According to the Commerce Department, the U.S. economy grew at a faster pace in the second quarter than previously forecast, climbing at a 1.7% annualized rate following a 1.1% increase in the first quarter.
Other encouraging signs for the economy were the faster pace of growth in the manufacturing sector and the drop in the unemployment rate that decreased to 7.4% in July from 7.6% in June.
Although these good figures may signal that the Fed may begin tapering its $85 billion of monthly debt purchases in September, there were also some worrying news about the slow increase in U.S. payrolls, and falling hourly earnings in July.
On the face of it, despite the good signs, I believe that the US economy is not yet robust enough to drastically curb the Fed’s debt purchases.
As far as the earnings announcements for the second quarter are concerned, the companies in my portfolio in general came out well with the exception of a few.
On the negative side, Eldorado Gold (EGO) had a small negative earnings surprise by missing the consensus estimate by $0.02, as the company’s earnings suffered from falling gold prices.
That said, the downward trend in gold prices seems to have lost pace lately. I will wait to see if this stock with its strong balance sheet and low-cost gold mining operations is well positioned enough to confront any headwinds related to lowering of gold-bets by hedge fund managers.
On the upside, Apple’s (AAPL) gross margins met expectations with a solid quarter. In my opinion, AAPL continues to be a buy according to my stock selection model on the basis of its fundamental factors.
I also continue to expect stronger revenue growth with the company’s future product launches. I personally believe the company’s fair value is close to $900 per share, despite allowing for the fierce competition in the smartphone market.
Another stock in my portfolio which had results much better than analysts’ expectations was Facebook (FB). The company’s revenue accelerated to $1.81 billion compared to the analyst expectations of $1.62 billion. I continue to expect further upside from FB as it continues to monetize the advantage of its 1.2 billion users in terms of strong mobile ad revenues.
Another company in my portfolio which had better-than- expected results was Baidu (BIDU). This Chinese company, like FB, benefited from increasing mobile revenues which accounted for more than 10% of its total sales in the last quarter.
Meanwhile, our portfolio holding Tesoro (TSO) raised its dividend by 25%. Despite its falling profits in the second quarter, I believe that this company has further upside with the revival of the economy and rising oil prices especially if the company continues with its share buyback program.
In our portfolio, a clothing company Gildan Activewear (GIL) also beat the consensus estimates of analysts. GIL’s net income jumped 47 percent, helped by lower cotton costs and higher revenues. The clothing company earned 95 cents per share versus 66 cents per share last year.
The performance of the online travel stocks in our portfolio were a mixed bag. Expedia (EXPE) missed earnings estimates by 19% and was punished drastically by investors.
Although the intensified competition is an issue, the company has an impressive revenue growth and is expected to benefit from the economic recovery. I think that the recent sell-off in this stock was overdone.
On the other side, another online travel stock in our portfolio TripAdvisor (TRIP) exceeded second-quarter earnings estimates of analysts. According to my estimates, I decided that TRIP has reached its fair value, therefore, we I sold the stock in July following its earnings announcement.
In general, I remain bullish about the future performance of the online-travel stocks which includes another online-travel stock, Priceline (PCLN) in my portfolio.
Among the stocks that surprised on the upside was also MasterCard (MA), whose profits improved by 19% year-over-year, beating the consensus estimate of analysts by 65 cents.
After the earnings announcement, this was the other stock I sold. I believe that the stock had a good run, and further upside is rather limited given the prospect of rising interest rates with economic recovery and caps on charges which may squeeze future profits.
In July, I added a new stock to my portfolio. According to my top-down stock-selection model, Goodyear Tire & Rubber (GT) is expected to outperform the market in the coming quarters in our opinion. The economic recovery in the US has started to show its impact on auto sales and new car registrations.
I believe that stronger demand for autos will continue to benefit this stock. GT’s profits rose in the second quarter beating the consensus EPS estimates by $0.28 per share.
Despite the fact I bought this stock closer to its 52-week high, I believe that given the relatively low rubber prices, and rising demand from emerging markets, this stock has a further upside.
The investments discussed are held in client accounts as of July 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
Photo Credit: Bernard Bujold
