You’d never know it by looking at plunging U.S. stock prices but the economic data this week have been solid. The numbers point to a U.S. economic recovery that is at worst chugging along and that at best might even be picking up speed.
So for example, factory orders for March showed a big 1.3% increase. The consensus among economists called for a 0.2% decline. The government also revised February’s numbers to show a 1.3% increase instead of the earlier 0.6% gain.
The biggest part of the gain in factory orders came from a huge jump in nondurable goods orders. That sector showed a 2.9% gain, the biggest increase since June 2009.
Pending home sales (a pending sale is one where a contract has been signed and this number is therefore a good indicator of actual future home sales) showed a 5.3% gain. That was again above expectations, which were looking for a 5.0% increase. Prior month numbers were revised upward here too to 8.3% from 8.2%.
There was good news on the financial front too.
The Federal Reserve’s survey of bank lending officers showed that big banks had actually stopped tightening their lending requirements and had even, in the judgment of bank officers, loosened requirements slightly.
Last week the government reported that business investment climbed at a 13% annual rate. That’s down from a 19% rate at the end of 2009, but that size of an increase was an unsustainable surge. The recent number certainly keeps the momentum going.
And this morning the jobs survey from Automatic Data Processing (ADP) showed that U.S. companies added workers for the third month in a row in April. The 32,000 increase was the most since January 2008.
Another survey, this one from Challenger, Gray & Christmas, showed that planned firings by U.S. companies had dropped 71% in April to the lowest level since July 2006.
Now not everything is completely rosy in these numbers or in the U.S. economy. Consumers in April raised their spending but only by saving less, for example. The bump in pending home sales is certainly at least partly the result of buyers rushing to beat the deadline for getting in on the expiring tax credit for home purchases. And the ADP survey of private employees doesn’t always track with the official jobs numbers (which are due out Friday, by the way.)
But it is important to realize at a moment when stocks are plunging and the news piles one negative on top of another (Wait, is that a plague of locusts I see? Is it about to rain frogs?), that the U.S. economic recovery is still intact. I don’t expect this rebound to be anywhere near as strong as the economy has historically delivered after a recession, but it still looks like we can count on solid if modest growth in the world’s biggest economy.
I’ve written about how to look for growth stocks in just this kind of economy several times over the last few weeks. (Try this post to get an idea of my thinking https://jubakpicks.com/2010/04/20/go-for-the-growth-and-where-to-find-it-at-a-reasonable-price/ .) And I think that perspective should guide your selling and, yes, buying, during what looks like a decent-sized correction.
I’ll have more on some moves to execute that perspective later today.
djpoints,
I agree with what you’ve said. Undiscovered small-cap with great potential may NOT cost less. I take that into consideration with a host of other things. Without being overly wordy, share price is not my only criteria. Hyperthetically speaking, out of 100 companies, 10 might make the watch list…1 or 2 MIGHT suggest a buying opportunity. Sorry for the confusion.
Someone has done a better job explaining this key concept – a must read for any newcomers out there.
Google “stock share price outstanding”
t
Bob,
I think you misunderstood. I agree, a value buy is a completely different story. But I’m actually speaking about absolute value, not relative.
It sounds like you still think a so-called undiscovered small-cap with great potential is more likely to cost less, say <$15/share than it say $45/share. Everyone should know this is def not the case. To take it even further, a micro-cap is just as likely to cost $200/share as it is $2/share. The share price just about tells you nothing. Why? Because, it all depends on how many outstanding shares there are.
And btw, there is nothing wrong with your general philosophy of looking for small/med caps that you think have great potential. But to screen stocks based on share price really does not make any sense whatsoever! But eh, it has been working for you, but keep in mind in general so have all the small, med, and large caps!!!
djpoints,
I’m saying, that given a choice between a $10 stock and a $50 one, it’s been my experience that many undiscovered companies get discovered quickly (the ones that are good…not the crap companies) and move up quickly especially when discovered by an institution. All it takes is a few good earnings announcements, good financials, etc., and folks pile on. I find a good entry point, make my $ and take my profit. My time frame for holding is weeks to a year.
Now, a value buy is a different story. Read Jim’s book and his articles. He gives good insight into this. Those stocks are above $40 and can be good plays with their rich dividends. There are some below that price but you’ve got to look for them.
I like small to medium cap companies in hot sectors that are fundamentally solid that don’t yet have the attention of institutions. Stock screeners will reveal who they are.
Off Topic:
Energy MLP’s really went down today(gas and oil processors/pipelines). I am thinking the drop is due to the possible removal of the $75 million cap on Guld Coast drillers liability; but has anybody heard anything else?
WPZ WILLIAMS PARTNERS LTD COM -2.77%
PGH pengrowth Energy Trust -4.85%
EEP ENBRIDGE ENERGY PARTNERS LP -2.26%
MMP Magellan Midstream Partners -2.32
LINE Linn Energy LLC Units -4.26%
OKS OneOK Partners LP COM – 2.16%
No news related to any of these companies’ symbols that I could find, anyway.
Thanks
Phil
bsdgv,
So are you suggesting that bobisgreen has a preference for small caps? Maybe, I’m not sure. Let’s say he does, as your implying. If so, again, that has nothing to do with the stock’s share price. For example, take the top 10 holdings in say Vanguard Small Cap Growth Index. The average share price is $53 —- not anywhere close to bobisgreen’s $15 target.
Again, just because a stock cost $15, $1, or even $.01 does Not mean it is a small cap, micro-cap, or most importantly cheap. And in general this is the rule, not the exception. Why? because a stock’s price/share depends much more on how many shares are outstanding.
BTW, there are others here that get this right? And sorry to belaber this, but this is one of the most critical misunderstandings of new investors. I know I did not understand it early on 🙂
Rolfer1,
Congrats! Circle gets the square!
Ed… agreed. I’ve been doing the same thing, shopping around and looking for bargains. Plus trying to sell off some winners to increase cash position and be ready to pounce if needed. Or sit and wait.
Run26.2,
Note the disclaimer at the front of Wilson’s statement: “We may be a little early, and we are conscious that contagion is hard to predict…” When you add in the last “looking for opportunities when we see a clear disconnect between price action and cyclical news”, they are doing pretty much what we’re doing: Looking for vulture opportunities.
Thank you. I feel better about my strategy now. 🙂
Goldman Sachs is buying:
http://www.cnbc.com/id/36968225/
“We may be a little early, and we are conscious that contagion is hard to predict, but we think risk-reward is better now than for several weeks,” Wilson said. He noted they had added fresh long positions in their Consumer Growth basket.
Wilson said he had been “looking for opportunities when we see a clear disconnect between price action and cyclical news.”
I like the good news, but a little confused with your post yesterday about the glass being “half empty”. In that post you said start looking for times to sell, this post seems to put some hope back into the equation. I’m having a double take here, which is it – get out, the market is going down, or stay in and look for opportunities to buy cause the economy is looking good. Maybe your saying both, which I guess makes a little sense. I know that in this post your just giving the numbers, and the numbers are well… the numbers. In case I don’t hear back from you on this one, I’ll assume this is a very tricky time and your basically saying look for times to sell, but also keep your eye open for bargains, which I guess is what your doing with Cummins.
> I would be curious to know if there is any data that suggests a $15 stock has a better chance to go to $30 versus a $45 stock going to $90. On the surface, that doesn’t really make any sense.
Small-cap and especially micro-cap companies’ stocks are usually are priced under $10-$15. Considering that these companies’ perform better than mid- and large-caps, it makes sense to say stocks under $10-$15 have a better return on average. Off course, better returns come with higher risks.
rolfer1,
Be very careful with that logic!!! If a $50 stock goes up 20% and a $5 stock goes up 20%, assuming you invested the same amount in each, your paper gains are equivalent, right?!! So actually, percentages are what matters!
Please realize that there are many many stocks trading for under $10/share that are actually much more expensive/valued much higher than many stocks trading over $50, $100, and even $200.
It sounds like bobisgreen just has a preference and has had some success trading stocks under $15/share. I would be curious to know if there is any data that suggests a $15 stock has a better chance to go to $30 versus a $45 stock going to $90. On the surface, that doesn’t really make any sense.
Rolfer,
I may be doing my math wrong but…
$800 at $22/per share = 36.36 shares.
36.36 shares * $26.60 = $967.27
Also for Aruba…
$800 at $8/share = 100 shares
100 share * $11.60 = $1160.00
The buy of Aruba is about $200.00 more profitable.
Unless I am missing something.
Jim, as you well know, the market and economy are often misaligned. Yes, in the long run, the market will economic growth and the market has been a good 6-9 month predictor of the economy…generally. But, do you really believe that today’s market value should be equal to that in May 2005 (before the financial meltdown)? With all the global headwinds in addition to the much more difficult quarterly earnings comparisons to come, I think not.
djpoints – huh? If you’d bought $800 (100 shares) of Aruba when it was at $8/shr and it ran up to $11.60, you would have made, on paper, $2,880. If you had invested that same $800 in Cisco at $22/shr and it ran up to $26.60, your $800 investment would be worth $3,680. Dollar gains, not percentage “gains”, are what matters.
djpoints,
Generally you are right…generally. I’m looking for exceptions. It is easier for $15 to appreciate to $25 than a $50 to jump to $80. Example: Aruba Networks is a competitor of CSCO. I’ve made 60% so far with Aruba who traded below $8 when I first bought it. It now trades for $11.60. CSCO currently trades at $26.60. During the same time period CSCO traded at about $22. The math is simple…could you shoot holes in my case with “yes, buts”…probably. I’m beating the S&P so far, having a little fun, making a buck or two with a different approach. By the way, If I had purchased CSCO back in Mar ’09, it traded for $14. From $14 to $26 is $2 shy of “double your $”. I look at many of the fine companies in “Jubak’s Picks” and many are 40 & above with a few exceptions (INTL).
bobisgreen,
I appreaciate your post, but you lost me when you said you’re looking to invest in stocks whose “Share prices below $15. It’s easier to reap sizeable profit on a stock like that, than one that is trading $45 or above.”
What do you mean? To me it sounds like your suggesting a stock trading below $15/share must be cheaper/better value than one trading above $45/share – which obviously is not necessarily the case. Would you mind elaborating? Thanks 🙂
> Pending home sales (a pending sale is one where a contract has been signed and this number is therefore a good indicator of actual future home sales) showed a 5.3% gain.
This number was from March which correctly predicted the closings in April. So it is old story.
Jim,
That’s exactly the frustration of this market, that is, the world (European in particular) economies are getting slammed against the ropes, while the US (and we do have our problems…duh!) has a modest to solid recovery in motion. The recovery represents smaller companies that have started to hire instead of fire (and actually making sales and profits), consumers who are starting to spend instead of hoard, and banks (yeah those guys) are starting to lend again, as you’ve said. The interesting thing to watch for later this year (fall perhaps) will be if companies who made earnings projections and upward guidance by virtue of cutting its work force and expenses, can do so by returning to previous work force levels.
These are some of the qualities I’m looking for when I invest right now in this market: 1. Share prices below $15. It’s easier to reap sizeable profit on a stock like that, than one that is trading $45 or above. 2. Value, technicals, earnings history, etc. have quality written all over it. 3. Recovery friendly sectors. What do you think?
Jim:
Thanks for another very timely piece! I agree with you that the economic news came out today and yesterday are very good. I think many people looking for cashing out opportunity and the worry about Euro zone is just an excuse to do so. I sold several holdings in the last 2 weeks of April, though I wish I had bought those new stocks later than last week. But none knows the ABSOLUTE low or high of the market. I did my best and live with my decision. I am fine with it.
I am starting to see businesses hiring again in the manufacturing area where I live. These companies were some of the hardest hit too