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Whether you want to call them artificial or real, the stimuli have moved and will continue to move profits, until it is withdrawn.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 (G20) 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 (FDIC) 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 G20 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 times. 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 cashflow 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:
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.
Recommendation: Buy Kimberly Clark Corp. (NYSE: KMB) at market(**). I suggest you buy anywhere between one third to half of your position initially, and dollar cost average into a full position over the next four weeks.
(**) – Special Note of Disclosure: Horacio Marquez holds no interest in Kimberly Clark Corp.
[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.
In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]
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