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The first month of 2012 has been a strong one for the markets. This January has seen the S&P 500 rise by 5.4% while the Dow Jones Industrial Average added 3.99%. In fact this has been the strongest January in 15 years. One interesting aspect of this rally is that some of the worst dogs of 2011 have led the charge upward. I would like to take a look at 4 of these companies and see if this upward trend can be expected to continue for the foreseeable future. The four companies that I have chosen to look at are First Solar (FSLR), Bank of America (BAC), Netflix (NFLX), and Caterpillar (CAT). All of these stocks have been on fire in 2012 with an average return of 41.81%. To understand why the market is rising we need to look at the underlying elements of the rise.

The popular sentiment seems to be that the markets have finally decided to discount the European soap opera and focus on the improving U.S. economic data. The United States released a GDP estimate for the fourth quarter of 2011 at 2.8%. This is a nice increase from the 1.8% increase that the U.S. saw in Q3. This gives the U.S. an average 2.3% growth rate in the last 6 months, still below the 3% rate that economists say is needed to put a significant dent in the unemployment rate. While this rate of growth is still below what we would expect to see in a recovering economy, it is still positive to see the growth rates to be moving up instead of down. This increased level of growth came primarily from three distinct areas; inventory investment, increased consumer spending, and a rise in residential investment.

There also seems to be improving technical data that projects a stronger market. One I have been hearing about all week on CNBC is the so called "Golden Cross." This is when the 50 day moving average of the S&P 500 moves above the 200 day moving average; this is traditionally seen as a very bullish sign for the market. A "Golden Cross" has occurred 26 times since 1962. Kevin Pleines an analyst for Birinyi Associates showed that, 6 months after the event the market was higher 81% of the time. An increasing 50 day moving average is seen as improving momentum in the markets. However, I usually take most technical analysis with a grain of salt.

The last factor that I want to touch on is the European debt crisis. Anyone with even miniscule interest in the market knows that the news last year was dominated by Europe's successes and failures. Our market was so headline driven that the slightest sign one way or another would jolt our markets. However, after the ECB launched its 3 year loan program and lowered their collateral standards, the liquidity returned. Throughout the begging of the year we have been inundated again by news of rising Portuguese yields. However, unlike last summer, our markets don't seem to be as concerned.

Netflix

Company Overview: Netflix operates a fast-growing DVD rental and video streaming service available in the United States, Canada, and eventually Central and South America. Netflix delivers digital content to PCs, Internet connected TVs, and consumer electronic devices including but not limited to the Xbox 360, Playstation, and Wii. In July 2011, the company changed its $10 per month price for 1 DVD at a time plus streaming.

Fundamentals:

  • Forward P/E Ratio = 44.8
  • P/CF Ratio = 17.8
  • Market Cap = 6 Billion
  • Price VS. 52 Week High = $125.00 - 304.79
  • Debt to Equity = .6
  • Dividend Yield = N/A
  • Years Increasing Payouts = N/A
  • 5 year Dividend Growth Rate = N/A

Stock Performance: Netflix was on a wild ride in 2011. The company started off the year with a share price in the $160's. By July, Netflix had seen its stock jump up to over $300. However, after that it was almost all downhill for NFLX. The stock bottomed out in late November at a measly $62.37 per share and then remained flat till the end of the year.

Morningstar's Take: Netflix built its franchise on the DVD rental business and has a head start in translating that success to a streaming video offering. However, we don't assign the firm an economic moat as we expect competition to intensify as the company transitions into to a streaming aggregator. Yet since the ball dropped in Times Square on New Year's Eve, NFLX has been supercharged. The stock price jumped from $69.29 all the way up to $120.20, a fantastic gain of 73.47%.

Opinion: Netflix was certainly all over the news in 2011. The company traded over $300 dollars in mid July. Unfortunately, some major missteps by the company's management cut Netflix share price by 75% by the end of the year. In their infinite wisdom the hiked their prices and took an absolute beating for it. Truthfully, the nature of this business just scares me away. The company loses and replaces so many subscribers on a yearly basis that it makes you wonder how they could keep it up. NFLX lost 16 million subscribers in 2011 and is projected to drop another 20 million in 2012. This has been offset by larger additions in subscriptions. Unfortunately, The first quarter showed a leveling off in the net additions. Still with only 75 million homes in the United States with broadband internet. How long can they sustain such high addition numbers? The stock has shot up so fast off of it lows that many investors are starting to see stars again. The amount of volatility in this stock is just too much for my portfolio to handle. Netflix is a stock that I want to stay far away from.

First Solar

Company Overview: First Solar manufactures solar modules and constructs turnkey solar systems. The company's solar modules use cadmium telluride (CdTe) to convert sunlight into electricity (CdTe is known within the industry as a thin-film technology). The company has actively used acquisitions to bolster its project capabilities and demand pipeline, with notable purchases including Tuner Renewable Energy (2007), Optisolar (2009), and NextLight (2010).

Fundamentals:

  • Forward P/E Ratio = 10.2
  • P/CF Ratio = 12.4
  • Market Cap = 3.7 Billion
  • Price VS. 52 Week High = 43.25 - 175.45
  • Debt to Equity = .1
  • Dividend Yield = N/A
  • Years Increasing Payouts = N/A
  • 5 year Dividend Growth Rate = N/A

Stock Performance: First Solar's stock had a disastrous performance in 2011. The company lost nearly 75% of its value; dropping from 133.75 on January 1st all the way down to the low 30's by the end of the year. This was indicative of nearly the entire solar industry in 2011. Since the start of the New Year the stock has rebounded and currently sits 25% above its January 1st price.

Morningstar's Take: The current solar downturn has been disastrous for the entire industry, and First Solar has not been spared, despite its leading cost structure. But although it faces a future where profits and returns will be much less than in the past, so do the top Chinese firms that are its primary competitors. Challenging times await, but First Solar still has a technological advantage that is unlikely to disappear anytime soon.

Recent News: First Solar has been in the news recently as the solar industry has begun to bounce. A recent jump up was due to the announcements by several CEOs of solar panel manufacturers suggesting that China was gearing up to increase demand in 2012. Suntech Power's (STP) CEO Zhengrong Shi and Trina Solar's (TSL) CEO Jifan Gao both expected China's solar market to expand between 4-5 gigawatts, a level more than double the 2.2 gigawatts installed in 2011. This was a larger increase than what many solar analysts had been looking for.

Opinion: The solar industry got crushed in 2011 and First Solar was no exception. It is one of the few American solar companies left standing. The major problem in the solar industry is the abundance of supply. The prices are falling so fast that it seems almost impossible to make money in this industry. First Solar was constantly throwing out warnings in 2011 about their declining expectations for the year. These warnings have continued into to 2012 as they lowered their outlook on 2012 significantly. In early November the company finally made a smart decision and canned their incompetent management. There has also been a lot of talk circling around FSLR as a potential takeover target for General Electric (GE). Even after its recent run up in 2012 the stock is still at extremely depressed levels when looking at its history. I think First Solar will survive this downturn in the solar market but I am unsure how long it will be until solar is seen as a practical area for a non-Chinese company.

Caterpillar

Company Overview: Based in Peoria, Ill., Caterpillar is the world's largest manufacturer of heavy construction machinery such as bulldozers, excavators, and loaders and equipment for surface and underground mines. The firm also produces engines for its own off-highway vehicles and others' machines. Cat supports its machinery and engine revenue with a financial services arm, a logistics business, and remanufacturing service work.

Fundamentals:

  • Forward P/E Ratio = 10.0
  • P/CF Ratio = 9.8
  • Market Cap = 72 Billion
  • Price VS. 52 Week High = $111.34 - $116.55
  • Debt to Equity = 1.9
  • Dividend Yield = 1.69%
  • Years Increasing Payouts = 18 Years
  • 5 year Dividend Growth Rate = 10.4%

Stock Performance: CAT opened the year trading at $94.38. The company bottomed in early October at near $70 per share. However, throughout the remainder of the year the stock rebounded back up into the 90s. All in all Caterpillar's stock lost about 4% in 2011. Since the begging of the year, CAT boosted by positive earnings has climbed up into the $110 area. This represents a tidy 20% gain.

Morningstar's Take: Caterpillar is the largest heavy equipment manufacturer in the world and holds an especially dominant share in the U.S. market. With its rebounding end markets, we don't think Cat has lost its competitive edge.

Recent News: Caterpillar released spectacular 4th quarter results on January 26th. It reported earnings per share of $2.32 for the quarter which blew away consensus estimates of $1.73. Revenues also were extremely strong in the quarter as CAT booked sales of $17.24B, which was approximately $1.2B over estimates. Caterpillar also upped guidance for 2012 to $9.25 a share from the consensus of $9.07. The rising demand in emerging countries spurred on Caterpillar's revenue growth, particularly China and India.

Opinion: Caterpillar is leader in the construction equipment industry. It has a fantastic position in the United States as well as a large position in China. CAT is extremely correlated with the performance of the global economies. This is why it was beaten down in 2011 as the European crisis and fears of a slowdown in China scared investors away from a solid company. As the U.S. continues to recover and China's economy steams forward, CAT will continue to grow. CAT absolutely blew the doors off with their 4th quarter earnings report. CEO Doug Oberhelman put it in perspective when he stated "The 2011 increase in sales and revenues was the largest percentage increase in any year since 1947, and much of it was driven by demand for Caterpillar products and services outside of the United States."

Bank of America

Company Overview: Bank of America is one of the largest financial institutions in the United States and the world, with lending operations in the consumer, small business, and corporate space, in addition to asset management and investment banking divisions. The company has operations in all 50 states, including approximately 5,900 branches and 18,000 ATMs.

Fundamentals:

  • Forward P/E Ratio = 6.8
  • P/CF Ratio = 1.7
  • Market Cap = 74.8 Billion
  • Price VS. 52 Week High = $7.25 - $14.95
  • Debt to Equity = 1.9
  • Dividend Yield = N/A
  • Years Increasing Payouts = N/A
  • 5 year Dividend Growth Rate = N/A

Stock Performance: Bank of America was easily one of the most beaten up stocks of the year. For a while it seemed that you couldn't turn on CNBC without hearing some breaking news about BAC. The stock dropped a staggering 60% in 2011. The company even got down below the dreaded $5.00 level; a place that few companies recover from.

Morningstar's Take: Bank of America's collection of businesses, ranging from its massive deposit franchise to the "thundering herd" of Merrill Lynch's brokers and wealth managers, is impressive on a qualitative basis, garnering the company a narrow moat. In our view, however, several important questions about the company remain unanswered. The universal bank model has proven difficult to implement successfully, and Bank of America's management team has not yet won our complete confidence. Furthermore, earnings must improve substantially in order for the bank to achieve escape velocity from the weight of billions of dollars in legacy mortgage-related liabilities threatening to reduce capital to unacceptable levels.

Recent News: Bank of America reported better than expected fourth quarter earnings in January. However, like the rest of the financial system BAC is heavily linked to the European crisis. This means that if the Germans decide to cut the Greek bailout or Italian yields blow out, bank of America is going to be affected. As I previously mentioned the markets seem to be disregarding the European situation and focusing more on the strengthening of the United States. Yet the financial are more susceptible to bad news from the old world.

Opinion: Honestly, I have extremely mixed feelings on Bank of America. Part of me sees the opportunity in a huge financial institution that has been so beaten up and is valued at such low levels. The speculative side of my personality looks at BOA and sees a potential opportunity. No matter how bad Europe gets, I can't see any situation where the U.S. will let Bank of America fail. I also wouldn't feel very comfortable being short a stock that Warren Buffet has decided to go long on. However, the part of my personality that looks for value in a company wants to hold back. First of all, financial stocks are notoriously difficult to analyze. This provokes some reservations in my psyche as I normally like to have a complete understanding of what I am investing in. When looking at a specific sector of the economy I try to identify the best in breed.

By objectively analyzing situation for 10 minutes you would quickly notice that it is not BAC. In full disclosure my favorite U.S. financial institution is JP Morgan Chase (JPM). The company provides you with a 3+% yielding dividend (which BOA does not do) as well as a management team with a proven track record. CEO Jamie Dimon is one the brightest stars in the financial industry. His true brilliance was shown in the way he guided JPM through the financial crisis while many of his competitors fell by the wayside. If you want to be involved in United States financial companies I would start my due diligence with JPM not BAC.

Conclusion: These 4 companies all have 2 indisputable facts in common with each other; their stock prices fared poorly in 2011 and they have rebounded strongly in 2012. Of these 4 companies I believe that only one has shown a material change that entices me to look for an entry point. The one I'm referring too is the construction machine manufacturer Caterpillar. CAT is on the rise after its latest fantastic quarter. This was all done as the United States housing market still continues its process of bottoming. Many professionals involved in the industry have been expressing their belief that 2012 may finally be the year when housing makes the turn around. If this event does occur it would provide terrific opportunities for CAT's future growth.

You might be asking yourself; what about the other 3 members of this group? Well I believe that the market is not acting rational in respect to these stocks. They were beaten down in 2011 because of fundamental flaws in their underlying businesses and future growth prospects. It is my opinion that the recent appreciation in their stock prices is due to two major factors; speculators looking for a bounce in the stock and former bears that are caught in a short squeeze.

Source: A Month For The Dogs