Here’s an interesting look at the 2017 market. Consumer services stocks look attractive, including this drug store retailer. In the past 30 days, five analysts have increased their 2017 earnings estimates for the stock.
Walgreens Boots Alliance, Inc. (WBA)
From DRIP Investor
The three main engines of sustained moves in the stock market are interest rates, inflation, and corporate profits, with corporate profits being the most important. Inflation clearly is perking up, especially wage inflation. Nevertheless, as long as inflation stays in the 2% to 3% range, I don’t see it being a problem for stocks. Interest rates are rising, and the speed with which they rise could have an impact on the market.
However, the 10-year Treasury probably needs to be above 3.5%—it’s currently at 2.5%—for bonds to be a competitive alternative to stocks. Thus, I think there is room for interest rates to rise and not derail stocks. Corporate profits are perhaps the most bullish piece of this three-legged stool. The third quarter represented a true pivot point for corporate profits, and I believe corporate profit growth will accelerate in 2017. It is important to realize that this acceleration in corporate profits began prior to the election, which means there is more to this rally than just a Trump Presidency.
Indeed, the venerable Dow Theory turned bullish October 5, more than a month before the election. The bullish signal was keyed by strength in the Dow Jones Transportation Index. The Dow Transports, though often ignored by market watchers, are perhaps the most economically sensitive group of stocks in the world. History shows when the Dow Transports get in gear—which they did prior to the election and have kept their momentum going post election—it is usually good news for future economic activity. And future economic growth should be good for sustaining the recovery in corporate profits.
Stocks are not massively overvalued, as many pundits would have you believe. Yes, the market rally has lifted a number of sectors, and certainly stocks are more expensive than they were earlier this year. But as is usually the case, it is a mistake to paint the entire market with the same brush. The defensive sectors that led the market in the first half of the year are probably still on the pricey side. But plenty of values still remain in a host of groups, from financials and technology to industrials and materials.
The mistake the bears are making is ascribing today’s valuations to yesterday’s earnings. In other words, they look at the company’s earnings over the last 12 months, look at today’s price, and deem the market overvalued. Markets look forward, and the recent market strength is taking into account what should be a nice advance in corporate profits over the next year. Thus, this is not an overvalued market if—and, admittedly, it is a big if—corporate profits accelerate. I think that will happen in 2017.
Another way to frame the market’s valuation is by using a long-time trusted tool—the Intermediate Potential Risk Indicator. This tool looks at the percentage of stocks on the New York Stock Exchange trading above their 200-day moving average. The idea is that when lots and lots of stocks are trading above their 200-day moving average—a reasonable proxy for a stock’s equilibrium range—stocks are extremely popular and probably overvalued.
Typically, I get nervous when I see readings above 80%. As the chart on this page shows, the current percentage of stocks on the New York Stock Exchange trading above their 200-day moving average is 62%. That’s not necessarily a level for a cheap market, but one that still is well under the levels that usually spotlight overvalued markets.
Bottom line—there is still upside in this market before values get too stretched. Furthermore, the ebullience that is usually associated with significant market tops is still missing from this market pick for gains in 2017 is Walgreens Boots (WBA).
The stock has barely budged in 2016, crimped by the overall in health-care-related stocks and uncertainties surrounding its Rite Aid acquisition. I expect 2017 to be much better for these shares and view them as a solid total-return play among the Editor’s Portfolio components. Walgreens’ direct purchase plan has a minimum initial investment of $250.
Charles A. Carlson, CFA, DRIP Investor, 800-233-5922, January 2017