by Jamie Dlugosch | October 22, 2009 2:57 am
Stocks powered forward in the third quarter, even as investors feared Economic Apocalypse Part II was just around the corner.
It was not. Instead, an economic recovery took hold, and investors bid up stocks on signs of a return to corporate profit growth. So much for that double-dip recession. The economy is doing just fine, thank you. As a result, most investors are playing catch-up, hoping to buy stocks before the run ends.
This chase has more than just legs, it has rocket boosters. While the little guy remains entrenched on the sidelines, the institutional investors, some of whom were aggressively short, are now buying stocks en masse. It is this buying, which was mostly unexpected, that has allowed the major indexes to move significantly above the lows established in March.
The unexpected nature of the move supports my own suggestions at the start of the year for investors to follow an absolute return strategy with respect to the markets. Not knowing if stocks would rise or fall made a strong case for investors being both long and short. In a market of uncertainty and volatility, such an approach can generate positive returns while minimizing risk. Done well, the strategy can propel a portfolio significantly higher.
In the case of my own Top Stocks to Buy and Sell for 2009 we have been ahead of the game from day one. When the market was up, my buys have outperformed the major indexes, and when stocks were down at the start of the year, the shorts dropped like a rock.
The combination, along with some timely short covering in late February, has left us with 10 longs and seven shorts. Since the March bottom, the long recommendations have been on fire, recording a composite gain of more than 30% in 9 months. Considering the S&P 500 is up only 17% during the same period, our stocks are doing significantly better.
Here is an update on how each selection is performing including some thoughts on where we go from here.
The Republicans will tell you that none of the stimulus money has been spent thus far. If that is the case, one would expect Jacobs Engineering (JEC) to be doing poorly this year, and that has certainly been the case. Shares are down more than 4% as of the end of the third quarter.
JEC was on this list as a result of the 2008 elections and the supposed emphasis on infrastructure spending in the United States. With little actually being spent on infrastructure, construction firms like JEC have had a tougher go of it than expected. Even worse, investors who may have bid up shares in advance of the election are likely to be sellers the longer they wait.
The bias on JEC is to the downside until the economy roars back to life or government spending becomes a reality. Shares are worth holding as there is talk of a second stimulus plan that perhaps might actually go to brick-and-mortar projects.
The supposed recovery in the housing market continues to be an on again/off again affair. For the most part, economic activity in housing was mostly positive in the third quarter, but there remains a healthy dose of skepticism about supply. Foreclosures are the biggest hurdle for the market. Increasing unemployment does not help matters. Prices have indeed fallen, but not far enough to really spur a boom in buying activity.
Until supply is absorbed, new construction will be dampened. Pulte Homes (PHM) was a Top Stock for 2009 as a long recession in housing was expected to end. So far investors are skeptical. Shares of Pulte are flat for the year through the end of September. Patience here is really a virtue. PHM is worth holding, as the sector is likely to recover eventually. Unfortunately for those, including me, hoping for a 2009 rally, 2010 may be the year.
One of the biggest winners on the Top Stocks list has been Chicago Bridge & Iron (CBI). Shares have increased by more than 85% through the end of the third quarter on the strength of its niche construction projects. With liquefied natural gas terminals under construction, and the potential for growth in nuclear power across the globe, CBI has been an infrastructure play that is actually working. In fact, it is more than working. It has been a huge winner in 2009. Energy and most anything tied to energy have been doing well this year, as we transition from global contraction to global growth. In preparation for energy needs of the future, CBI’s book of business is likely to be full for many years to come.
At the current price of $20 per share, CBI trades for under 13 times December 2010 earnings. There is more growth to come on CBI, and I would not be surprised to see some of that growth occur in the fourth quarter. CBI should be a double by the end of the year.
General Electric (GE) finally brought itself to life during the third quarter. The stock had been a laggard for some time as it struggled with a weak economy and troubles in its GE Capital unit. The financial crisis made loans at GE Capital worth less, and frankly, difficult to value at all. Thankfully, the disaster in lending looks to be ending, as GE worked frantically to right its ship. After bottoming in March in the mid-single digits, GE has roared back to more than $16 at the end of the third quarter, nearly tripling in value. That impressive move, though, would be impressive if you bought shares in March. If you had started in GE at the beginning of the year, you would be just over break-even.
The point is GE has a long way to go before recovering lost value during the recession and financial crisis. Any future gains in the stock will have to be tied to earnings. GE will simply need to grow its way out of trouble. Given its history as a top innovative industrial powerhouse, I would bet on that recovery coming sooner than later.
Of course, anything tied to energy has done very well in 2009. The huge natural gas company, Chesapeake Energy (CHK), fits that description. Shares are up more than 75% in 2009, with more gains on the horizon. Oil and gas prices had been quite volatile in 2008, leading to a mispricing of assets across the category. Stocks like CHK were dirt cheap at the beginning of the year.
Today, looking forward, CHK is positioned to increase even further. The global economy is recovering, and with it, commodity prices are rising. In addition, the dollar has been in decline during the last several months, putting more pressure on prices. The benefactor of an inflationary environment will be commodity plays like CHK.
Of the stocks listed here, the energy plays make the strongest case for continued holding in 2010. Another double from current prices is certainly possible as economies across the world spring to life.
It has been a tougher go in the energy sector for the oil refineries. Wild volatility made profits in a very thin margin business hard to come by. The thought for 2009 was that volatility would be ending. In some ways, that has, indeed, occurred, but not before prices rallied sharply during the first half of the year. At the same time, inventories climbed and demand slipped. That is a dangerous combination for an oil refinery.
Despite the difficult operating conditions, refineries are indeed making a comeback in 2009. Tesoro Corporation (TSO) has climbed nearly 14% during the first nine months of the year. Not bad, but not great either. The market is doing better.
Frankly, I’m pleased with the results, considering. I would hold the stock for the remainder of the year, but I cannot see a scenario whereby refineries would be included in any stocks to own list for 2010.
With global growth outpacing oil supplies, the demand for exploration and drilling is likely to be strong for the foreseeable future. No wonder then that Transocean (RIG) has been a big winner in the Top Stocks for 2009 list. Shares of RIG are up more than 81% through three quarters, and investors can expect that ride higher to continue. Many experts are predicting oil prices of $100 or even more. There are predictions for $200 per barrel oil by very credible experts. At those levels, RIG can be expected to approach $150 or higher, as it did when oil prices touched $150. The bottom line is that RIG is a cash cow, and that cash grows when oil prices rise.
However, I am concerned about oil prices flattening in 2010. If so, RIG’s gains in 2009 will likely be the high water mark. It would be tempting to ride the wave through 2010 and doing so would bring no shame, but I am turning my attention elsewhere for opportunities. That said, I would most definitely hold RIG for the rest of this year.
Not nearly as explosive as oil and gas, the fertilizer play has been quite fruitful in 2009. Mosaic (MOS) has generated a profit of 39% so far, significantly outperforming the market. The demand for more yields on less land will keep demand for fertilizer strong. The most likely scenario for MOS is that the company is bought by a larger player or nationalized by someone like China. The Chinese have a storied history in making more with less with respect to agriculture. Mosaic plays right into their hands.
I would not sell this stock until it passes $100 per share. There is more than a double remaining in gains as far as I am concerned. Get past this nonsense of a double-dip recession, and this stock will rocket higher. I would hold for the remainder of the year and possibly beyond.
Like Jacobs Engineering, the lack of stimulus spending has hurt Fluor (FLR). Shares have moved a modest 13% higher in 2009 lagging the rest of the market. Giant construction projects require government spending or strong economic growth. A combination of both is a home run. So far we have neither. As a result, there is not much enthusiasm for shares of FLR. Of course, investing is all about patience, and when stimulus spending does run into strong economic growth, FLR will be a stock to own. Unfortunately, that has yet to occur and not likely to occur in 2009. Instead investors may need to hold this stock through 2010.
Personally, I’m convinced there are stronger growth stories to follow in 2010. I don’t want to dump FLR with a quarter to go in the year, but I wouldn’t get too excited about this position.
If there is a mistake on the list of Top Stocks for 2009, it would be Archer Daniels Midland (ADM). I added the company to the list for exposure and diversification in the agriculture space. It would have been far wiser to stay in the fertilizer space instead. ADM has had a nothing year, with shares of the stock basically flat for the year through the end of September. Obviously, investors could have done better in any number of sectors, but that is the way it goes.
A list of 10 stocks barely offers enough diversification as it is, thus the addition of ADM in and of itself is not a bad thing. We more than made up for its flat performance with big gains in other stocks. I would keep ADM through the remainder of the year and that is it. ADM is not a stock to own or even consider holding during 2010.
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