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Published: September 21, 2009
In the last few months we have seen a very
strong stock market rally. The market has recovered from highly
distressed levels and posted exorbitant gains. In addition the
“wall of money” from the U.S. Federal Reserve has pushed
risk-prone investors back into the market, pushing its general
level up.
You see, the massive fiscal stimuli and ultra-easy money from
the Fed does indeed have real effects on the economy. Whether
you want to call them artificial or real, the stimuli have moved
and will continue to move profits, until it is withdrawn. And
the timing of the deployment of the fiscal and monetary stimuli,
the timing of its positive effects and the timing of its
eventual removal are uncertain.
In addition, we have many short-term uncertainties. The upcoming
Group of 20 (G-20) meeting has potentially important
ramifications for the global financial system and for global
currencies. We also will get more data about foreclosures,
existing and new home sales and the Federal Deposit Insurance
Corp.’s funding needs. Finally, we have Damocles’ sword hanging
over the market with the potential for additional deficit from
President Obama’s healthcare reform.
So we are going to go for a safe play that enjoys a nice
dividend and presents a compelling value proposition right now:
Kimberly Clark Corp. (NYSE: KMB).
When in doubt, go for consumer staples. And a superbly run
Kimberly Clark will do the trick. The stock has overcorrected
recently, and the headwinds of soft consumer demand and volatile
commodity costs are abating. What’s more is that KMB’s major
source of growth will continue to be emerging economies.
U.S. consumer activity is not as dead as it looks. While
unemployment is still climbing, the rate at which people are
losing jobs is declining on a consistent basis. Additionally,
the pick-up in home sales and in the stock market is helping
slowly reverse the negative wealth effect suffered from last
year’s crash. Programs like “Cash for Clunkers” and tax
incentives for purchases of new homes are having a positive
effect on those sectors and are generating increased incomes in
the industries that benefit from them.
With respect to emerging markets,
the situation is even more positive.
Advanced economies are surely going
to commit their support to emerging
market growth at the G-20 meeting in
Pittsburgh this week.
This is good for KMB, because
supportive trade and capital flows
will help propel the main source of
KMB’s growth. Emerging markets have
been giving KMB more than three
times the growth than advanced
economies have. And the trend will
continue.
It is easy to understand why. For
starters, it helps a lot to have
much higher population growth. Also,
income growth is higher as the
currencies appreciate, and people
leave poverty to join the middle
class at a much higher rate than in
the advanced economies.
The expected rate of growth for next
year in emerging markets will
continue to accelerate and dwarf the
rate of growth of the United States,
Europe and Japan for years to come.
Growth rates in emerging economies
are catching its self-sustaining
levels, which should lead to further
acceleration next year. This has
been my thesis since last October,
when I called the turn on Brazil
with my recommendation of the
iShares MSCI Brazil Index (NYSE: EWZ),
which has since doubled in value.
Then we have the issue of volatile
commodity prices, which have led KMB
to raise prices, hurting some
demand. KMB is taking further
restructuring measures to address
costs in short order. This will
improve profitability short term,
and it will give the company a
lasting competitive advantage.
What is critical for KMB’s success
is their established brand
leadership. The company’s brand
enjoys superior recognition and
acceptance and creates sustainable
competitive advantage in an industry
that is little affected by economic
mishaps. This cements the defensive
nature of our call.
Meanwhile, KMB’s price-to-earnings
(P/E) ratio on estimated earnings is
only about 11. That makes the
stock a gift for investors that
could easily pay about 15 times for
a name like this. Adding to the
allure of the value proposition is KMB’s generous dividend yield of
more than 4%. This dividend is
supported by a mammoth cash flow
that ensures that it is safe. In
fact, the dividend payout ratio is
only 60%.
Rather than investing in U.S.
Treasuries, why not own a stock of a
company that will surely appreciate
strongly over several years?
And there is yet another reason to
buy KMB. There is short interest
that in this market is likely to get
squeezed out of their positions. By
many measures, KMB is an attractive
short-squeeze play. Shorts typically
increase their positions in
defensive stocks in bullish markets
in order to go long against highly
cyclical stocks. Now, close to year
end, as we are right now, it is
highly probable that they will be
reversing their position in order to
close their books for the year.
And for those lovers of technical
analysis, this stock is a gem:
* Its 50-day exponential moving
average crossed to the upside
violently in mid-July and has been
consolidating at these levels.
* The stock is sitting at the
precise lower-end of the Bollinger
bands.
* And, very importantly, it is way
oversold by many key indicators.
So, this is a defensive stock that
pays a generous 4.2% dividend yield,
and enjoys an earnings surprise
upside as it deals with headwinds.
-- Horacio Marquez
Contributing Editor
Money
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