The ninth week of trading on the year ended Friday with some mixed results. Although the three major indices ended the day lower, it remains clear that the market continues to show considerable amounts of strength and resiliency. I have been keeping track on each week's activity with these types of articles and according to my records - this is the eighth week out of the previous nine where both the S&P 500 and the Nasdaq both netted positive gains. And during that span the S&P 500 has gained 9%. If that is not a model of consistency, I'm not sure what is. Basically, investors continue to be filled with optimism that the worst is behind us and the economy will continue to improve. So far the economic data that investors have received continues to support that sentiment.
For several weeks now I've been asking the question, how high can the market continue to soar? What I'm finding out is that the answer depends on who you ask. David Kelly, chief market strategist for JPMorgan Funds, had this to say when asked this question:
- "We're in a small pullback, but that's to be expected after a very strong rally," said David Kelly, who added that he considered stocks cheaper than other asset classes like bonds.
- "Unless something major happens, we'll continue to move up," he said. "It's like we're trying to find our way around a dark room: We're making progress, but slowly because of all the uncertainty out there about Europe and the Middle East."
I agree with regard to the pullback and certainly feel that caution continues to be the right approach with respect to the high marks of each index. For the week, the Dow was down 0.05%, while the S&P and Nasdaq climbed 0.3% and 0.4% respectively. Investors should also be reminded that as I noted previously, it is prudent during these euphoric times to keep a watchful eye on rising oil prices which have risen 15% since the start of February. Paying more at the pump has the potential to cut into consumer spending and damage the economic recovery. But as with anything else, it all depends on where you place your values. Speaking of which, here are how this week's news impacted my favorite stocks.
Sirius XM (SIRI)
What is going on with Sirius XM? I suppose the more appropriate question would be - what is not going on in the company? It continues to be a soap opera of sorts because there has been a rash of insider selling and nobody has been able to explain the suspicious timing. I say "suspicious" in that the company had recorded only 14 total sales over the past two years, and new sales occurring last Friday now brings the total number of transactions to 9 this month alone. Could this all be happening on the heels of a Liberty (LMCA) acquisition? It just doesn't make sense.
The stock continues to show tremendous strength as it closed Friday at $2.31. I know I have been down on the company for most of the year, but I would not be honest if I did not admit that what it has done over the past week has not been impressive. However, my slight uptick in sentiment comes tempered with the fact that I don't expect it to last. As best as I can tell, its current activity has all of the qualities of a "bull trap" to entice unsuspecting investors to make them execute some "scared buys" for the fear of "missing a run."
I think the professional traders are using the upcoming March 6th date and are actively exploiting it. When March 6th comes and goes with no activity, you will likely see the rash of selling occur to bring the price back down to its pre-run range of $2.00 to $2.10. There is nothing fundamentally new with the company to justify this current reaction. If you are not suspicious, you are not paying attention. But that's just one person's opinion and fellow Seeking Alpha contributor Rocco Pendola always says, I reserve the right to be wrong.
Bank of America (BAC)
The consumer advocacy lobbying group, founded by onetime Green Party presidential hopeful Ralph Nader, is calling for the breakup of Bank of America. The idea is for the bank to break itself up into smaller, less systematically important pieces. This is not a new idea and one that I think makes perfect sense if it can be executed correctly. But I question the timing of this request - particularly as it seems that the bank has just turned the corner toward profitability.
In its most recent quarter, the bank gave investors many reasons to believe that a bright outlook for the year was indeed possible by reporting a profit of $2 billion for the quarter. It came after having posted a loss of $1.2 billion during the same period last year. Its full year earnings arrived at $1.45 billion compared to a prior loss of $2.24 billion in 2010. For three months prior, the primary question surrounding the company was, can it execute its business effectively enough to make any money? Since that question has clearly been answered, the new question is, can it build on this momentum? I think that is what investors are waiting to see before pushing the shares higher.
Bank of America has netted a remarkable 44% gain, and many (including me) are expecting more. So I wonder why Mr. Nader would make this request now. For those who are in for the long haul, to truly consider the optimistic recovery for Bank of America, the best bullish case that I have read so far on the year comes from Fellow Seeking Alpha Contributor Spencer Knight, who offered from both a fundamental as well as a detailed technical perspective on why BofA has a bright 2012.
Last week streaming movie giant Netflix lost 9% of its value on news that Comcast (CMCSA), the top cable operator in the U.S., plans to take it head-on with its own Internet movie streaming service. Investors immediately began to ask how much time does it realistically have left? Comcast's service is called Xfinity Streampix, and will offer a library of TV shows and movies. The service will be made available only to Comcast's cable TV subscribers. But the service could also operate as a standalone service outside of the cable subscription package under programming agreements it has with some of the partners that supply it with shows and movies.
Streampix will come free with Comcast's top video packages and for an extra $4.99 a month in lower tiers while offering TV shows and movies from partners including Disney Time Warner, Sony Pictures as well as from its own studio, NBC Universal. There is little doubt that Netflix was the king of online content. But content is not always enough as competition, innovation and costs are typically the drivers of any market.
This same competition allows content creators themselves to either figure out a way to become their own means of distribution as Comcast plans to do or they shop around for whoever is willing to pay them the most money for their content. There is a lesson in there also for Sirius XM since it is always being compared to Netflix. As much as I enjoy both services, content is not "always the king" that it is said to be, but rather, the true king is whatever drives customers to your product.
Research In Motion (RIMM)
After having lost 8% on the week, I am beginning to suspect that Research In Motion is heading to my low level mark of $10. Granted this is a tad premature, but it is hard to see any catalysts to send the stock higher. On Thursday, with regard to the possibility that the company may guide down for the coming quarter, Jefferies analysts Peter Mizek noted the following:
- "We are cutting our RIM estimates and target based on our belief that there is a greater than 50% chance that RIM will negatively pre-announce the February quarter," he writes. "We believe sales of both RIM's low-end and higher-end phones continue to be challenged."
- Misek says he continues to think Street estimates for the February 2013 fiscal year are too high: He now projects $1.87 a share, down from $2, and sharply below the Street consensus at $3.07. Misek maintains his Underperform rating on the shares, while slicing his target price to $12, from $15. The stock closed Wednesday at $14.17.
I have to agree, however I continue to think that Peter's target remains too generous and I suspect that the stock will continue to tread lower until reaching below $10 before the start of Q3 if not sooner. Interestingly, the year started with much optimism that its inept executives would be ousted, though it came to pass, investors were left disappointed to realize that it will still be business as usual. As sad as it is to say, it's time to stick a fork in RIM - the foregone conclusion of the year, I know.
Microsoft is back with a vengeance and is once again a threat to tech giant Apple. It goes without saying that the fact that Microsoft is starting to matter once again in the tech space bodes extremely well for its investors, but it has to be a welcome sight for consumers as well. Currently the stock is trading over $32 and sitting at its 52-week high. The question is, how much more leg does it have? I think investors should be pleased that its momentum has not slowed down and there are clear signs that it is heading to $40.
The company has plenty of positives to inspire an entry at current levels - not the least of which has to do with its rave reviews for the anticipated release of its Windows8 OS. Growth has always been my primary investment motivation and something that Microsoft has failed to produce over the past several years. But regardless of how one feels about the company and its prospect of competing with Apple and Google, the fact remains that Microsoft still has a business with very good returns on capital and excellent cash flow. And it also helps that it pays an excellent dividend.
The company will most likely never grow again in a way that resembles the mid- to late-90s, but that does not mean it does not have life. It has been considered the sleeping giant and remains only one good idea away from being awakened. And when it does, $40 will be a realistic destination.
Additional disclosure: Author may establish a short position in SIRI at any time