This environment has showed quite beautifully the fact that a stock market can thrive without a truly robust economy. All that investors want is a measure of consistency and a sense that the ship is headed in the right direction.
They have come to realize that even in a low-growth stretch of time in which it is hard to raise prices or increase revenues by double digits, companies have a lot of levers that they can pull to increase earnings growth. They also realize that companies can hold labor costs low in a slack labor market, they can use technology to increase productivity, and they can get commodity inputs such as natural gas, coal and corn at lower levels that reduce the expense side of the ledger.
But most importantly, investors have come to realize that many companies are issuing cheap debt and using the funds to buy back their own shares. It is a gimmicky way to increase earnings per share, but it has the dual effect of putting a deep-pocketed buyer in the market for the shares and making the total number of shares more scarce.
We are participating as traders mostly by opportunistically buying the shares of three classes of stocks:
- Large caps like McDonald’s (NYSE:MCD), 3M (NYSE:MMM) and Eli Lilly (NYSE:LLY), which are leaders of the advance and trading at new all-time highs;
- Medium-sized companies like Legg Mason (NYSE:LM) and Boston Scientific (NYSE:BSX) that are trading up forcefully from hellacious declines as deep-value buyers add to positions that have a ton of headroom for further gains; and
- Recovering small-caps like Gramercy Capital (NYSE:GKK) that are being purchased by opportunistic deep-value players. These people see that structural changes have been made to allow a company left for dead to prosper again.
This year has been extraordinary so far, and even though it is bound to have its rough patches similar to what we saw around Feb. 25, the spirit appears to be for a broad re-rating of risky assets higher. If sentiment changes, we will change too. For now, though, we will stick with health care, asset managers, staples producers and the occasional industrial for their time in the spotlight.
Because if there is one thing I know after almost three decades of trading, it’s that you have to make hay while the sun shines in this business. And it does not shine all the time.
InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days.
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