More than a third of the year has passed and the markets have rebounded nicely from their lows to turn a small profit on the year. It seems that the worst may be behind us when it comes to equity prices as many stocks have rallied more than 50% this year alone. Here at Bullish Bankers, we published a “Best Stocks of 2009″ newsletter at the beginning of the year, and our equities have performed very admirably when compared to our benchmark, the S&P 500. This article is designed to give a recap of how our equities have performed and give some additional explanation to our initial stock picking process. Through Friday, May 8th, our BB2009 Index has outperformed the S&P 500 by 11.51% on a geometric basis ex-dividend payments. Beside each of the sectors I have listed our three picks and the comparable ETF to show our relative performance on a sector by sector basis.
Our consumer discretionary sector has lagged thus far in 2009, and this was mostly due to having two very defensive and conservative type plays in Apollo Group (APOL) and McDonald’s (MCD). Coach (COH) has been a great surprise this year with consumer spending down so drastically, but the fundamentals at year-end were much healthier than the stock price and as you can see from the price appreciation it was a screaming buy. McDonald’s has reported good earnings and carries a solid dividend but hasn’t kept pace up to this point, but that is likely to change if the recession is prolonged through the end of this year. As more people are laid off each month, Apollo stands to benefit from individuals going back to school for new skills who are looking for an affordable education.
Consumer staples has been one of the quieter sectors this year after it steadily outperformed the market in 2008. Smuckers (SJM) has been in line with the composite while Kroger (KR) has fallen sharply due to competition with other grocery stores like our third pick, Wal-Mart (WMT). Wal-Mart was getting very expensive at the end of last year, but there is a premium on the cash flows of a company that is arguably the most stable and consistent in the world. Our consumer staples is another sector that would benefit from a sustained recession.
One of our best performing sectors has been energy. After oil and natural gas prices dropped more than 70% from their highs, it was very evident that many of the names in the sector were oversold, especially the smaller names and the names in the services sub-sector. Noble (NE) and National Oilwell Varco (NOV) both fall into this category as companies with excellent free cash flow that were oversold when the markets priced in oil staying at $30 for a sustained time period. Apache (APA) brings excellent Southeast Asian natural gas exposure to the table, and the companies recent earnings and the rebound in natural gas prices has done wonders for the stock.
By far our best sector relative to its benchmark has been financials, and this has been due to our index having no exposure to the big banks. Goldman Sachs (GS) and Morgan Stanley (MS) both passed the stress tests with flying colors and are in line to be two of the first companies to pay back the TARP funding when the government allows firms to capitalize privately again. Travelers (TRV) has outperformed many of its insurance peers as their real estate exposure is less toxic than its competitors.
Another sector that has lagged in 2009 is healthcare, although this could turn around very quickly. Teva (TEVA) is the world’s largest generic company and stands to benefit a lot under President Obama’s new healthcare spending plans. Abbott (ABT) and Gilead (GILD) are both leaders in their respective sub-sectors, and any rebound in healthcare will see these names outperform some of their smaller peers. Gilead’s work on cancer drugs has been groundbreaking, and their exposure the cancer market will help them to be one of the fastest growing large healthcare companies for years to come.
The industrials sector took it on the chin in 2008 but is starting to show the signs of an early recovery in 2009. Some of the rebound was due to President Obama’s stimulus plan, as seen with Fluor (FLR), while another portion of the rebound was due to fundamentals sitting at historically attractive levels. Ametek’s (AME) strategy of using acquisitions for growth obviously won’t play out in 2009 but in the near future the company could find smaller competitors at extremely cheap valuations. Northrop Grumman (NOC) remains one of the big four defense contractors and has a number of reliable government contracts to help its revenues remain steady over the next few years.
Information technology has been one of the best sectors to be in during 2009. The rebound in IT started before all of the other sectors and has only slowed recently. Our index had exposure to many smaller names that have skyrocketed in 2009 because of their exposure to niche sub-sectors. Cerner (CERN) stands to benefit tremendously from President Obama’s healthcare plans and could see growth rates well over 25% for years to come. Western Union (WU) has safe revenues from transaction services and Sybase (SY) excels in their small niche as demand increases for mobile information solutions.
By a wide margin the best sector so far this year has been materials, which coincidentally was one of the worst performing sectors in 2008. This is another sector where depressed commodity prices led to valuation that made no sense even in a severe recession. Packaging company Greif gave our index exposure to a small portion of the composite that well outperformed its peers in 2009 based on fundamentals alone. Praxair is one of the two most profitable companies in the gases space and Agrium has made aggressive moves in 2009 to boost shareholder confidence.
Even with their lofty dividends, the utilities stocks were able to keep pace through the first third of 2009. WGL (WGL) and Consolidated Edison (ED) have chugged along steadily, but Florida Power and Light (FPL-OLD) has been the real star this year. They are owners of the most envious wind generation portfolio in the country and have extensive build-out plans over the course of the next few years. Again, this is a company that will no doubt benefit from President Obama’s stimulus plan and his plan to move to renewable energy sources as quickly as possible.
We will continue to track these picks for the rest of the year and by no means are we chalking this one up as a win just yet even with our hot start. At this point, we remain cautiously bullish on our companies and fairly neutral on the market over the short term mainly because the rally has occured so quickly. If you want to read extremely detailed analysis about these 27 companies you can visit the following link and download our newsletter free of charge.
We will be releasing a new newsletter later this week entitled “Stocks For An Economic Recovery” that will highlight stocks that stand to benefit the most when the economic data begins to turn around. Lastly, we would like to thank all of our readers and newsletter subscribers for their continued support through these tough economic and financial times. Best of luck investing!
- Charles W. Petredis
Disclosure: The mutual fund the author manages has long positions in MCD, WMT, NE, APA, GS, XLF, ABT, TEVA, GILD, FLR, AME, CERN, PX, ED, and FPL. The authors family has long positions in MCD, WMT, NE, NOV, APA, ABT, CERN, XLY, XLP, XLE, XLF, XLV, XLI, XLK, XLB, and XLU. The author has long positions in APA, and NE.