“I try to push ideas away, and the ones that will not leave me alone are the ones that ultimately end up happening.”

. . . J. J. Abrams, American film director, producer, screenwriter, and composer

Many of you know the way that I construct portfolios. I typically begin with a base of mutual funds, but not just any mutual fund. I tend to invest in mutual funds where I know the portfolio manager (PM) and like his or her investment style. Then, because I talk to these PMs, I hear lots of good ideas. I mean really, if Tom O’Halloran, who manages Lord Abbett’s Growth Leaders Fund (LGLAX/$21.99), has purchased millions of shares of Facebook (FB/$118.47/Outperform) in the mid-twenties one has to assume he has done the fundamental work. Having been a bottom-up stock analyst myself in a past life, I then can spend a half an hour looking at the earnings estimates, financial statements, recommendations, and the chart to decide if I am going to buy the shares. This is how I try to add alpha to a portfolio (alpha).

At the mid-February lows of this year, Andrew Adams and I had a lot of investment ideas and wrote about them in these missives. Our timing and pricing models were in sink and we suggested moving back into select securities. At the May lows, however, we were not as aggressive, for as stated, while our timing model nailed the mid-May lows, we never got down to the 1990 – 2000 level our pricing model had targeted. Still, given the intensity of the rally from the May lows (S&P 500 up ~3.9%), we are currently getting “pinged” for investment ideas. Admittedly, our models are calling for new all-time highs by the S&P 500 (SPX/2099.13), but in the very near term the SPX remains very overbought. Accordingly, we are not inclined to be super aggressive right here. For those wanting to commit capital on a risk-adjusted basis, there is a relatively new product from Raymond James’ Asset Management Services department (AMS) for your consideration. To wit:

While waiting for a more definitive breakout signal from our models, clients may want to increase their allocation to attractive dividend paying stocks. The best income ideas from the Raymond James Equity Research department may be found in the latest Equity Income Report, published last week. The report features the best yielding common stocks, with a separate section for MLPs, REITs, and business development companies. For a stock to be on the list, it must be rated Outperform or Strong Buy, have at least a $1 billion market capitalization, and a dividend yield exceeding 1.5%. When an analyst downgrades a stock, it is removed from the report. The recommendations are also available as a managed portfolio through Asset Management Services, which creates a diversified portfolio of the 30 highest dividend yields.

For those wanting to be more aggressive there are two relatively new names to the Raymond James research universe of stocks that have intriguing stories, favorable ratings from our fundamental analysts, and screen well using our proprietary algorithm. The first name is Blueprint Medicines Corporation (BPMC/$20.36/Outperform). As our analyst writes:

Blueprint Medicines Corporation is a development stage biopharmaceutical company based in Cambridge, Massachusetts. Leveraging a novel target discovery engine, it is focused on the development of small molecule kinase inhibitors for the potential treatment of cancer and rare genetic diseases.

The other name is Instructure (INST/$18.04/Strong Buy). Hereto, our analyst writes:

Based in Salt Lake City, Utah, Instructure is a leading provider of software-as-a-service (SaaS) based learning management systems (LMS), which are currently gaining significant market share in the education market. In addition, the company is beginning to address learning management and human capital management (HCM) needs of the much bigger enterprise or commercial market.

For more information please see our analysts’ reports.

As for Friday’s unbelievable employment report, well it was just that . . . unbelievable!
As our economist, Scott J. Brown Ph.D., writes:

Payroll growth was much lower than expected in May, with softness spread across industries. Some of this may be noise. Some of it may be weather (pulling seasonal job gains forward) – prior to seasonal adjustment, we added 2.9 million jobs between January and May, vs. 3.2 million last year. Taken at face value, this is a disappointing report. However, even considering the usual amount of noise, the trend in job growth has slowed. This is likely because firms are having a tougher time finding qualified workers (that is supported by the anecdotal evidence). This report significantly lowers the odds of a Fed rate hike in June, July, and September. A negative for the dollar and the stock market. A plus for bonds.

And it was a negative for stocks, but only for about 50 minutes, for at 10:20 a.m. the D-J Industrial Average was down ~149 points (the low of the session) when mysterious “bids” showed up leaving the senior index down only 31 points by the closing bell. Likewise, the SPX found support in its 2080 – 2085 support zone and once again had “eyes” for the 2100 level at the “bell.” To me this smacks of a stock market that wants to trade higher, which would leave many PMs scrambling to play catch up. That’s certainly what Bank of America Merrill Lynch’s “sell side” indicator is suggesting as it shows Wall Street strategists’ recommended stock allocations fell to a lower level than at the March 2009 lows!

The call for this week: Friday’s upside reversal caused one old Wall Street wag to exclaim, “When the stock market ignores bad news that’s good news!” To be sure, there is not enough data to alter our “call” for new all-time highs as of yet. On a valuation basis the forward 12-month earnings estimate for the SPX (IBES) is $124.48, giving us a nearly 6% forward earnings yield and a forward P/E multiple of 16.9x. If new highs do emerge, the market probably will be led by the healthcare and technology sectors. That should put focus on the Health Care SPDR (XLV/$72.29) and the Technology SPDR (XLK/$43.94). Looking at the chart, it is worth noting that the XLV has broken out to the upside (see charts on page 3). Today “The Street” will put on rabbit ears at 12:30 p.m. to hear if Ms. Yellen has damage control on her mind, which has left the futures flat this morning.

PS – My friend Jason Goepfert (SentimenTrader) notes in Barron’s over the weekend:

Examining data beginning in 1928 shows that in 12 out of 14 years in which the SPX posted three consecutive months of gains following a 12-month low (like now), the market rallied for the next three months. If the fourth month rose as well, future gains in the months ahead were even better, except for 1930 and 1940.

© Raymond James

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