Stocks were off to a decent start this week before some disappointing economic news crushed sentiment and pushed the averages to their fourth consecutive losing week.
The data in question, an exceptionally weak read on regional manufacturing, is a build on the recent trend of economic data signaling slower growth. That’s not exactly great news, but slower growth is a far cry from an economic meltdown. And just like we said last week, the market is desperately trying to figure out which of the two is at hand.
The bearish camp is being fueled by further financial deterioration in the Euro zone, where the interconnectedness of EU member countries is causing great concern on the Street. You’ve also got to include the United States in this conversation, where an unsustainable deficit and massive amounts of debt are weighing heavy on sentiment.
But the bulls have a few weapons of their own, coming in the form of healthy earnings, optimistic guidance and compelling value in many sectors and individual names.
For the time being investors are choosing to take a cautious approach, selling growth stocks and shifting into more conservative segments of the market.
How are Individual Stocks holding up?
We see that showing up in companies like McDonald’s Corp (MCD), closing the week with a 1% gain as a 3% dividend yield and strong global brand attracts fresh capital in a volatile market.
CF Industry Holdings (CF) was also in the game, falling just 2% for a strong outperformance of its own. CF is most definitely being buoyed by its absolutely insane earnings power and valuation, where analysts looking for more than $20 in earnings this year have this stock trading with a forward P/E of just 8.6%, a sharp discount to the overall market and its peers. Anyone looking for exposure to the global food and agriculture story should check out this fertilizer producer.
The food and agriculture trend also showed up in Bunge (BG), falling 2% on the week as investors appreciate that inelasticity in food regardless if global GDP comes in at 1% or 2%.
Sticking with our theme of stocks that hung tough in the down market, CPFL Energy (CPL), the Brazilian electric utility that pays a 6% dividend, also outperformed, closing the week in neutral territory.
It also provided some support for Buckeye Partners (BPL), a MLP that specializes in refined petroleum pipelines, closing the week with a 2% decline as its juicy 6.6% dividend yield enticed risk aversion.
But there was also plenty of blood on the Street, and it showed up in growth and cyclical stocks.
Kansas City Southern (KSU), a mid-cap rail shipper, took a shot to the ribs, falling 15.5% on the week and back to even on the year. Rail shippers are viewed as being highly correlated to global economic growth, and with all the big investment banks recently downgrading their GDP projections for the second half of the year, KSU fell out of favor with the market. But here’s the upshot. That downward pressure comes on the heels of another strong quarter and upward revisions in estimates, which speaks of sustained earnings strength and makes the valuation picture more compelling. And on a longer-term basis, rail shippers operate in a highly insulated industry with high barriers to entry, so with energy and transportation costs remaining in focus, rail shippers still look like a great long-term investment.
Energy stocks were also on the ropes, with Cimarex Energy Corp (XEC) falling 7% and Baker Hughes, Inc. (BHI) dropping 13%. Generally speaking, energy services companies are less volatile than exploration companies, so it was a bit surprising to see BHI fall more than XEC. But either way, investors are shifting into more conservative segments of the market on growth concern, causing some short-term losses and volatility. But on the flip side, when energy stocks move back into favor, they can crank out some big gains pretty quick, so for the time being that is a dynamic energy investors must live with.
And finally, to end on a high note, the precious metals saw some very nice gains, where PowerShares Double Long Gold (DGP) gained 10% as the averages fell between 4% and 5%. That movement came on the heels of gold blasting into a new all-time high above $1,880 as investors look for shelter from an ever weakening Dollar and global instability.
It also gave Market Vectors Junior Gold Miners (GDXJ) a nice boost, also closing the week with a 1% gain as the Street begins to take notice that junior and regular gold miners produce….wait for it, wait for it…Gold. I joke because there has been a highly unusual phenomenon in correlations where gold sky rockets and gold miners trade lower with the overall equity market. Back in the 70’s when gold surged on higher inflation the junior gold miners pumped out massive gains, so if we see that response play out again, anyone who owns these stocks will enjoy a very profitable ride higher.
No doubt it’s been a tough stretch for the market, with the averages falling four consecutive weeks. But even though volatility and uncertainty seem to rule the day, there are still plenty of reasons to be optimistic and invest for the long haul. So let’s stay optimistic and look for this recent soft patch to provide an opportunity to buy more shares of our favorite stocks at a big discount.
That’s all for this week, but until next week, here is an article profiling some solid international dividend stocks and ETF’s for anyone looking to de-risk and shift into more conservative segments of the market.
Your Investment Partner,