Let's say you have new money to put to work in stocks, or you
took profits and you've got old money to redeploy, or you never got
fully invested in this rally and you'd like to put more cash to
work now. I think you've got three alternatives.
1. You can wait to see
if the current drip, drip, drip of a 4.6% retreat on the
(INDEXSP:.INX), from the 52-week high of 1,687.18 to the June 5
close at 1,608.90, turns into a dip so attractive that you can get
over your fear of a falling market and actually buy.
2. You can hope to find a bargain or two
, but let me tell you I've seen more tempting selections at
Filene's Basement on Christmas Eve. We are talking about a market
that's not far off its all-time highs, after all. The bargain bin
has been picked over more than a few times during this rally.
3. You can decide, consciously, to be too early.
I know, I know...the time value of money and all that. Buying too
early is usually a huge no-no. And it can be emotionally
Waiting and waiting and waiting can become so depressing that
investors throw up their hands and say, "Get me out of that." It
probably only seems like every stock you give up on then takes off
like a rocket.
But consciously buying too early can be your best bet in a strong
rally that has run for months and shows signs of running some more.
As rallies age, investors go further and further out the timeline
looking for potential winners. That process means that some of the
far future gains that you'll get in a "too early" stock actually
start showing up now.
I don't know if that description-a strong rally that has run for
months and shows signs of running some more-will accurately
describe this stock market in a few more days or weeks. Maybe the
"drip" will turn into a buyable "dip."
For now, I'm going to cover another base and give you three "too
early" stocks, just in case this rally isn't quite done with us
My rules for good "too early" stocks are pretty simple. I want to
be able to clearly identify the turnaround, trend, event, whatever
that I'm waiting for. The more clearly I can define that event, the
And I want to be able to put a time of arrival on whatever I'm
waiting for with some degree of confidence. You're buying
consciously too early. That's different from "buy and hope." If you
can define what you're waiting for, you should be able to give an
estimated time of arrival.
Without further ado, let me give you three "too early" stocks to
buy on the assumption of a resumption in this rally.
Let me go into detail on this first stock, because it defines so
well what I'm looking for in a "too early" stock.
) is struggling with low natural gas prices that (maybe) have
started to recover, but remain well below the cost of production
for many players in the industry.
The company, which loaded up on debt to acquire drilling leases, is
selling assets to fill a funding gap of $3.5 billion in 2013. And
asset sales, uncomfortably, have been going more slowly than the
But I see five major catalysts that make me willing to buy the
stock now. First, it looks like natural gas production in the
United States will increase by just 1% this year, according to the
US Energy Information Administration. That's a big drop from the 8%
growth of 2011 and the 4% growth last year.
Second, less production plus more demand for natural gas should
push prices higher. Standard & Poor's is projecting Henry Hub
spot prices will average $5.00 per million BTUs (British thermal
units) next year, up from $2.58 in 2012 and a projected $3.72 in
Third, Chesapeake's production is showing an increasing shift
toward oil and natural gas liquids that command higher prices than
Fourth, Chesapeake has shifted away from its traditional strategy
of land acquisition and asset sales to a more conventional emphasis
on drilling and production. Spending on land acquisition will drop
to just $400 million out of this year's $6 billion capital-spending
budget. That's a huge shift for a company that spent $5.8 billion
on acquiring leases in 2010.
Fifth, long-term CEO Aubrey McClendon retired in April, and has
been replaced by Doug Lawler from
). McClendon's strategy of aggressively growing acreage under lease
seemed increasingly out of touch with the natural gas market.
Lawler comes to Oklahoma City having most recently headed
Anadarko's international and deepwater operations, including the
company's LNG project in Mozambique. Before that he had headed
Anadarko's unconventional onshore development.
Before their recent pullback, Chesapeake shares were showing a gain
of 33.3% in the last 12 months, enough to convince me that this
"too early" stock has picked up some support. Considering the
company's near-death plunge from $62.90 on June 26, 2008 to $14.25
on December 2, 2008, the June 5 price of $21.52 leaves plenty of
I'll be adding Chesapeake to
Jubak's Picks portfolio
, with a 12-month target price of $31.
This is the earliest of my "too early" stocks-so early, in fact,
that you won't be able to find signs of a significant move up in
the shares. (The stock is down 14.7% year to date as of June 5.)
Here, I'm waiting for the global mining industry to stop cutting
capital budgets. I think that's likely for 2014.
In its second-quarter earnings,
) reported improving stability in sales and orders. Sales did drop
12% year over year, but that was in line with expectations. Orders
dropped 8% from the 2012 quarter, but were up 10% from the first
quarter. The order backlog fell 9% from the first quarter. Most
importantly, gross margins of 33.2% were more than a percentage
point above expectations.
Unfortunately, I think Joy Global will have to weather one more
round of capital-budget cuts from its mining customers. A report by
PricewaterhouseCoopers calculates that the 40 largest mining
companies (by market capitalization) plan to cut capital spending
by 20% in 2013.
Given the continued weakness in commodity prices, those planned
cuts will likely grow to include one more round of so-far unplanned
reductions. Mining companies finished 2012 with the lowest return
on capital-just 8%-and the lowest free cash flow in a decade.
Dividends climbed in 2012 to 57% of net income, from 52%. That puts
pressure on mining companies to increase profits and cash
flow...and the easiest way to do that is to cut capital spending.
I'd say Joy Global is a 2014 story, but I'd like to see more
visibility on the timing of a turn in orders before I plunk my
money into this one. (Joy Global is a member of
Jubak Picks 50 long-term portfolio
At the other end of the "too early" spectrum is
). On the eve of Apple's Worldwide Developers Conference (June
10-14 in San Francisco), investors are focusing too much on the
potential buzz out of the conference and giving too little weight
to the other hurdles that Apple needs to jump.
Generating some buzz out of this conference is crucial to a
recovery in Apple's stock. (The 52-week range for Apple is a huge
$385 to $705. On June 5, the stock closed at $445.11.) Crucial, but
not sufficient, in my opinion.
For the stock to recover a big share of lost ground, buzz has to be
followed by June and September quarters that put to rest Wall
Street's worries about a collapse in Apple's margins. San Francisco
won't see the introduction of a new iPhone or a new iPad-those
products will get their own events later in the year. Instead,
Apple is likely to preview the new iOS7 and latest OS X operating
The big deal here is the iOS7 overhaul, the first big makeover to
Apple's mobile operating system. Will the preview from Jony Ive,
Apple's design guru, be enough to get developers and the press
gushing about the platform's potential?
(I think the event could also see a refresh for the Siri voice
application and Apple's iCloud service, along with a
preview/announcement of Apple's new iRadio streaming music service.
Apple is under pressure to at least match
) announcement of its music service at its developers conference in
Part two will take longer. Apple will have to demonstrate in its
results for the June and September quarters that while its margins
might be under pressure, they certainly aren't in any danger of a
Currently, the view on Wall Street is that competition from
(OTCMKTS:SSNLF) and makers of other Android phones, Apple's own
possible plans for a cheaper iPhone, and Apple's raft of scheduled
new products will all cut into the company's gross margins. But
what has freaked analysts out about Apple's shares is no one knows
how big that drop in gross margins will be, or how long it might go
For anything but a bounce on the buzz, Wall Street will have to see
that margins aren't going into a major swoon. Without that, I don't
think buzz will be enough.
Apple is scheduled to report quarterly earnings on July 23. (Apple
is already a member of my Jubak Picks portfolio.) I'd be looking to
buy these shares after that July earnings report, in anticipation
that Apple will be able to deliver the margin evidence that Wall
Street wants in the September and December quarters.
Full disclosure: The
Jubak Global Equity Fund owned
shares of Apple as of the end of March. For a full list of the
stocks in the fund as of the end of March see the fund's portfolio
Editor's Note: This article was written by Jim Jubak of
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