Thursday, October 30, 2014

About Face

Just as fears of widespread Ebola virus swarmed the stock market earlier this month, the acceptance that the illness might be contained has returned the market to its previous levels. Put simply, stocks fell 6% in the first two weeks of October and then rallied 6% over the last two weeks.

This type of zig-zag recovery masks a market that is really flat overall. After the volatility, when the smoke clears, we are right back where we started.  It will be difficult for the market to push too much higher after this latest advance. We are still in a “long dry road”, which is a metaphor for a begrudgingly slow advance for stocks. We are also in a very slow economy with considerable economic headwinds throughout the rest of the world.

The brightest opportunities for investment appear in the industrial sector of the stock market. Other areas don’t look nearly as attractive.  Consumer spending is likely to be muted. Job growth and wage increases are barely happening according to most recent data. The principal engine of retailing, Amazon, reported disappointing sales this month. This suggests many consumer related companies will see little progress in their stocks. In addition, financial companies face headwinds from low credit spreads. Social stocks and story-stocks like Tesla have already been played out and investors have been setting expectations too high.

The industrial sector, instead, retains considerable value based on the business outlook for these companies. Companies like Cummins, Chicago Bridge and Iron, Eaton, Parker Hannifin, Paccar, and United Technologies are representative of these companies. We plan to add to our holdings in these stocks.

Overall, we plan for a flat market for the remainder of this year. This will emphasize stock and sector selection in order to make solid gains in the fourth quarter. 

Friday, October 3, 2014

Seeking a Cornerstone

Wanted: Investment manager seeks fun loving stock that can continuously travel to new heights, no matter what. This stock must be able to overcome market corrections from political turmoil.  It also needs to gracefully shrug off any general economic worries. This stock must love to frustrate all of its doubters and maintain an unwavering sunny disposition despite all circumstances. If any possible disappointment should happen, this stock must be able to recover quickly so that no one will remember why it went down in the first place. If you are a candidate for this request, please make yourself known in a clear and concise manner.

The flattish stock market that we are experiencing seems tethered to the dock. After a sell off early in October, the S&P 500 was only up 6% for the year and the DOW was virtually unchanged. The market makes very little progress in either direction.

In order for portfolios to grow, it is imperative that investors dig out and discover standout performers. This might imply singling out small companies that can grow to magnificent proportions from relative obscurity.

Or, as is more often the case, an enterprise that is already a juggernaut simply runs away from the field and catapults itself to new heights by generating more rapid growth than anyone expects.

Such is the case at Netflix which has been the market’s number one stock over the past two years for all stocks at a relevant market capitalization. In spite of this gain, Netflix may be just scratching the surface of its potential.

Netflix is known primarily for streaming movies made by other companies. It has shaken up the TV world by offering original television content  like smash hits “Orange is the New Black” and “House of Cards”.

Most recently, Netflix has announced a foray into making its own original movies. A sequel to “Crouching Tiger, Hidden Dragon” will be a Netflix property. In addition, Netflix has signed Adam Sandler to make four feature films. Netflix’s plans include a suite of pay per view offerings at $5.99 that would be a significant increment to its $7.99 monthly service.

Netflix reached 490 per share in September before succumbing to profit taking. It dropped as low as 437 this month before recovering slightly.

In the months ahead, this company should regain its royal state as investors become more convinced about its bright prospects. Netflix should be a cornerstone for our investment portfolios and we plan to buy these shares this quarter.