Strong Data Fuels Rally

The first days of spring ushered in a much welcomed change for the market, with stocks reversing two weeks of losses on some encouraging economic data that lifted the averages to their best performance in two months.

The market took its marching orders from a pretty solid batch of economic data.

It kicked off with initial jobless claims dipping to a 2.5-year low, followed by some strong corporate earnings out of technology directly ahead of Q1 earnings season and ended with an upward revision in GDP that came in ahead of expectations.

These are all very encouraging signs from the economy.

But there were also a few stinkers in there.

Mainly housing. The two most common words I saw being used to describe new-home sales were “awful” and “disaster.” With both transaction volumes and prices on the run, the trend is looking a bit weak.

But here’s the upshot. The market already knows housing is lousy, and it doesn’t seem to really care. It’s not a story that’s going to sneak up on anyone. If the numbers get worse, maybe that changes, but with the housing story many years old now stocks don’t seem to be too concerned about it.

It also looks like the market is getting more comfortable with some of the political road blocks that have been springing up over the last few weeks. The Japan nuclear situation is at the very least looking better than it did two weeks ago when we had no idea what was going on. And even though the Middle East is looking a bit shaky, the market seems to be coming to terms with $105 oil.

This is all part of a very natural digestion process. The market just took in a huge amount of new information and it needs time to figure everything out. But once the uncertainty is replaced with strategy, the appetite for risk returns and capital is reinvested.

And that’s exactly what’s playing out right now as new money continues to flow into equities in spite of the huge gains we have seen over the last two years.

But that doesn’t mean it’s time to sell, here’s something for everyone to consider.

Peak Earnings in Sight

The S&P500 is on the brink of eclipsing peak earnings from 2007. Back then, the index topped off at 1,561. But as of Friday, the S&P500 closed at 1,314. Put your calculator away, that’s an 18% premium. That means the valuation picture is fairly compelling right now, with the S&P500 trading at a historically cheap 14X forward earnings, safely below its median of 16.5X over the last ten years.

If there’s a near-term catalyst is Q1 earnings, set to kick off in early April. The actual results will be important, but the Street will be following guidance even closer to get an idea of how corporate earnings and consumer spending are being affected by higher energy prices and geopolitical conflicts. If the analysts like what they hear it would be a nice injection of confidence that the trend of strong corporate earnings will continue.

But before then we have a very important jobs report set to hit the wire this Friday with non-farm payrolls. Jobs have been one of the weakest parts of the economic recovery as companies have chosen to max out productivity instead of hiring additional labor resources. Last month’s results came in ahead of expectations, so another strong showing would give the market another reason to feel good as the averages trade directly below the recent two-year high.

Let’s go ahead and take a look at some of our stocks.

The leader of the pack was EZCORP, Inc. (EZPW) , locking into what traders call breakout mode and jumping more than 13% on the week. This is definitely looking like the little pawn store that could, can and will, hitting a new 52-week high at $31.80 in the process. But EZCORP’s business goes beyond pawn stores; it’s also big in payday lending. Classify that one under specialty financial services, because what payday lenders do is service the millions of people who can’t get regular financial services at a big bank because of the financial or credit profile.

And the weak economy means that demand for these services has been booming, where lenders have the ability to squeeze fat margins out of very low-risk products and services. It’s a wicked business model and perfectly suited for the kind of macro environment we are seeing right now.

Kansas City Southern (KSU) was also in the game, adding 7% on the week to trade within $2 of its 52-week high at $56.98. No doubt that the strong economic data fueled the gains, with rail shippers being viewed as bellwether stocks that benefit from broad economic expansion. And with crude trading over $105, rail shippers will also see a boost in demand as company’s route away from trucking into a less expensive alternative. Onward ho Kansas City Southern, ride those rails.

We also saw a strong performance from Apple, Inc. (AAPL) , adding 6.31% on the week on the heels of a very bullish analyst report that made some waves on the Street. A highly respected tech analyst said that if Apple continues its recent stretch of 50% annual revenue growth, it will hit $200 billion in annual sales by 2012. That would easily make Apple the largest tech company by most metrics and also the world’s most valuable company. It is absolutely amazing to see a company this size posting these kinds of growth numbers.

We also saw a few nice recoveries, with CF Industries, Inc. (CF) jumping from $120 to $132 on rising corn prices and Market Vectors Junior Gold Miner (GDXJ) adding 5% as gold hit a new all-time high.

Overall the portfolio is looking pretty strong. With our next round of additions we’ll be almost fully deployed, perfectly timed with the end of the first quarter and ahead of spring and summer.

Let’s go ahead and talk about some of our next targets.

Blackstone Group LP (BX)

Blackstone Group is a financial services company that specializes in private equity, commercial real estate and distressed debt. As a private-equity firm, Blackstone is fairly unique in the world of publicly traded financial services companies. And with a market cap of $8.5 billion, we’re talking about a large mid capper.

There are two main reasons why Blackstone looks like a good pick. The first is because the improved global economic landscape means more capital wants to flow into a wide basket of assets, which is exactly how Blackrock is designed to profit. The second is the rising values of those assets that Blackstone is leveraged against. Having leveraged exposure to rising asset prices in a bullish market is a very powerful combination. More gains for Blackstone’s customers means more gains for Blackstone, kind of like a self perpetuating cycle.

The company has an absolutely ridiculous 7.3% dividend yield and with a historically low P/E of 12X, the capital gains side of the equation looks compelling too.

TAL International Group, Inc. (TAL)

TAL owns and leases inter-modal shipping containers and has a market cap of $1.1 billion. As you might think, this is a direct play on shipping, economic activity and global trade, all of which have been on the upswing for the last two years as the global economy has continued to recover. But this is also a very long-term trend, with ever-growing trade between countries and across the planet increasing demand for shipping containers and logistics services.

The company reported awesome Q4 results in February that included a 21% earnings surprise. Looking forward, the analysts see a longer-term cycle that is still well in play driving demand and supporting earnings growth. And with a forward P/E of 10X and awesome dividend of 5.30%, TAL looks like a great pick for a global economic recovery.

NASDAQ 100 (QQQ)

We’re still looking for one or two more picks in technology, so in the meantime we are going to fill the gap with the NASDAQ 100, an index of the 100 largest non-financial stocks on the tech heavy NASDAQ index. Moving forward this will be one of our more fluid positions as we dial in on a few specific names in the tech space. But for the time being it’s a great way to get exposure to a wide basket of very good companies and stocks in a strong market.

That’s all for this week, but in the meantime here are two articles for everyone to check out. The first gives you a few reasons to be optimistic about retirement and the second discusses hiring attitudes.

Nine Reasons to be Optimistic about Retirement

Should Businesses Rush to Hire?

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.