10/25/2012 10:15 PM ET|
16 stocks for the rest of 2012
To make sense of the uncertainties ahead, balance buying opportunities from the US market pullback with resurgent growth in China.
It's time for some heavy lifting for the last months of 2012. That will mean using a barbell strategy, in which you load a portfolio with stocks clustered at opposite ends (supposedly) of a spectrum.
For the remainder of 2012, I'm suggesting a barbell strategy heavy on U.S. domestic stocks that match up with my call for slow but better-than-expected economic growth in the United States and -- at the other end of the barbell -- overseas stocks that match up well with my call for a slow but clearly discernible re-acceleration of China's economy.
At each end of that barbell, though, I'm going to add a little extra weight in the form of a few U.S. technology stocks and a few global commodity stocks.
Why is this superweighted barbell strategy attractive? Well, let's take a look at where we are in the market.
On one end, the US pullback
Right now, the U.S. market is in the midst of a mild but worrying retreat amounting to 3.9% (so far) from the 1,466 high on the Standard & Poor's 500 Index ($INX) for 2012 on Sept. 14 to the 1,408 close on Oct. 24. The retreat is more worrying than the magnitude of that drop indicates, because much of the damage has been done on earnings for the third quarter that missed Wall Street estimates and on lowered guidance for earnings and revenue for the fourth quarter or into 2013.
Caterpillar (CAT), which reported Monday, is typical: The company lowered guidance for the full year of 2012, with projected revenue falling to $66 billion from $68 billion, and also talked about weakness in its overseas markets, particularly China, in the first half of 2013.
Or take a look at McDonald's (MCD), which reported Oct. 19. The company missed Wall Street earnings estimates by 4 cents a share -- due, in part, to an 8-cents-per-share hit to results from a strong U.S. dollar. Operating income was down 4% -- but flat in constant currency terms -- and global revenue was flat but up 4% in constant currency. The company said it expects the near-term environment to remain challenging and, as an indication, talked about October same-store sales trending negative. Watching the reaction of Wall Street analysts to that comment on the conference call brought to mind a nature documentary of wolves taking down a caribou.
These are exactly the kind of comments that rattle investors when a market is near a top -- even though they don't much matter after a correction. When stocks are coming off a top like that of Sept. 14 -- when the entire market seems expensive -- misses and lowered guidance for the quarter take on an importance that has more to do with the worries that come with a top than with the erosion of fundamental stories.
Face it: Investors get nervous when stocks move back up to the top of their ranges or toward important highs. It's why indexes frequently take more than one run at a high before breaking through to new territory.
In a pullback, bargains emerge
If we do get a correction -- say, if the S&P 500 drops back to its 200-day moving average at 1,376, roughly 40 points lower than the Oct. 24 close -- and investors start hearing Wall Street analysts say, "Stocks are now oversold," results like those that McDonald's delivered are going to look very different.
Instead of worrying that sluggish growth in the United States will make it hard for the company to beat last year's good same-store sales growth, investors will notice that they can buy the other McDonald's story, the slightly more long-term story, at $85 or so -- about 10% cheaper -- than the $94.09 the stock sold for on Oct. 16.
That other story was front and center in the company's conference call, but nobody seemed to be paying attention. McDonald's continued to gain share in China and in the U.S. domestic market, the company said. Because it has deeper pockets than just about any of its quick-service-restaurant peers (we don't call it fast food anymore, my dear), the company refreshes its restaurants at a faster pace than the competition does -- and a refresh is good for a 6% to 7% lift in sales at a restaurant, the company added.
Now if you wish you'd sold McDonald's, down 7.2% from its October high as of the close on Oct. 24, with the idea of rebuying it at a lower price, I can't say I blame you. But I wouldn't worry too much. The long-term fundamental story at McDonald's is intact, and at the end of this correction, you can bet that Wall Street will be telling folks to buy this bargain. (McDonald's is a member of my Jubak's Picks portfolio.)
Of course, you might like to do better than follow McDonald's shares down to $85 and then back up to $94 in the short term -- even though the stock is paying a 3.53% dividend.
For that, I think you need to look at the first end of my barbell: stocks for a slow-growing but better-than-expected U.S. economy.
Buy US stocks 'experts' are wrong about
What you're looking for here are individual stocks where the pessimists -- be they CEOs, economists or Wall Street analysts -- are wrong about growth prospects for the U.S. economy or for some part of it.
When a company does demonstrate that the consensus on growth is wrong, the market jumps in surprise.
That's exactly what happened with Lumber Liquidators (LL), one of the stocks I named Oct. 15 in my "slow-growth portfolio." On Oct. 24, the company beat third-quarter Wall Street earnings projections by 12 cents a share (reporting 46 cents instead of 34 cents) and reported an 18.8% increase in revenue to $204 million versus the $189 million consensus. Lumber Liquidators followed that up by raising guidance for 2012 to earnings of $1.53 to $1.59 a share, from a prior $1.30 to $1.42, and revenue of $791 million to $799 million, from prior guidance of $750 million to $775 million.
The numbers further down the quarterly report weren't too shabby, either. Comparable-store sales, for example, increased by 12% in the quarter, driven by an 11.7% increase in store traffic. And while the company guided Wall Street to expect comparable-store sales in the high single digits in the fourth quarter, management noted that the sweet spot of comparable sales growth -- 22% -- at its stores came at stores open for 13 to 36 months. The company has been growing its store count in recent years -- adding roughly 25 this year, for example -- so Lumber Liquidators has a good pipeline of maturing stores to feed into its numbers.
To my regret, I didn't add Lumber Liquidators to my Jubak's Picks portfolio back on Oct. 15, so the portfolio missed out on Wednesday's pop to an all-time high, closing at $55.81. You're obviously taking on more risk buying near that high than 10% or 15% lower, but I think once a stock has taken out its previous high, shares often have solid momentum to go higher.
If you like that logic, I'd also recommend PulteGroup (PHM) from my "slow-growth portfolio" list.
If you like even your slow-growth surprises better after a pullback. I'd recommend Costco (COST), which I added to Jubak's Picks on Wednesday, and Dollar General (DG), which I'm adding now. The stocks were down 6.7% and 10.8%, respectively, from their September highs as of Wednesday's close.
Overweight in tech
If this alternative appeals to you, you should also take a look at superweighting this end of the barbell with some of the technology stocks that have sold off recently. Unlike the S&P 500, which is still has 40 points or so to go to hit its 200-day moving average, the technology-heavy Nasdaq Composite Index ($COMPX) is just about to enter "oversold" territory. The index closed at 2,981 on Wednesday, with the 200-day moving average just 9 points lower at 2,972.
Now remember, you don't want to buy just any depressed technology stock -- although the entire sector will bounce together if we do get an oversold rally. What you'd like to find are technology stocks that have sold off on near-term worries but that have fundamentally great growth stories. For that combo, I'd look to the Apple (AAPL) and Samsung Electronics (SSNLF) ecosystem stocks that I identified in my Oct. 11 column "5 iPhone stocks that aren't Apple."
I think these stocks have been living in fear of Apple's Oct. 25 earnings report. Nobody knew what the company would report for the September quarter, what guidance it would issue for the December quarter -- Apple has a tradition of low-balling guidance -- or how investors would react to those numbers. Now that Apple's numbers are out, and after the market has had a chance to react, it will be time to add from a group that includes Qualcomm (QCOM), Broadcom (BRCM), Skyworks Solutions (SWKS), Avago Technologies (AVGO) and Tatsuta Electric Wire & Cable (which trades as 5809.JP in Tokyo). I added Qualcomm to Jubak's Picks on Oct. 12.
On the other end, China moving forward
I've written about the other end of the barbell -- China stocks -- very recently, so let me just summarize the argument I made in "4 'good' (and 5 'bad') China stocks" last week. I think we're seeing reasonably convincing signs that the Chinese economy hit a bottom, in terms of growth, and that in September it started to show a re-acceleration from that low point of growth.
In the early stages of a hope-based rally in China's stock markets, I suggested owning the big commodity and export names that Chinese traders would see as the best ways to play a surge in government stimulus. Then, I suggested, as the rally on hope changed to a rally on evidence, I'd move to own domestically oriented Chinese stocks. That transition may be taking place faster than I expected; it now looks as if the consensus in China is that growth is accelerating enough so that the People's Bank won't need to cut interest rates. In this environment, I think some of the financial stocks such as AIA Group (AAGIY) or Ping An Insurance (PNGAY) look timelier than the commodity or industrial exporters.
The increasing belief that China's economy did indeed put in its growth bottom in September, along with the disappointment that the People's Bank won't cut interest rates, make shares of commodity companies that export to China a better bet than Chinese commodity companies and exporters themselves.
Hence my recommendation to superweight this end of the barbell with the shares of such companies as BHP Billiton (BHP), an Australian commodity producer of just about everything; Peabody Energy (BTU), a U.S. coal producer with a big presence in Australia's coal fields, copper giant Freeport-McMoRan Copper & Gold (FCX) and Brazilian iron ore producer Vale (VALE), which just reported a 66% drop in third quarter profits. Vale is the cheapest, BHP Billiton has some momentum, and Peabody has moved strongly to the upside recently. (Freeport McMoRan is already a member of my Jubak's Picks portfolio.)
Your decision will depend on how strong you think the recovery in China's growth rate will be. The stronger your projection, the more inclined you should be to go with the cheaper Vale.
And (do I have to say it?) a postelection disaster on the politics of the U.S. fiscal cliff would require, at the very least, a rethinking of the U.S. end of this barbell.
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- Why Costco shares could hit $110
- Freeport-McMoRan's solid quarter
- Abbott, Bristol-Myers race for hepatitis cure
- Banking investors cheer Citigroup results
- Stillwater shares recover as strike settles
- Why Xylem is looking better
- Price worries in the rare-earth markets
At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any company mentioned in this column. The fund did own shares of AIA Group, Apple, Freeport McMoRan Copper & Gold and Ping An Insurance as of the end of June. Find a full list of the stocks in the fund as of the end of June here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial
subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website. Click here to find Jubak's most recent articles, blog posts and stock picks.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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VIDEO ON MSN MONEY
My Scots-Irish Grandfather was fond of saying that the best way to double your money is to fold it once and stick it in your pocket. He's never been far wrong.
Right now, the U.S. market is in the midst of a mild but worrying retreat amounting to 3.9% (so far)
worrying??? hey captain, I'm worried about that iceberg........
its all KOOLADE!!
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