitcoin rose 1.7% to $57,974.81

• Ether rose 1.7% to $2,381.06

Bonds

• The yield on 10-year Treasuries declined six basis points to 3.64%

• Germany’s 10-year yield declined four basis points to 2.13%

• Britain’s 10-year yield declined four basis points to 3.82%

Commodities

• West Texas Intermediate crude fell 3.7% to $66.19 a barrel

• Spot gold rose 0.4% to $2,517.30 an ounce

This story was produced with the assistance of Bloomberg Automation.

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