One of the most fascinating sectors right now are the oil and gas producers, who have been bucking the downward trend in crude oil.
XTO Energy (XTO), Chesapeake (CHK), Range Resources (RRC) and Anadarko Petroleum (APC) have certainly lost their star status after losing a whopping two-thirds of their value in little more than three months, but they do appear to be catching the interest of value buyers. (See also: "Chesapeake Energy: Wait for the Oil Bubble to Burst.")
The ones who have hedged their output properly and taken appropriate steps to rein in spending are going to be survive and at least be worth their dividends once they stop going down and set a base.
The last few times that the group got clobbered like this it took as much three years to lose an equivalent amount of market cap. It then typically took three years for the stocks to consolidate and range-trade before moving back up again. If the super-compressed time machine that’s been at work lately is still working by the time that growth buyers get serious about the group again, then maybe the next base-making process will only take six months.
Either way, there’s no rush to buy these, or any of the other materials makers like steel, while they’re in free fall unless it’s for a trade.
Why are we seeing the steels, the energies, the fertilizers trading off like this? It’s just a reversal of the perfect emerging markets conditions we saw earlier in the year. Rather than that virtuous up-cycle, we now see a perfect storm in which commodity-intensive manufacturing industries like home building and auto making are not just at a standstill, but contracting. And with the credit available for big infrastructure projects evaporating, everything from power plants to airports and factories are sitting on drawing boards without funding.
Investors are running away from anything cyclical, from copper futures to foresters, without any regard to fundamental value. Moreover the dollar has become a safe haven in an ugly world of deleveraging and, and that has made all the basic materials priced in other countries less attractive.
The bottom line is that we will want to trade these with their new ranges, but from a long-term perspective remain underweight everything related to infrastructure and heavy industry until these cycle dynamics burn themselves out. Stocks rarely, if ever, go from free fall right back into a bull market, so please don’t rush into these stocks on your own just because they look cheap.
Their natural buyers are bruised and battered—the walking wounded. People need to forget about how much they lost in them, and that will take awhile. The base-making process is all about healing, forgiving and forgetting. There are no quick fixes for investors’ broken hearts.
Earnings Churnings
Earnings reporting season got fully under way last week, and we started to see the impact of the sharp drop in manufacturing shown in the Federal Reserve’s Beige Book report last week. Even though the federal deficit stormed 30% higher than a year ago, not much of that money appeared to work its way into people’s bank accounts. Retail sales were terrible last month, with core sales (ex-building materials, autos and gas) down by 0.7%, which was the steepest drop since September 2001, according to Thomson Reuters data. Homebuilder sentiment also sank to a record low, dragging down both home sales and construction employment.
Consumer sentiment is now its second lowest level in 28 years, which is amazing. When sentiment sinks to very low levels, there’s usually a powerful reversal higher.
It’s hard to it now, though, so I guess we cannot expect a big holiday season. Most of us probably already have too much stuff anyway.
So far this earnings season, we are seeing earnings growth for the third quarter coming in as no growth at all—in fact, it’s a 9.1% contraction. Consider that estimates for the third quarter back in April were +17.3% and you can see why stocks are getting trashed. The group most responsible for this is the financials, which are showing a 84% contraction in earnings. The sector with the most growth is energy, at 52%, but it’s not doing them a lot of good because earnings going forward are expected to be a lot lower.
Now one bit of good news I can provide here is that not much new supply is coming on the market. Thomson Reuters reports that for the tenth straight week, not one single initial public offering hit the U.S. market, which is the longest consecutive-week IPO drought since records have been kept. There were no IPOs in September and none are expected in October. That’s obviously bad for investment banks, who aren’t making those juicy fees, but it will ultimately good for the broad market because there’s less supply.
My least favorite stock right now, for those who are into short-selling, is Research in Motion (RIMM), which sank another 8.5% on Monday. I’m beginning to think that RIMM could be a long-term short like Starbucks (SBUX) and Whole Foods Markets (WFMI) now that it is getting much fiercer competition from competitors and it will suffer from a slashing of payroll at high-paying jobs on Wall Street and in real estate.
RIMM used to be special and deserving of its premium price/earnings multiple, but now its phone technology has slipped badly behind the iPhone and push-mail isn’t unusual anymore. I would not be surprised to see RIMM trading in the $20s or $30s by this time next year as its earnings moderate and its premium PE withers.
To see more ideas like this, check out my Trader’s Advantage letter.
This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
