Seeking Alpha
Long only, dividend investing, ETF investing, energy
Profile| Send Message|
( followers)  

It's hard to believe, given our point in the bull market, but there's a move afoot from defensive to growth sectors, says Jim Fink of Roadrunner Stocks.

Nancy Zambell: My guest today is Jim Fink, and he is a writer and analyst with Investing Daily. Welcome Jim, and thank you so much for joining me.

Jim Fink: Thanks Nancy. It's good to be here.

Nancy Zambell: So we're sort of on Fed Watch these next couple of days, aren't we?

Jim Fink: Yes, they have a meeting this week, and all eyes are on their statement and the guidance they're going to provide going forward. Nobody expects them to taper down their bond purchases right now, but people are going to want to see whether Bernanke issues any hint as to when they might start tapering.

Former Fed chairman Alan Greenspan was recently interviewed on CNBC. He recommends tapering right now, thinking the economy is strong enough to handle it, but no one really thinks Bernanke is going to do that right now. The earliest anyone expects is at the September meeting, but even that is probably much too early.

Nancy Zambell: What about the unemployment picture? That has been such a drag. Certainly, it's improved since 2009—by a large degree—but it's very, very slowly recovering. What do you think it's going to take to get people to actually hire again?

Jim Fink: That's a good question. Unemployment has definitely been the lagging economic indicator. This has been the worst jobs growth coming out of a recession in the past 80 years.

Part of it is just structural realignment, with emerging markets taking over the slack of a lot of our lower-income jobs. A lot of the job growth in the past just is not going to happen this time, and that's one argument for why tapering is not going to happen as soon as some people think.

The Fed has already targeted a 6.5% unemployment rate before they would even consider raising short-term Fed funds rates. And I think unemployment right now is more than a full percentage point above that, so they're nowhere near close to a situation where they would raise the Fed funds right now.

The quantitative easing bond purchases are not subject to the 6.5% level, so, theoretically they could start tapering even before unemployment gets down to 6.5%. But I think they would want to see more indications of continued jobs growth before they would start even tapering.

It's a tough issue. The Fed—unlike central banks in other countries which have a sole mandate of preventing inflation—has a dual mandate of both maintaining stable inflation and also promoting full employment. So with that mandate, they're going to be very careful not to screw up any further jobs growth down the line.

Nancy Zambell: The market, as we both know, is an anticipator of the economy, and it's certainly done very, very well for the last year. Do you expect additional volatility? For the last ten days, we've been up 100 points, down 100 points, up 100 points. Do you anticipate that will continue for the rest of the summer or the rest of the year?

Jim Fink: Yes. A great indication of that increased volatility is CME Group (NASDAQ:CME), the Chicago Mercantile Exchange. That stock has just taken off to the upside recently, and the reason is because a large part of their business is the trading of interest rate futures.

Interest rates have been so stable and so low for so long that a lot of the CME's trading business volume just dried up over the past few years. But now with the increased interest rate volatility, the CME's business is really strengthening.

This all started back at the beginning of May, with the April employment report showing strength—with revisions upward of even prior-month job growth—and the ten-year U.S. Treasury just took off. It went from 1.6% all the way up to 2.2% in the span of two weeks, and that was the beginning of the reevaluation by investors of the economic climate.

I don't think interest rates are going to skyrocket much more than they are right now—for a bit—but I think the trend is definitely up. The May 3 jobs report marked the turning point, and over the next year or two, interest rates will be moving higher-not tremendously, but maybe to 3% on the ten-year.

Nancy Zambell: What do you expect in terms of sectors right now? Where are you putting your new money?

Jim Fink: One of the big stories of the second quarter has been the massive correction in the defensive sectors. If you look at utilities and real estate investment trusts, it's just been an incredibly sharp correction.

Yield-hungry investors bid up the valuations of the defensive industry sectors so much that there was a big sell-off when they realized that interest rates might be going up, and they can get decent yields and perhaps capital gains growth as the economy strengthens. So they really sold off those sectors.

I don't see the defensive sectors going down much more, but I think there is a change of sector leadership. I don't think the defensive sectors are the place to be anymore. It's time to start moving into more economically sensitive sectors.

My favorite sectors right now would be what I would call growth cyclicals. I don't think the economy is strong enough to favor the deep cyclicals like steel or coal or the metals and mining stocks. I think it's too early for that yet.

Just look at what's going on in the coal sector. There has just been carnage. Walter Energy (NYSE:WLT), Peabody Energy (NYSE:BTU)—they've just crashed. And the steels-ArcelorMittal (NYSE:MT) and Posco (NYSE:PKX)-the Korean steelmaker-have gone way down.

So it's too early for the deep cyclicals. I would focus on growth cyclicals, like consumer discretionary and industrial stocks Danaher (NYSE:DHR) and General Electric (NYSE:GE), and information technology stocks.

Nancy Zambell: Who do you like in technology?

Jim Fink: Everybody says it, but I'm going to say it too, I think Apple (NASDAQ:AAPL) is undervalued. It's gone almost straight down from its September high of $700.

I know that there's talk that it's losing its competitive advantage with the iPhone. The Samsung Galaxy and the HTC smartphones are very high quality, but I just believe that Apple has a lot of profit making to go. I sincerely believe it's worth more toward the $600 range. I think in the second half of the year, when it comes out with new products, the stock is going to rise.

I'm the chief investment strategist of Jim Fink's Options for Income, and one of the trades I'm looking at right now is selling puts on Apple. I don't know exactly when it's going to go up, but I like to sell because you can make money even if the stock doesn't rise—just as long as you're pretty sure it's not going to fall much further. And I don't think Apple's going to fall much further.

One trade I'm looking at is October puts, where you would sell the $400 put and buy the $390 put. It's a ten-point put spread and you get about a $3 credit for that, giving you a potential rate of return of around 40% if it stays above $400 by October expiration.

A more direct stock trade is a smaller-cap company called ValueClick (VCLK). People might remember that from the dot.com days of the turn of the century. It's been a volatile stock, but it's survived, and it's ready for better times ahead.

Its main business is affiliate marketing on the Internet, where it enables advertisers to create a network of third-party Web sites that will act as their salesforce.

The main catalyst for this stock is that one of its competitors was Google (NASDAQ:GOOG), who recently decided to exit the affiliate marketing business, leaving a lot less competition for ValueClick. I think ValueClick has a lot of growth ahead of it just by gaining market share from Google's exit.

Source: 2 Picks That Prove Growth Is King