For the first half of 2011 anyway, you need to own industrial stocks: Here’s how to learn that possibly unfamiliar sector
“I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.”
I don’t have the foggiest idea if Abraham Maslow, the psychologist who authored that quote back in 1966, knew anything about investing.
But from painful personal experience I’d propose an investing version that goes like this: “When you only know one group of stock, it’s tempting to see that group as the way to succeed in every market.”
In 2011 I think it’s going to be very hard to make much money in the stock market unless you learn a new stock group, one that you’re possibly uncomfortable with, and one that’s not the commodities or technology stocks that you’re familiar with from the last two huge rallies.
You’re going to have to learn something about industrial and manufacturing stocks. That’s the stock group you’ll need in 2011—or at least in the first half of 2011.
(My Dad told me his own version of Maslow’s quote one day when he handed me a pipe wrench and said “When every problem is a nail, you should use just about anything you have as a hammer.” But I don’t know what the investing wisdom in that might be.)
In 1999, for example, anyone who knew technology stocks hammered the stock market for about a 100% gain. Or more. Shares of Cisco Systems (CSCO) climbed 131% that year.
Try that in 2007, a huge rally year like 1999 that preceded a crash, and you would have been left crying on your router. Shares of Cisco dropped that year by about 1%. Not every technology stock did that badly in 2007. IBM (IBM) was up 13%. Microsoft (MSFT) advanced 21%. Oracle (ORCL) nailed 32%. Intel (INTC) 34%.
But compare those gains to those delivered by a completely different stock group. General purpose mining stock BHP Billiton (BHP) was up 79% in 2007. And BHP Billiton would have been a lagging mining pick that year. Brazil’s iron ore giant Vale (VALE) climbed 122%. Potash of Saskatchewan (POT) soared 202%.
Yep. In 2007 it sure would have paid off to abandon what you know—technology stocks–and learn an unfamiliar group—commodity producers.
In 2011, I’d argue, that group you need to know is industrials. Read more
For after the correction, think industrial stocks: Market history says this is their time
Are you in the right sectors of the stock market for this point in the economic recovery? (Yes, despite the stock market correction, we are still in an economic recovery.)
Solid data stretching back to 1945 argues that certain industries and sectors outperform during specific stages of any economic recovery. (The best work on this subject comes from Sam Stovall, the chief investment strategist for Standard & Poor’s Equity Research Services. His 1996 book Sector Investing is still the best resource on the subject to my mind.)
My first rule of investing is “Put every trend you can on your side.” Neglecting what we know about what sectors thrive when is in my opinion wasting an asset that could help you make bigger profits.
Stovall divides the economic cycle into four stages. Read more
The key to commodities investing now is idle capacity. And how quickly it gets back into production
In its regular report on June iron ore production, delivered on July 22, BHP Billiton (BHP) gave investors the key to investing in commodities over the next year. Ignore this at your portfolio’s peril. BHP just told us all what to buy, what to avoid, and when.
Ready for those words of wisdom: “Commodity prices will be influenced by supply responses due to latent capacity currently existing in the industry.”
Let me translate into language useful to investors: Yes, commodity prices are climbing as consumers of raw materials rebuild their stock piles. And yes, we are seeing what is a real increase in demand and not just a result of inventory rebuilding. But don’t get carried away by short-term spikes in commodity prices. So many commodity producers have idled mines or wells or whatever that any big increase in price will be temporary as it will bring that idled capacity back into the market. And that will depress prices–for a while. Expect, then, a start-stop price chart where the trend is gradually higher, but where the trend is punctuated by spikes and plunges as demand and supply lurch toward equilibrium.
And from that I think investors should be able to figure out what commodity stocks to buy. I’ll lay out three general prices of commodity investing–in the current scenario–in this post. And I’ll give you a stock to buy later today. Read more
