6/6/2013 5:30 PM ET|
3 picks for the rally's last gasp
Each of these stocks should get a lift from catalysts expected to kick in before the rally runs its course.
Let's say you have new money to put to work in stocks, or you took profits and you have old money to redeploy or you never got fully invested in this rally and you'd like to put more cash to work now.
I think you have three alternatives:
• You can wait to see if the current drip, drip, drip of a 4.6% retreat on the Standard & Poor's 500 Index ($INX) from the 52-week high of 1,687.18 to the June 5 close at 1,608.9 turns into a dip so attractive that you can get over your fear of a falling market and actually buy.
• You can hope to find a bargain or two, but let me tell you, I've seen more tempting selections at Filene's Basement on Christmas Eve. We are talking about a market that's not so far off its all-time highs, after all. The bargain bin has been picked over more than a few times during this rally.
• You can decide, consciously, to be too early. I know, I know . . . the time value of money and all that. Buying too early is usually a huge no-no. And it can be emotionally exhausting. Waiting and waiting and waiting can become so depressing that investors throw up their hands and say, "Get me out of that." It probably only seems like every stock you give up on then takes off like a rocket. But consciously buying too early can be your best bet in a strong rally that has run for months and shows signs of running some more. As rallies age, investors go further and further out the time line looking for potential winners. That process means that some of the far-future gains you'll get in a "too-early" stock actually start showing up now.
I don't know if that description -- a strong rally that has run for months and shows signs of running some more -- will accurately describe this stock market in a few more days or weeks. Maybe the "drip" will turn into a buyable "dip." In that case, I'll do a very quick revision of my April 22 column on 10 picks for a potential correction.
For now, I'm going to cover another base and give you three "too early" stocks just in case this rally isn't quite done with us yet.
My rules for good "too early" stocks are pretty simple.
I want to be able to clearly identify the turnaround, trend, event, whatever, that I'm waiting for. The more clearly I can define it, the better.
And I want to be able to put a time of arrival on whatever I'm waiting for with some degree of confidence. Using this approach, you're buying consciously too early. That's different from "buy-and-hope." If you can define what you're waiting for, you should be able to give an estimated time of arrival.
Without further ado, let me give you three "too early" stocks to buy on the assumption of a resumption in this rally.
Let me go into detail on this first stock because it defines so well what I'm looking for in a "too early" stock. Chesapeake Energy (CHK) is struggling with low natural gas prices that (maybe) have started to recover but remain well below the cost of production for many players in the industry.
The company, which loaded up on debt to acquire drilling leases, is selling assets to fill a funding gap of about $3.5 billion in 2013. And asset sales, uncomfortably, have been going more slowly than the company projected.
But I see five major catalysts that make me willing to buy the stock now:
• It looks like natural gas production in the United States will increase by just 1% this year, according to the U.S. Energy Information Administration. That's a big drop from the 8% growth of 2011 and the 4% growth last year.
• Less production plus more demand for natural gas should push prices higher. Standard & Poor's is projecting Henry Hub spot prices will average $5 per million BTUs (British thermal units) next year, up from $2.58 in 2012 and a projected $3.72 in 2013.
• Chesapeake's production is showing an increasing shift toward oil and natural gas liquids that command higher prices than natural gas does.
• Chesapeake has shifted away from its traditional strategy of land acquisition and asset sales to a more conventional emphasis on drilling and production. Spending on land acquisition will drop to just $400 million out of this year's $6 billion capital-spending budget. That's a huge shift for a company that spent $5.8 billion on acquiring leases in 2010.
• Long-time CEO Aubrey McClendon retired in April and has been replaced by Doug Lawler from Anadarko Petroleum (APC). McClendon's strategy of aggressively growing acreage under lease has seemed increasingly out of touch with the natural gas market. Lawler comes to Oklahoma City having most recently headed Anadarko's international and deep-water operations, including the company's liquid natural gas project in Mozambique. Before that, he had headed Anadarko's unconventional onshore development.
Before their recent pull-back, Chesapeake shares were showing a gain of 33.3% in the previous 12 months, enough to convince me that this "too early" stock has picked up some support. Considering the company's near-death plunge from $62.90 on June 26, 2008, to $14.25 on December 2, 2008, the June 5 price of $21.52 leaves plenty of headroom. I'll be adding Chesapeake to my Jubak's Picks portfolio with a 12-month target price of $31.
This is the earliest of my "too early" stocks -- so early, in fact, that you won't be able to find signs of a significant move up in the shares. (The stock is down 14.7% year to date as of June 5.) Here, I'm waiting for the global mining industry to stop cutting capital budgets. I think that's likely for 2014.
In its second-quarter earnings, Joy Global (JOY) reported improving stability in sales and orders. Sales did drop 12% year over year, but that was in line with expectations. Orders dropped 8% from the 2012 quarter but were up 10% from the first quarter. Order backlog fell 9% from the first quarter. Gross margins, importantly, at 33.2%, were more than a percentage point above expectations.
Unfortunately, I think Joy Global will have to weather one more round of capital-budget cuts from its mining customers. A report by PricewaterhouseCoopers calculates that the 40 largest mining companies (by market capitalization) plan to cut capital spending by 20% in 2013.
Given the continued weakness in commodity prices, those planned cuts will likely grow to include one more round of so-far unplanned reductions. Mining companies finished 2012 with the lowest return on capital -- just 8% -- and the lowest free cash flow in a decade.
Dividends climbed in 2012 to 57% of net income from 52%. That puts pressure on mining companies to increase profits and cash flow. And the easiest way to do that is to cut capital spending.
I'd say Joy Global is a 2014 story, but I'd like to see more visibility on the timing of a turn in orders before I plunk my money down on this one. (Joy Global is a member of my Jubak Picks 50 long-term portfolio.)
Apple (AAPL) is at the other end of the "too early" spectrum. On the eve of Apple's Worldwide Developers Conference (June 10-14 in San Francisco), investors are focusing too much on the potential buzz out of the conference and giving too little weight to the other hurdles Apple needs to jump.
Generating some buzz out of this conference is crucial to a recovery in Apple's stock. (The 52-week range for Apple is a huge $385 to $705. On June 5, the stock closed at $445.11.) Crucial but not sufficient, in my opinion.
For the stock to recover a big share of the ground it has lost, buzz has to be followed by June and September quarters that put to rest Wall Street's worries about a collapse in Apple's margins. The San Francisco conference won't see the introduction of a new iPhone or iPad; those products will get their own events later in the year. Instead Apple is likely to preview the new iOS7 and OS X operating systems.
The big deal here is the iOS7 overhaul, the first big makeover to Apple's mobile operating system. Will what Jony Ive, Apple's design guru, previews be enough to get developers and the media gushing about the platform's potential? (I think the event could also see a refresh of the Siri voice application and Apple's iCloud service, along with a preview/announcement of Apple's new iRadio streaming music service. Apple is under pressure to at least match Google's (GOOG) announcement of its music service at the latter's developers conference in May.)
Part two will take longer. Apple will have to demonstrate in its results for the June and September quarters that, while its margins might be under pressure, they certainly aren't in any danger of a collapse.
The view on Wall Street is that competition from Samsung and makers of other Android phones, Apple's own possible plans for a cheaper iPhone and Apple's raft of scheduled new products will all cut into company's gross margin.
But what has freaked Wall Street out about Apple's shares is that no one knows how big the drop in gross margins will be or how long it might go on. For anything but a bounce on the buzz, Wall Street will have to see that margins aren't going into major swoon. Without that, I don't think buzz will be enough. Apple is scheduled to report quarterly earnings on July 23. (Apple is a member of my Jubak Picks portfolio).
I'd be looking to buy these shares after that July earnings report in anticipation that Apple will be able to deliver the margin evidence that Wall Street wants in the September and December quarters.
Updates to Jubak's picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- Abe's speech disappoints Tokyo
- Mitsubishi UFJ's future isn't entirely grim
- Will higher interest rates mean fewer home sales
- Can Petrobras live up to its potential?
- Heady times for platinum and palladium
- What do overseas LNG sales mean for US?
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund (JUBAX), I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Apple as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio 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.
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