As is often the case, my time away from the market gives me a chance to take a deeper reflection on things. The theme that came to mind today to describe the current environment is: "The Boy Who Cried Wolf" Stock Market.
Meaning that every few months we are presented with another catastrophe (wolf) that will potentially end the market rally. Yet each time the fears are overdone and the bull rally plows ahead.
On the one hand it is good that people are becoming a bit numb to the fears as the case for economic improvement and stock gains trumps all potential catastrophes to date. On the other hand, we do not want to become completely numb as one of these days there may indeed be a real wolf lurking around the corner with the potential to harm our portfolios.
Right now that potential wolf is in the form of the Middle East crisis and its ability to create oil price shocks that could curb economic growth in the U.S.
Libya is not big deal. However, the potential for revolutions in larger oil producing areas like Iran or Saudi Arabia are the real concerns.
We must keep an eye on this situation because if oil prices get too high then it will put a damper on the current economic rebound leading to lower earnings expectations and potentially lower stock prices. And yes, this would be a very clear reason to get more defensive in our portfolios.
How high does oil need to get to be a real concern? I have read many different opinions on this. It seems that the consensus is around when gas prices hit $4 on average at the US pump. That is when consumers will likely take a real notice of the rise and start changing their consuming behavior. Most people say $4 per gallon equates to about $120 per barrel.
Then again, this oily wolf may be a hoax like so many of the others before it. So when you consider all the great economic news from last week (especially all 3 jobs reports in unison about employment gains + ISM Manufacturing + ISM Services) then we need to not be hasty in our move to a more defensive posture.
Long story short, I will assume the bull rally is still intact until proven otherwise. And that the trading range of Dow 12,000 to 12,400 will continue to hold up for now until more investors feel comfortable that the case for economic improvement trumps that of malaise from higher oil prices. I will, of course, keep a very watchful eye on the situation and get more defensive if and when needed.
This is where I share 5 of my favorite stocks that all have a coveted Zacks Rank of 1 (Strong Buys)
1) Carbo Ceramics (NYSE:CRR): With oil prices on the rise there has also been a major increase in exploration spending. Carbo is seeing explosive growth in demand that can clearly be seen from their recent earnings beat. Most signs point to more to come.
2) Cliffs Natural (NYSE:CLF): Oil isn’t the only commodity on the rise. Cliffs Natural mines many of the resources that are also in high demand. The recent 31% positive earnings surprise shows that management has them running on all cylinders.
3) Dell (NASDAQ:DELL):This company has been disappointing investors for years. Finally they have put together a string of earnings surprises that has folks taking notice. The latest 43% beat got shares moving up and ready to make new highs.
4) RailAmerica (NYSE:RA): One of the best ways to play a rise in oil prices is with the railroads as a more cost effective alternative to trucking goods across the country. The bonus with RA is that as a smaller firm they also become an attractive buyout target for one of the other US majors to scoop up. .
5) Robbins & Myers (NYSE:RBN): The healthiest part of the US economy is clearly the industrial space. Many attractive investment choices there, but few better than RBN. Big earnings beat this quarter woke up many investors to this lesser known firm that, amazingly, has no debt (very, very rare for an industrial company). Estimates are on the rise with $50 in its sites for later this year.
Disclosure: I am long RBN.