This is a market that encourages short-term thinking even from long-term investors.
In a market supported and driven by central bank cash flows moves are big and sometimes even clear. Right now, for example, the government of Prime Minister Shinzo Abe is determined to weaken the yen. Despite the recent volatility that comes from the criticism of Japanese policy at the meetings of the leaders of the G7 and G20 economies, it’s hard to see this trend not running until the yen hits 100 or 105 to the U.S. dollar. For a month or two or three, buying shares of Japanese exporters makes sense, even if you think the long-term trend in the Japanese economy is down and down some more.
Sure, housing stocks like Pulte Group (PHM) and shares of oil refiners such as Marathon Petroleum (MPC) tied to the mid-continent oil boom in the United States, are up 123% and 93% respectively in the last year, but the trends behind these stocks are still going strong and the market momentum is still with them, so isn’t it worth jumping on board for a while?
Shares in pummeled sectors such as Yingli Green Energy (YGE) in solar or Banco Bilbo Vizcaya (BBVA) among European banks are up 106% and 33%, respectively, in the last three months. Is it too late to pile in? How about adding Trina Solar (TLS), up 56%, or Mediabanca (MB.IM in Milan), up only 19% in three months, on the theory that lightening can strike twice (or more frequently) as these sectors recover.
And don’t forget that the lessons of the volatility of recent years—2011 as an extreme example—and, of the boom and busts of 1999-2000 and 2008-2009—argue to go with the momentum but to be ready to hit the door running.
I think some of this short-term thinking is perfectly appropriate to the nature of the current market. This is a market dominated by central bank cash flows with all the volatility that suggests, for example. And I have advocated adopting short-term strategies such as swing trading around a position as well-suited to this market. And certainly momentum strategies have been alive and well as U.S. and some overseas stocks have raced to new all-time or five-year highs in 2013. (In fact I own both Yingli Green Energy and Banco Bilbao Vizcaya in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
But that doesn’t mean short-term thinking is the only thinking that will turn a profit in this market. In fact the very prevalence of short-term thinking suggests to me that some or many long-term opportunities are going undervalued. By long-term opportunities I don’t mean opportunities like those in the red-hot 3D printing sector—stocks like 3D Systems (DDD), Stratasys (SSYS), and recent IPO the ExOne Company (XONE). Those have been amply recognized by momentum players.
The opportunities I’m talking about are a little further out than this market is interested in seeing at the moment and perhaps a more nuanced story than those of the rise of a manufacturing technology that is 1) like your desktop printer and 2) will revolutionize global manufacturing.
Can I give you five quick examples? Thanks. I knew you’d say Yes.
Yamana Gold (AUY). Right now gold stocks—like gold itself aren’t anyone’s favorite investment. Despite lots and lots of evidence pointing toward future inflation (those central bank printing presses again) and devalued currencies, gold has been going nowhere but down recently. Part of that seems to be—if we can judge from the amount of money flowing out of gold ETFs—that some investors/traders in gold have gotten discouraged and tired of waiting and have decided to sell today and come back another day. So the February 13 announcement of a 44% increase in estimated reserves to 1.95 million gold equivalent ounces at the Cerro Moro mining project in Argentina that Yamana acquired in mid-2012 didn’t move the stock up at all. In fact the stock fell 0.88% on the day. However, despite the perverse market action, this is exactly the kind of announcement a long-term investor wants to see from a gold mining company. Yamana closed at $15.78 on February 13, below the $16 a share price that I’ve been using to build a position in the stock. Given gold’s recent weakness I might hold off on this one a bit since the chart looks to be headed to a negative cross (where the 50-day moving average moves below the 200-day moving average.) That kind of chart often indicates further weakness ahead. The shares pay a 1.65% dividend, not bad for a gold stock since gold itself pays 0%. (Yamana Gold is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
Statoil (STO in New York or STL.NO in Oslo) has been on investors’ minds—if it has at all—because the company owns leases in Alaska near the leases owned by Royal Dutch Shell (RDS). Nothing like watching a competitor (and sometime partner) ground a rig off Kodiak Island and set off a major regulatory review of all offshore Arctic drilling to raise a few doubts in the market. Statoil apparently had some doubts too—the company put its Alaska efforts on a slow track back in September as it waited to see what would happen with Shell’s efforts. Which is why I’m not surprised that the February 12 news that Statoil is going ahead with plans to build a new oil terminal on Norway’s Arctic coast to process oil from the company’s recent Arctic oil discoveries in the Barents Sea in Norway’s promising Arctic oil frontier did nothing for the stock. (Did I mention that Statoil is a Norwegian company—in fact the Norwegian state oil company.) The Skrugard field, expected to come on stream in 2018 will deliver oil through a 170-mile pipeline to the new terminal. Okay, the finds in the Skrugard and Havis fields in the Barents Sea are big enough to be important in themselves—production from the two fields is projected to reach 200,000 barrels a day. But the finds and the terminal are an important proof of concept for long-term investors like myself who believe that Statoil’s experience in the tough environments of Norway’s outer continental shelf give the company an important technology edge in the race to produce oil from the Arctic offshore waters of North America and Russia. The stock pays a 4.68% yield. Statoil has been in a modest uptrend since December. (Statoil is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
L’Oreal (OR.FP in Paris or LRLCY in New York), the world’s largest maker of cosmetics by sales, has a huge opportunity in front of it built on management myopia. At a time when companies like Nestle (NSRGY), which owns 30% of L’Oreal, or Unilever (UL) have already moved deep into emerging markets, L’Oreal remains a laggard. Unilever’s personal care business, for example, gets 55% of revenue from emerging markets to L’Oreal’s 37%. The company is sitting on 1.6 billion euros in cash and a 9% stake in drug company Sanofi (SNY.) That’s plenty to finance a move into the fast-growing cosmetics market in developing economies. L’Oreal’s standstill agreement with Nestle expires in 2014—and that’s likely to lead to an offer from Nestle to buy L’Oreal or from L’Oreal to buy out Nestle. The battle—or even the speculation that there will be a battle—will push L’Oreal shares higher. (And in the meantime L’Oreal seems intent on keeping shareholders happy with a big share buyback plan.) The stock pays a dividend of 2.04%.
General Electric (GE) is selling the remaining stake of NBC Universal to Comcast (CMCSA) for $16.7 billion. Why is that important to long-term investors? General Electric now has restocked its vault with billions at a time when slow growth in Europe has put very attractive prices on some European industrial companies with technology that GE can use to solidify its #1 or #2 ranking in markets from jet engines to turbines to MRI scanners to water treatment systems. For example, General Electric is spending $4.3 billion to buy the aerospace-parts business of Italy’s Avio. Acquisitions of the bolt-on size that CEO Jeff Immelt favors work for General Electric and its shareholders in the long-term because GE’s scale lets it increase sales for companies it acquires and cut costs. The stock pays a dividend of 3.25%. (General Electric is a member of my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ )
Stryker (SYK) is the most long-range of these long-term opportunities. On January 17, Stryker, a maker of medical devices such as hip, knee, and shoulder replacements, announced that it would pay $764 million in cash to buy Hong Kong-based Trauson Holdings, a maker of spinal orthopedic products. The move will let Stryker, which gets just 20% of its revenue from emerging markets, jump deep into a Chinese market serving a huge (181 million) and fast-growing aging population. China’s orthopedic market is projected by Frost & Sullivan to hit $2.7 billion by 2015, making China the second largest market behind the United States. (Japan would be #3.) Trauson has about a 7% share of China’s market currently and did $81 million in sales in 2012, a 36% increase from the prior year. The opportunity here for an overseas player like Stryker is equivalent to the opportunity in China for overseas producers of infant formula and dairy products. Chinese consumers don’t trust the safety record of domestic producers—of either infant formula or hip and knee replacements—so if an overseas company like Stryker can build upon a reputation for quality and technology (granted an “if” in the hip and knee industry lately) and then add the distribution that a local company has in China’s Tier 1, 2, and 3 cities, then the sales opportunity is huge. I’d call Stryker fully priced at the February 13 closing price of $63.80. 2013 looks like a tough year for Stryker and its competitors thanks to austerity budgets in Europe and cuts in reimbursement formulas in the United States. That’s actually an advantage to patient investors since I think it means that Stryker will probably produce a disappointing quarter or two in 2013 that will present a buying opportunity.
You do remember how to wait don’t you? It’s what long-term investors do.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares General Electric, Pulte Group, Statoil, Stratasys, and Yamana Gold as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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