Overall, 2013 was a good year for the stock market, as the Dow Jones Industrial Average finished up 29.6 percent, an impressive number. However, as we look toward 2014, a moderate correction should be expected.
We are anticipating S&P 500 earnings at about $112/share, lower than the $120/share consensus. Using a 17x multiple, we get a fair value for the S&P of around 1900.
As far as particular sectors, we like technology as a growth story in 2014. We favor companies with greater exposure to the enterprise market than the consumer market. For example, we still like Intel (INTC); it’s trading around 13x forward earnings and has a 3.5 percent dividend. The company’s server sales are in the enterprise space and we are seeing progress in mobile device adoption of the company’s products. They have developed some great technology and it’s making its way to the marketplace. Today, mobile devices require more power and longer lasting battery life to run applications that are meaningful for businesses, which is why we continue to hold INTC.
In addition, we like a smaller company called CA Technologies (CA), a software company that is also focused on enterprise customers. They have a high-margin mainframe software that should provide annuity-like returns for the company to then re-invest in its other newer businesses. CA has been an aggressive acquirer of other companies, but about a year ago it raised its dividend to $1.00/share/year, signaling that it would no longer be a large acquirer. The company’s CEO, Michael Gregoire, has been at the helm for about a year and comes from startup software companies. He has some interesting plans to increase the efficiency of the sales force, which worked at his prior companies.
Check back to Ramparts, as we continue to keep readers updated on Fort Pitt’s market outlook and the long-term investment themes we favor.