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| Gems in the Rubble | ||
| By Elliott H. Gue | ||
| LEIDEN, The Netherlands--Investors all too often make the mistake of assuming that when a company issues negative news, such as a weak earnings report, it’s bad news for that firm’s stock price. But that’s not necessarily to case. In fact, it’s often quite the opposite: The fundamental news tends to be most bullish near key tops and most bearish near major lows. In fact, bearish fundamental news can be the most bullish indicator you’ll ever see on Wall Street. As my longtime friend and editor of Commodities Trends George Kleinman is fond of saying, it’s not the news that counts but the reaction to the news. When a stock or index rallies after what appears to be a negative fundamental announcement it’s a sure sign that the worst possible outcome is already priced into the stock – in such cases you should look to be a buyer, not a seller. The S&P 500 is off to a nasty start in 2009, down around 8 percent as of this writing. Of course that doesn’t sound too bad considering last year’s 37 percent fall, but the year is young. Amid that nasty performance, there are some signs of life. Standard & Poor’s divides the S&P 500 into 10 separate, official economic sectors. Check out the year-to-date performance for those 10 sectors.
Source: Bloomberg As you can see, not a single economic sector is actually trading higher this year. Some of the best performers are predictable; for example, health care and utilities are considered classic defensive groups that perform well in a weak market and in gloomy economic environments. Both are down only slightly this year. Unemployment Rate Highest in 16 Years – Investors Flock to Safe 9% Yields Nearly 2.6 million jobs were lost in 2008, with 1.9 million destroyed in just the past four months. It's the biggest job loss in any calendar year since 1945, when 2.75 million jobs disappeared as the wartime economy was demobilized. With the accelerating recession hitting companies in every industry, now is not the time to take chances with your investments. Nor is it time to bank it for measly .2% yields. See how my subscribers are securing their income by carefully plucking 7-9% yields from the safest investments on the planet. Learn how… As I’ve detailed in this journal over the past few issues, health care has been and remains one of my favorite groups. Health care stocks are projected to offer the strongest earnings growth of any sector for 2009, and earnings are far more predictable because economic growth has little effect on demand. The bottom of the list is also not particularly surprising. The nasty drop in financial stocks is down to fears that the US and other governments will ultimately be forced to nationalize some of the world’s largest banks to prevent outright collapse. In the UK, the leading candidate for nationalization right now is the Royal Bank of Scotland (NYSE: RBS); shares in the former high-flyer collapsed last week and currently trade at 12 pence per share, down from a 52-week high of more than 470 pence. But some of the other groups that top the list of year-to-date performers are a bit more surprising. For example, the S&P 500 Energy Index has actually performed well this year, down less than 3.5 percent despite continued weakness in oil and natural gas prices. After all, energy is a cyclical business and with demand collapsing right now due to the weak global economy, you might be tempted to suppose that energy shares would be among the weakest groups. In addition to the 10 official economic sectors, the S&P breaks down the market even further into 154 index groups. Here’s a look a how those groups have fared so far this year.
Source: Bloomberg Here the picture looks brighter. A number of specific groups have bucked the broader market trend and are trading higher in 2009. Topping the list is one of my favorite groups, for-profit education companies. I explained my rationale for investing in the group in the last issue of Personal Finance as well as in the Jan. 5 Pay Me Weekly, Buying Uncle Sam. When the economy is weak and unemployment rises, many workers decide to return to university to enhance their skills rather than entering an uncertain jobs market. Therefore, enrollment at US universities tends to accelerate when the economy decelerates. Meanwhile, the government continues to actively support education. While the private student loan market has collapsed, direct government loans and government-subsidized loans have totally filled the gap. If there’s one loan market the credit crunch has hardly touched, its student loans. And I doubt the incoming Obama administration will change that; in fact, the proposed $800 billion stimulus bill is likely to contain provisions providing more funding for education. This is all great news for the for-profit educators; the index is up more than 10 percent so far in 2009. But some of the other groups on this list are more surprising, at least at first glance. Note, in particular, that oil refining stocks are actually trading higher this year, despite ongoing weakness in energy prices and continued signs of weak demand for gasoline. Another group that some will find surprising is the fertilizer and agricultural chemicals. The prices of agricultural commodities have not been immune to the commodity sell-off of the past 6 months; demand for fertilizer has also been hit as farmers attempt to cut back on their costs. The performance of these key groups and sectors tells us a great deal about which stocks are likely to lead the market this year. My advice remains unchanged: Focus on a mixture of defensive, recession-resistant growth stocks and early cycle performers--early cycle firms are companies that tend to perform well in the early stages of an economic expansion. The former can continue to perform well even if there’s no sign of an economic recovery this year; in some cases, these groups actually benefit from a weak economic picture. The latter group has been hit hard in the recent downturn and the fundamental news remains negative. But recent action suggests these stocks have priced in most of the worst news--investors are already pricing in a weak market. The defensive growth group includes companies in the health care, for-profit education and consumer staples groups. Two of my favorite early cycle groups are energy and agriculture. As noted above, many will find it surprising that these groups have performed well in a weak market this year. But it’s actually extremely encouraging that these names are performing well despite a steady drumbeat of negative newsflow. For example, oil services giant Schlumberger (NYSE: SLB) reported generally weak earning on Friday, reporting an outright drop in earnings over the year-ago quarter. During the company’s conference call CEO Andrew Gould stated: The sharp drop in oil and gas prices due to lower demand, higher inventories and the belief that demand will erode further in 2009 as a result of reduced economic activity, is leading to rapid and substantial reductions in exploration and production expenditure At current prices most of the new categories of hydrocarbon resources are not economic to develop... That’s hardly an upbeat outlook on Schlumberger’s business. But investors decided to look at the bright side of this gloomy release; Schlumberger rallied on heavy volume in the wake of the report. This suggests that the bad news is already in the sector. As for the oil refiners, the group is negatively impacted by falling demand for gasoline. However, contrary to popular belief, refiners do NOT benefit from rising oil prices. In fact, they’re often hurt by rising prices. Refiners buy oil and sell refined products like gasoline; these firms earn profits on the spread between the price of the oil they buy and the refined products they sell. Therefore, the depressed oil prices of recent weeks have had the effect of boosting margins for refiners by lowering their costs--in that light it’s hardly surprising that the badly battered refining group is seeing a rally. In The Energy Strategist, I recommend a refining firm as a shorter-term play on this trend and within Personal Finance, we recommend two integrated oil companies with significant exposure to the refining business. Then there’s agriculture. Demand for fertilizer has fallen as have prices; falling prices have prompted a major supply response. Higher-cost fertilizer mines are being shuttered while even bigger, lower-cost producers are cutting their output. This is already starting to put a floor under prices. Buy Now or Forever Hold Your Peace Valuations for energy-related stocks are the lowest they’ve been in more than 15 years. The S&P 500 Energy Index is cheaper today than it was when oil and natural gas were trading at a third of current levels. One oil and gas E&P is trading so low, two of Europe’s majors are salivating over its prime reserves they can now snap up on the cheap. You get heaps of upside and windfall potential to boot. Meanwhile, the market for agricultural commodities doesn’t look as weak as many suppose. Global stocks of key commodities remain relatively low by any historical measure. And a severe drought in South America this year is hitting the harvest hard – there’s scope for an uptick in prices later this year. While short-term headlines remain weak, the chart above shows that agricultural chemical and fertilizer stocks are already beginning to price in the coming turn. In the newest issue of Personal Finance, available at http://www.pfnewsletter.com/ as of Saturday morning, associate editor Yiannis Mostrous offers a detailed look at the agricultural industry and some of our favorite plays in the group. Speaking Engagements Redirect the stress built up during this long bear and bask in the Florida sunshine as winter extends into its extra six weeks: Join Elliott Gue, Roger Conrad and Gregg Early Feb. 4-7, 2009, for the Orlando Money Show. Click here to attend as Elliott’s guest, or call 800-970-4355 and refer to promotion code 012647. And make plans to meet up with Elliott Gue, Roger Conrad, Gregg Early and Benjamin Shepherd at the 18th Atlanta Investment Conference. Sponsored by Friends for Autism, the conference is held in a mountain setting north of Atlanta from Thursday, April 23 to Saturday, April 25. Roger, a steady hand through many market events such as the one we’re dealing with now, will talk about Canadian income and royalty trusts as well as his new service focused on exploiting the greatest spending boom in history, New World 3.0. Elliott will detail the new direction for Personal Finance and provide insight into his approach to stock selection and portfolio management. What’s required now amid these difficult times are clarity and focus, qualities Elliott has demonstrated in these pages and through The Energy Strategist for years. Gregg, a constant at PF for nearly two decades, will be there to address recent developments with the publication. He’ll also discuss the Smart Grid, an endeavor he’s exploring as part of his role with New World 3.0. Ben, editor of Louis Rukeyser’s Mutual Funds and Louis Rukeyser’s Wall Street, the in-house mutual fund expert, will discuss efficient, cost effective ways to simplify the investing process. Be sure to bring your questions. These guys love to talk markets and everything that impacts them. Attendance is limited to 175 of the most enlightened, savvy individual investors. Go to http://www.aicatchota.com/ for more information. Meals are included for the Personal Finance discounted price of $459 for a single and $599 for couples. Call 770-952-7861 or e-mail altinvestconf@mindspring.com to register.
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Pay Me Weekly - Gems in the Rubble
