Perfect Storm Brewing

● 8 of 10 all time largest corporate buyouts occurred recently

● Private equity is sitting on nearly $1 trillion in cash (about 1/10 the value of the S&P)

● Stock buybacks are averaging $2.4 Billion daily while corporate selling (new offerings & insider selling) is around $900 million daily.

● The yield on the 10-yr treasury is 4.8%

● According to S&P the dividend + buyback yield = 5.6%

● The earnings yield on the S&P 500 = nearly 8% (2007 estimates)

● Earnings season is over and companies beat estimates by a ratio of 4:1

● Earnings estimates are rising

● Currently the fourth consecutive month of US equity fund outflows (last time was late 2002)

● The yield curve is inverted

Ok, so the yield curve is inverted, I know that has historically signaled a recession. But what does an inverted yield curve really mean? It means long term inflation is under control and short rates will be moving lower in the future. Most corporate debt is financed on the long end, so the fact that yields are falling is allowing companies to issue debt at lower yields and lower their cost of capital. The average investor is clearly bearish as witnessed by the fourth month of US equity fund outflow, but corporate America clearly isn't as witnessed by the record buybacks and M&A activity. The amount of cash just looking to be put to use is mind boggling, and when that happens it will be seeking the highest returns as capital always does, with stocks looking more attractive on a dividend/buyback & earnings yield basis. Lets not forget the analysts who follow these companies full time, they are currently revising their earnings estimates upward further showing that the fair value of many companies is above current levels. Ok, so you say with all this cash being put to use, when it finally happens their will be massive inflation. Lets not forget that businesses are growing and they need capital to finance this growth, perhaps why the yield curve is signaling low inflation ahead. So we have growth with little inflation, sounds like the making of a bull market.

Till death we part?

I was recently reading about Philip Fisher and his original investment in Motorola in 1955, which held until his death in 2004. This got me thinking about small companies today which have long term growth potential. This is a small list of unique companies which in my opinion have the potential to continue growing for years to come.

GARMIN LTD (NasdaqGS:GRMN) - The market leader in GPS is showing great growth potential with many cars still lacking GPS, there is plenty of room to grow.

CONSOLIDATED WATER (NasdaqGS:CWCO) - Develops and operates seawater conversion plants and water distribution systems in areas of the world where fresh water is rare or non-existent. Is there any doubt that there will continue to be demand for fresh water and in fresh water lacking areas no less?

CLICK COMMERCE (NasdaqGM:CKCM) - In short Click Commerce provides the software which allows e-commerce companies to work efficiently with their channel partners. Unless you see e-commerce going away, demand for supply-chain software should remain robust for years to come. Given the size of Click Commerce its not hard to see someone like Larry Ellison adding it to their collection.


DISCLOSURE: I maybe long the stocks mentioned above for myself and clients. Not a recommendation to buy or sell any security. The information above has been obtained from sources we believe to be reliable, but its accuracy cannot be guaranteed. The author and affilates shall have no obligation to update or amend any information contained above. For informational and educational purposes only.