Q1 2012 Market Performance Overview
The first quarter of 2012 is shaping up to be one of the best first quarters in 14 years with one week to go. The Dow is up 7 percent for the quarter. The S&P 500 is up 11 percent since the start of the year. Both the Dow and S&P are on track for their best first quarter since 1998. The NASDAQ has outpaced them all, up 17 percent for the quarter. The quarter has been drastically different from 2011. It has been a paradise for stock pickers with low volatility and low correlation producing outstanding gains.
From Bust to Boom
At the beginning of each year, I select my top five stocks for the coming year based on macro-economic and company specific catalysts. I reflect on the past and attempt to predict the future. 2011 was a year of high correlation and volatility driven by macro forces. The Eurozone sovereign debt dilemma and Middle-Eastern instability whipsawed the markets with highly volatile swings. Market participants received a roller coaster ride for the ages. I saw 2012 as a turnaround year. By December of 2011, we had the beginnings of a rally on our hands. However, certain sectors and specific stocks remained severely beaten down. The sectors I focused on were the financial sector, basic materials sector and the consumer goods sector thinking these sectors had the most upside based on a global recovery.
Financial Sector Picks
The financial sector was devastated by Eurozone sovereign debt contagion fears. Many U.S. Banks stocks were completely decimated. I saw this as the buying opportunity of a lifetime based on the fact these stocks had strong fundamentals yet were unjustly sold off due to macroeconomic pressures. My picks were Bank of America (BAC), Citigroup (C) and Goldman Sachs (GS). I stated Bank of America and Citigroup could possibly double in 2012. Bank of America nearly has with a gain of 77.48% year to date. Citigroup is up over 41% in 2012 while Goldman Sachs is up a respectable 39.95%. The entire financial sector has been on fire since most passed the recent Federal Reserve stress tests. I took profits recently on my Bank of America and Citigroup positions and am looking for an opportunity to get back in on any dip. These stocks have much more room to run due to the fact they are both still trading at approximately half their book values. I did not start a position in Goldman due to diversification concerns. With the recent "muppet malarkey" reverberating throughout the markets, I am inclined to stay away from this one going forward as well. I don't think the rally is over for these banks. Nevertheless a correction is overdue for these white hot stocks and would be technically healthy.
Basic Materials Sector Pick
My pick for the basic materials sector is Alcoa (AA). Alcoa is up 17.29% for the year. My theory here is twofold. Firstly, Alcoa is still trading for three quarters of book value and has a PEG ratio of slightly less than one with projected EPS growth of 92% next year. These are strong fundamental indicators. Second, I see a win-win scenario for the materials sector. Either the global economy picks up and the demand for aluminum does as well, or the economy weakens and Bernanke employs another round of quantitative easing driving the dollar lower and basic materials values higher. With the U.S. Economy seemingly in the midst of a turnaround, the stock has done well. China recently came out with some disappointing numbers last week, but I think they will manage a soft landing regardless. Sometimes I feel like they come out with disappointing growth numbers just so they can get a break on commodity prices. Don't get me started about Chinese market manipulation.
Consumer Goods Sector Pick
I chose Ford (F) as my top pick in the consumer goods sector based on the fact that Ford was reporting record profits, making tremendous strides in regards to balance sheet improvements and announced plans to pay a dividend for the first time in years. Yet the stock was trading close to 52-week lows at the end of 2011. Ford is up 15% for the year. Ford failed to meet analysts' expectations last quarter and took a 5% hit. I was disappointed with the results and sold out for a short time, but am back into the stock.
Ford's combination of superior global repute and executive management coupled with outstanding products keeps bringing me back. What's more, Ford paid its first dividend in several years, revealing they are willing to reward patient investors for their loyalty. Nevertheless, Ford is still 23% below its previous 52 week high and has been trading sideways for the past month. I see Ford firing on all cylinders before long and breeching its 52 week high by the end of the year.
With the U.S. Economy showing signs of life and the Eurozone debt debacle cooling down, the future of these companies seems brighter than ever. If China is able to engineer a soft landing, the continued success of these companies appears certain.
Nevertheless, the entire market may be due for a breather. I don't think it is time just yet. I believe a correction is coming but will coincide with the traditional "Sell in May and Go Away" season phenomenon. I predict we have another month or two before the summer sell-off begins. Many stocks have already achieved analysts' expectations for the entire year. Consequently, we could see some downgraded due to valuation but this will only serve as a buying opportunity in my mind.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis to reduce risk and setting a 5% trailing stop loss order to minimize losses.
Disclosure: I am long F.
Additional disclosure: I may buy BAC, C, or AA within the next 72 hours.