Investors Dumping the Junk Is a Great Sign

by Richard Band | April 2, 2014 12:00 pm

Can Wall Street’s bull avoid an unhappy end?  I’m a little more hopeful than I was a few short weeks ago.  Why?  Because investors—at long last—are dumping some of the speculative junk they had bid up to stratospheric heights.

You can see this change of heart in the most popular exchange-traded fund serving the biotech sector, iShares NASDAQ Biotechnology ETF (IBB[1]).  Biotechnology holds great promise for improving the quality of human life, but momentum players have carried the craze for biotech stocks to a ridiculous extreme.

At the end of February, as the biotech mania was cresting, the average stock in the iShares fund was quoted at a nosebleed P/E ratio of 44.  The fund sported a nearly invisible dividend yield of 0.03%.  In short, the type of fund that would appeal to crapshooters, not sober, calculating investors.

Lo and behold, IBB, as of today’s close, has now skidded nearly 13% from its February 25 peak.  Please join me in cheering for a bigger decline.   The further IBB drops, the more confidently we can assert that sanity is returning to the market.  A recovery of health is something to celebrate!

There’s more good news.

Outside the biotech orbit, many other inflated darlings are breaking down.  Amazon (AMZN[2]), Netflix (NFLX[3]), Priceline (PCLN[4]) and Salesforce (CRM[5]) have all shed double digits in the past few weeks.  King Digital Entertainment ( KING[6]), a highly touted IPO, is just starting to come back from a plunge. Wonderful!  Beautiful!

“Hey, wait a minute,” you say. “Couldn’t this turmoil in the speculative areas be an early sign that the whole market is about to fall apart?”

Yes, that’s possible.However, the mo-mo breakdown isn’t occurring in a vacuum.  While the speculative favorites are tanking, buying interest is shifting into neglected, value-rich corners of the market.

Did you notice, for example, the recent rally in WisdomTree Emerging Markets Equity Income Fund (DEM[7])?  It was the second time in March that DEM scored a better than 1% advance on a down day for the S&P 500.  Before March 2014, emerging-markets equities hadn’t mustered even one instance of such pronounced daily relative strength since August 2013.

Don’t get too excited yet, but maybe, just maybe, the long drought for EM investors is ending.  If value counts for anything, emerging bourses should enjoy an extended catch-up move.

Elsewhere among stocks I follow, Baxter International (BAX[8]) announced plans to split[9] into two companies.  One business will focus on traditional medical products (anesthetics, injectable drugs, intravenous solutions and the equipment to administer them) and one will develop and manufacture biopharmaceuticals. I welcome the decision, since the sum of the two parts will likely be worth substantially more than old Baxter as a single entity.

My best buy right now is Kinder Morgan Energy Partners (KMP[10]). Last Wednesday, KMP said it will invest approximately $1 billion to expand its carbon dioxide operations. Injected CO2 is used increasingly in America’s oilfields to recover crude that conventional methods can’t lift.

This is just the latest in a series of growth projects the Kinder Morgan family of companies has launched in the past few months.  Contrary to bearish articles in Barron’s and elsewhere, KMP is still finding ways to generate additional cash flow for investors.

At a current yield of 7.4% (mostly tax deferred), KMP is just too cheap relative to its peers in the master limited partnership space. 

Source URL: https://investorplace.com/2014/04/bax-nflx-kmp-stocks-to-buy/

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