Late Rally Stirs Optimism

If the market was an obstacle course this week, it would have been called the gauntlet. Let’s take a quick look at what we saw.

1.) Political tension escalating in Libya as key oil ports are bombarded with rockets.

2.) China reports its second monthly trade deficit in seven years, indicating lower global demand.

3.) Euro-zone bonds yields jump to all-time high on renewed financial weakness.

4.) Market contemplates the end of QE2, the Fed’s plan to stimulate the economy.

5.) Oil continues to trade at $100 barrel.

Needless to say, it was a pretty intense back drop, even for the battle-tested market and S&P500.

That weighed on stocks early in the week, with the average trading sharply lower on Tuesday and Wednesday. But just like last week, stocks rebounded on Thursday and Friday to fuel optimism into the weekend.

So as it stands, the Dow and S&P500 are trading about 3% off their recent high. And keep in mind, that’s not just any high, it’s the 2-year high that has a lot of big players sitting on big gains. So the fact that stocks continue to linger in elevated territory in the face of massive uncertainty is a sign of optimism. Let’s look for more of the same down the road.

Crude and Energy Stocks

With energy as one of the strongest themes in the portfolio, I wanted to take some time to talk about how $100 crude is affecting our energy stocks.

Going into this year we were looking for oil to be strong. That has definitely played out over the last few weeks as oil prices responded with vigor to growing political tension in the Middle East.

Although that kind of upward movement in crude is usually great for energy stocks, this time around, its bigger effect was scaring the crap out of the market. All these analysts and investors trying to figure out how a 15% energy premium effects consumer spending and corporate earnings. After much contemplation, the consensus was “not good.”

So when stocks as an asset class sold off, energy stocks were brought along for the ride. Our domestic exploration and production company Cimarex Energy Co (XEC) opened on Monday morning at $115, traded below $104 on Wednesday and the closed the week at $108. Normally a stock like this would be jumping on higher crude, that’s why we like it, but in this case it took a little hit as investors lightened up on stocks. Longer term those higher crude prices will most definitely give Cimarex a boost, but in the short run it was an interesting example of the correlation between energy stocks and the overall market.

Transocean Ltd (RIG) was also a bit weak, opening the week just above $85 and closing at $80.96. But with crude production more profitable than ever, there will be strong demand for Transocean’s off-shore drilling services, so higher crude prices will support this company’s business too.

Baker Hughes, Inc. (BHI) however, bucked the trend, outpacing the market with a big rebound on Friday to close with a weekly gain. That rebound is a bullish signal, it means that when investors rotate back into stocks after being scared away for a few days they are focused on energy. BHI’s bump on Friday also has a lot to do with its specialty, providing natural-gas drilling services, because $100 crude makes natural gas a less expensive and more attractive alternative.

So what we saw from the market this week is that it’s not just about oil prices, it’s also about “how did those prices get there?” This time around it happened a little quicker than the market would have liked to see, but make no doubt about it, higher prices and the long-term trend support the energy trade.

Let’s take a look at some of our other stocks.

McDonalds (MCD)

Mickey D’s was strong in the weak market after reporting better than expected February same-store sales. The company’s European business posted another strong month, an interesting shift after the region showed signs of weakness late last year. That helped to offset some weakness in McDonald’s US business, which came in a bit lighter than expected. Looking forward, we saw some upward revisions in estimates from the analysts, so the short-term and long-term trend is looking good.

Amerigroup, Inc. (AGP)

Amerigroup was also relatively strong, posting a weekly gain as healthcare stocks remain in favor with the market. That upward movement also has something to do with the company’s strong Q4 results from mid February that saw income almost double from last year to $80 million. With the ranks of Medicare and Medicaid growing daily, this is a good place to capitalize.

With an eye to adding more stocks to the portfolio, here are a few more names at the top of the list.

Apple, Inc. (AAPL)

This isn’t a name that’s going to creep up on anybody, but the simple fact of the matter is that Apple is one of the best companies in the world. The company has completely reshaped the face of technology and consumer electronics over the last few years with the iPod, iPhone and iPad. Apple also has a strong presence in the desk and lap top markets. The company is a leader in a number of markets, including tablets and smart phones, and has a ridiculous balance sheet, with over $50 billion in cash. Steve Jobs is a bit of a wild card, but there just isn’t a stronger name in technology than Apple.

Banco De Chile (BCH)

Banco de Chile is the second largest bank in Chile, with a market cap $11 billion. This is a direct play on the strong South American economy, being fueled by growing exports, an emerging middle class and consistent trade surpluses. The company barley blinked an eye in 2008 and 2009 through the financial crisis, as a more conservative business model protected it from leverage and toxic assets. A potential threat to BCH is the bout of inflation that has been sweeping through South America. If that pushes interest rates, higher it poses a threat to the company’s margins. But with growing volumes, a strong balance sheet, compelling valuation and 3% dividend, BCH is a good way to play the South American growth story.

That’s it for this week, but as always here are two articles I wanted to share with everyone. The first talks about rising rents due to foreclosure trends and the second discusses the much hyped release of Apple’s iPad 2.

Landlords Raising Rent on Strong Demand

Appeal of iPad 2 a Matter of Emotions

Your Investment Partner,

Mike

ABOUT THE AUTHOR

Michael Vodicka

Michael Vodicka is the president and founder of the Vodicka Group Inc., a licensed investment advisor (Series 65) and a financial journalist.