After the fall of the iron and bamboo curtains towards the end of the 20th century, the west finds itself being uncompetitive versus the east. For some time this was masked by a massive debt build-up in western countries which supported consumer spending but also boosted asset prices.
More specifically we had the benefits of the internet boom leading up to 2000. Then, when the dot com blow-up occurred post 2000, central banks provided large doses of economic stimulus via abnormally low interest rates. These abnormally low rates spawned further consumer borrowings and a property bubble. Not surprisingly, as central bankers tightened monetary policy from 2004 to 2006 in an effort to cool growth and asset inflation, this caused asset prices to deflate back towards more normalized levels. However, the tightening process also exposed a raft of damaging flaws across the banking system which unavoidably spilled into the wider economy.
Meanwhile, increased global oil demand, coupled with the end of cheap sources of conventional oil, led to higher oil prices. These are set to stay with us indefinitely, albeit with periods of moderately softer pricing during recessionary periods.
So, here we are: Uncompetitive western economies that face anemic growth for an extended period of time because consumers, who represent the kernel of economic growth, need to embark on a lengthy period of deleveraging as well as paying for higher energy costs. And of course, governments hands are restricted because they too have massive debt burdens.
This is not the stuff of quick fixes.
With western economies set for an extended period of low growth - the ‘new normal’ - average annual GDP growth is unlikely to be above 2%. There isn’t a big difference between growth of 2% and growth of 0%, and, most important, recession is never very far away. Of its very nature this presages strong volatility.
During a typical year the following two major trends can be observed:
- Year-end and early new year: The approach of year-end brings relief that a tough old year is ending and a new better time lies ahead. This positive sentiment is supported in the early new year by analysts issuing new ‘next year’ earnings estimates as well as the Q4 reporting season in February. Both of these normally serve, at a minimum, to convince investors that the world is indeed not ending. During this year-end and new year period the overall positive aura is reflected in the business media which then becomes more self-reinforcing.
- Mid-year: Around mid-year many people take their summer vacation, especially for citizens of European countries where August is traditionally the vacation month. Consequently, trading volumes in financial markets are reduced, investors avoid taking positions until this period passes and some of the positive news dries up. Meanwhile, the media still need to attract viewers and they focus on whatever remains; sovereign debt, government deficits, high unemployment, soft spots, political impasse, don’t just take your pick, take them all. This negative focus helps problems, and the mid-year lull, to self-fulfill. After all, why rush to hire additional staff if you constantly hear via the media that a slowdown is arriving?
To maximize profits investors need to recognize the existence of year-end and mid-year swings in confidence and risk, and their significant impacts on stock valuations. There is an age-old saying that goes “sell in May and go away”. This saying had some merit in olden times. Now, in an age of anemic growth, and recognizing that lower growth amplifies risk and accentuates market volatility, and also keeping in mind how we are evermore influenced by the media and its obsession with the whatever bad news du jour topic bubbles back up, it makes abundant sense to sell high beta stocks early in the year – not later than April i.e. into the strength of the Q1 earnings season or into new year optimism – and look to buy again on a deep market pullback arriving in summer.
The Rule: Buy on summer weakness, sell in spring, and repeat.
Stocks suitable for this strategy are those that have strong upside potential between now and spring 2012, as well as over the long-term. Better still if they are high beta. Here are 6 interesting candidates for investors to consider:
Apple (AAPL) What more can be said about Apple, a company that has given us a stable of game changing consumer electronics products; Mac, iPod, iPhone and iPad. It is a company that, even without the inspirational Steve Jobs, has growth opportunities. Without doubt additional new product ideas are on the development treadmill right now and we already know that new versions of existing products such as the iPhone will soon boost future sales and profits.
But, what few commentators mention is that Apple, unlike great rivals such as Microsoft (MSFT) or Google (GOOG), doesn’t yet have a social network leg to its business model. This will surely come in 2012 (don’t be surprised if it is announced around the time Facebook is going public) and, given the esteem for all things Apple by its customers, you can bet that Apple’s social network business will be a roaring success.
For now this is just conjecture. The stock, at $385, trades on a 2012 p/e of 12 and mean analysts’ target is $493. This represents upside from the current price of 28% and investors should expect most of this upside to be realized between now and spring 2012.
Whilst a 6-month gain of 25-30% is attractive the remaining stocks on this list should generate even better returns.
The telecom network infrastructure and data management businesses remain in growth mode. Not least via the need to support ever-higher and more reliable data transmission for video/movie-on-demand as well as virtual world of cloud computing which is still embryonic, and growth in smart mobile devices including iPads and smart phones.
We live in an increasingly mobile business and consumer world. There are a number of companies operating in these broad sectors that should see their sales and profits have many years of exciting growth.
Here are two of them:
Riverbed (RVBD) is focused towards managing data across WANs, the mobile environment generally and the cloud. It has an enviable record of racking up consistent 25-30% sales and EPS growth and this trend is set to continue. A glance at analysts’ quarterly earnings forecasts is insightful: 2011 Q3 $0.21, Q4 $0.24, 2012 Q1 $0.25, Q2 $0.27, Q3 $0.29, Q4 $0.33.
Nice. An extension of this trend will lead to 2013 EPS estimates coming in at about $1.60. The stock is trading at $25, down from $45 before the recent market pullback, and the mean target is $37.40, implying 50% upside. When 2013 estimates are issued in early 2012 this should help lift the stock towards the $37.40 target and year-end ‘cloud concept buying’ is likely to give the stock strong support.
F5 Networks (FFIV) provides technology that optimizes networks, storage, server performance and security. According to a note issued Monday August 29 by Ticonderoga, FFIV is “the leading player in the ADN market and the most direct play on secular trends in the data center, including surging IP traffic growth, the trend toward virtualization and the shift of IT into the cloud”.
FFIV has a solid record of delivering 20-30% annual sales and EPS growth and there is every reason to expect this to continue in coming years. The stock was hit by the market slump in mid 2011, falling from a peak of $145 to just under $70. Analysts mean target for the stock is $113.50 and this represents upside of 40% from the current price of $81.50.
Investment themes such as cloud computing receive a great deal of positive attention when market optimism returns and this is likely to occur over year-end as people focus on forward looking investment concepts. Hence, investors can expect the stock to appreciate strongly around year-end and into the new year.
One particularly interesting area of long-term future growth is US oil shale, not to be confused with less profitable gas shale. Oil prices are determined evermore by increasingly tight supply/demand metrics globally with the US segment playing a diminishing part in this overall equation.
Contrary to often expressed views that unconventional oil extraction methods are expensive, the better US oil shale players are certainly not high cost. In fact they have strong after-tax profit margins and generate operating cash-flow of over 50% of sales which in turn funds strong multi-year growth.
Here are three outstanding oil shale stocks:
Brigham (BEXP) is a leading oil driller in the Bakken. It is a pure-play on the Bakken with 376,000 net acres nearly all of which was acquired cheaply before the shale boom took hold. Brigham consistently produces some of the best output per well rates in the Bakken.
It is a highly efficient operator with 2012 Net Income margins forecast to be 35% and cash from operations estimated to be ~50% of sales. These numbers support terrific year-after-year growth. Because of its multi-year drilling potential via its large acreage, and its highly respected management, Brigham is considered to be an ideal acquisition target for oil majors looking to move into the oil shale patch.
The acquirer would get assets, value and respected know-how all in one clean package. The recent stock market correction has cut the shares from a high of $38 in April to $28.60 at present which represents a 2012 p/e of 12. This is good value, especially for a trusted growth company such as BEXP that traditionally and comfortably beats estimates. BEXP is a very high beta stock - over 3.0 and investors can now take full advantage of this: By spring 2012, the stock should be trading at least into the low $40s, which would be 50% above the current price.
Whiting (WLL) has some of the most efficient oil wells in the entire Bakken. Its Sanish wells have EUR of 950,000 barrels that cost about $8 million, including land rights and derisking costs. Based on $80 oil, this represents a payback of less than a year.
By its own calculations, Whiting’s six-month oil output per well is the highest of all producers in the Bakken. While not all the company’s wells are long laterals with paybacks of less than 12 months, it certainly remains true that Whiting is one of the top drillers in the Bakken. Whiting has very large Bakken acreage – 678,000 acres - which it bought cheaply at the beginning of the cycle. It also has leases in Niobrara and elsewhere but is predominantly a Bakken play.
The stock, currently $47, is cheap by any measure (forward p/e of 9.6) and particularly considering WLL’s multi-year growth prospects. Whiting stock isn’t just undervalued, it is also high beta – over 2.0 - an attractive combination should that help investors make big profits over the next 5/6 months. Analyst’s mean target is $73 which represents upside of 55%. Between now and spring 2012 investors may anticipate appreciation of about 50%.
Carrizo (CRZO) is a company transitioning from a natural gas producer to predominantly oil and, to a lesser extent, some liquids including propane, l-butane , N-butane and l-pentane which collectively generate prices near or above WTI oil prices. Carrizo’s primarily area of focus is Eagle Ford in Texas, its acreage is in La Salle county beside that of Petrohawk which has just been acquired by BHP Billiton (BHP) in a $12 billion deal. It also has assets in Niobrara, Barnett and Marcellus.
The inflection point in the transition from gas to oil occurs between Q3 and Q4 2011 and strong growth in oil output is to occur during 2012 and thereafter. This switch of emphasis to oil is uniformly predicted by analysts to have an enormously positive effect on earnings with EPS estimated to hit $4.23 in 2012 up from $1.38 in 2011.
The stock market correction has hit Carrizo shares hard, falling from $44 in July to $30 currently which equates to a forward p/e of 7. In the spring of 2012, at which time analysts will issue new next year estimates for CRZO (i.e. 2013 EPS; something like $6 per share), CRZO stock may be up anything from 50% to 100% from current levels. CRZO has a beta of 2.08 and is one of the best value oil stocks on offer. These factors, together with the promise of great earnings growth in 2012, make it an ideal stock for playing over year-end. Read more here.
During these volatile times, investors who buy promising stocks on summer weakness and sell in spring 2012 strength should be able to generate far superior returns compared to following the old buy and hold mantra. I hope this note and the list of stocks mentioned help investors to focus and execute in a way that delivers excellent returns.