as part of our
Author: CJ Brott,
Last month we wrote about a potential end to investor gloom and
the possibility of making money in shorter term momentum stocks.
That is happening.
The market indices are rising and that is stirring animal
spirits. Trading opportunities are opening up for some of the
beaten up stocks. And we are excited because these stocks are far
safer than the high relative strength stocks normally associated
with momentum investing.
In this atmosphere we have continued putting money back to work.
Recently we bought two cyclical stocks. Both companies' stock
prices have been depressed by worries about the economy and yet
each reported earnings that exceeded expectations.
One is Baker Hughes (
) and the other Caterpillar (
). Both stocks have declined substantially from their highs and
formed reasonable bases from which to launch a rally. We think
these companies should benefit short term and could continue higher
if the market does.
Baker Hughes fell from $64 to $38 before stabilizing. It fell
with the collapse of oil and gas prices and production problems in
the Bakken shale. But with earnings of about $4 per share it was
too cheap. Now with oil, gas, and the stock market rising, it is a
very interesting play.
Caterpillar has fallen on China worries and a current belief
that the economy worldwide is collapsing. But with earnings of $10
per share and a favorable outlook for the future, it is hard to
justify the fall from $116 to $80 per share.
With the market rallying and investors looking for familiar
companies which pay dividends CAT may rally back towards its old
Last month we stated that bear markets end with a whimper not a
bang. It would be easy to believe that we have heard that
whimper and become euphoric as the market indices approach their
old highs. Rather than blindly following the crowd we believe now
is the time to analyze the underpinnings of the current market
From a technical perspective, the current rally is based on a
narrowing group of stocks. This is not a formula for long term
success. So we will be watching to see if participation broadens
and the market demonstrates staying power. If so we would expect to
see a continuation of the current move with the potential for
From the fundamental perspective we still face the November
elections and the worry of Congressional inaction resulting in the
so called "fiscal cliff." This uncertainty is causing investment by
business into their companies to grind to a halt.
Their current outlook remains gloomy. But while businessmen look
at current conditions and cannot invest, a market professionals'
business is to look to the future and determine if stock prices
have already discounted the worst possible outcome.
As professionals we cannot know the future so we will be guided
not by today's news but by market conditions. In the short term if
the market falls, we will look for opportunities to become more
fully invested. If the markets continue to rise as they become more
fully priced, we will most likely reduce exposure. For now we will
try to sit back and enjoy the ride.
Covestor models: Macro Plus Income,
Disclosure: Long BHI, CAT
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