Seeking Alpha
Growth at reasonable price
Profile| Send Message| ()  
Short-Term Key: Neutral Long-Term Key: -7 (Neutral)
As you know, we pay a lot of attention to sector trends. But it's equally important to look at specific stocks within strong and weak sectors, because the difference in performance can be considerable.
Take, for instance two large cap oil companies we've been following, Exxon and Chevron (CVX), which is in our Growth and Income Portfolios. While Chevron has been on a bit of a roller coaster this year, its price is certainly higher than it was a year ago. Meanwhile, Exxon's stock has been dropping ever since December 2009, when it made a bid for the natural gas giant, XTO Energy. We pointed out before that Exxon bought XTO primarily for its unconventional reserves – particularly its shale gas reserves. We disapproved of the move because shale gas is an uncertain and expensive commodity to extract.
The fact that Exxon has lost $65 billion in market cap on the back of the XTO purchase speaks louder than any Wall Street analyst's rosy projection. Both we and the market believe that shale gas cannot halt the looming energy supply shortage.
Nor is this just a “gas vs oil” issue. ConocoPhillips (COP), another major gas producer which we happen to own, has also beaten Exxon by a wide margin. (It's also beaten Chevron by about 10 percentage points.) Admittedly, COP has gotten some extra credit for its savvy restructuring effort. But the real difference between it and Exxon is that Conoco's gas reserves are mainly of the conventional variety. Clearly, the market expects that natural gas prices will make a big comeback and reward companies with conventional reserves.
We agree. Natural gas prices are likely to soar, especially if there are any signs of increased demand. In addition to COP, we also like Nabors (NBR) for its gas revenues.
CHINA AND THE GROCERY TRADE
Another example where stock selection matters is the differing performance between the U.S. giant retailer, Wal-Mart (WMT), and its Chinese near-namesake, Wumart. In the past 6 months, Wumart has soared by around 25% while Wal-Mart has limped along, posting a 5% loss.
Once upon a time, U.S. companies with a footprint in China looked like excellent investment opportunities. The theory was that their distribution and marketing skills would allow them to quickly take over a market that was potentially 5X the size of the U.S. Well, the market is there all right, but it seems Chinese companies are the ones capturing the lion's share of it. You can see the general trend by comparing the performance of The China Fund (CHN) with the S&P 500. Over the past year, CHN has gained more than 30%, while the S&P is up a mere 5%.
TECHNOLOGY: THE END APPROACHES
For some time, the performance of technology stocks has been a mystery. Despite very low valuations, many of them continue to tread water. For example, Cisco has spent most of the past decade confined to a trading range between $10 and $33. Today, it's right in the middle at just under $22. Investors must find this frustrating, since Cisco's annual earnings growth has been around 15% over the past 5- and 10-year periods.
The market seems to be telling us that the best days of information technology are behind us. Last week, Cisco announced that it was initiating a dividend that could give the stock a 2% yield. That's not chump change, considering the yield on 10-year Treasury bonds is only about 60 to 70 basis points higher. Yet Cisco's shares refused to budge higher.
We think the market took the dividend as a further sign that Cisco has very few ways to use its cash hoard profitably, other than distributing it to shareholders. The situation is much the same as drug companies encounter when they cannot come up with new drugs - they start to trade like utilities rather than growth stocks. Now it looks like the technology industry is maturing into utility-like status as well.
One tech stock we continue to recommend is Intel (INTC), and more for its yield than its growth prospects. If we are lucky, the new growth industry will be in an area we desperately need: energy technology. In a rational world, that's where the next generation of growth stocks would emerge.
FINALLY, ON THE MACRO LEVEL...
The Federal Reserve meets this week, and we expect no increase in interest rates. Growth is likely to be revised downward, and the governors will likely downplay the idea of more quantitative easing or QE2.
But don't be fooled. QE2 remains a very likely course of action, and the most likely trigger will be Europe. The recent rally in the euro feels like an oversold bounce. Even America's anemic growth seems strong compared to Europe, which gives the Europeans plenty of incentive to devalue their currency. When that happens, the U.S. will need to do the same to the dollar, in order to help our exports. It will be a race to the bottom.
Of course, timing the next drop in the euro is hazardous, but we think it will likely occur sometime within the next month or so. When it does, the markets will go haywire. Our advice on this one is to buy the ProShares UltraShort Euro Fund (EUO), an ETF that bets aggressively against the euro and should bring you a healthy reward on any drop in the European currency.
An interesting hedge on this trade is the Russian company, Gazprom. If Europe surprises us on the upside (maybe if China and Russia come to Greece's rescue), Gazprom will benefit big time, thanks to its near monopoly on natural gas supplies in Europe. The nice thing about this hedge is that it could also win if the euro doesn't decline (thanks to rising gas prices). Moreover, the stock is so cheap it is unlikely to fall much below its current price.
Source: Stocks Over Sectors