I Eat Bear

Fundamentals, fundamentals, and fundamentals. The three most important items in picking good stocks. The rest, is just a matter of time.

So, in a market that has been, and likely will continue to be vicious for some months, I can offer little advice except to say "When going to the dance, stick with what brung ya". That is to say, you likely picked stocks from fundamentally sound companies in the first place (let's hope so!). Despite the markets wicked mood of late, good companies are still growing. And, at some point, that will be recognized, and rewarded.

So, at the risk of being very wrong, I am going to make some short term predictions. I think we are near a short term bottom of the market right now, and I do expect a short term rebound. Catalyst for that include second quarter earnings better than the worst fears of Wall Street, and the Olympics. The Olympics solely for the increased spending that will occur, and to a lesser degree the medal count, as Jim Jubak suggests, although he makes an interesting case. I am tempted to add the US presidential election as a catalyst also, but that could swing either way. I expect some skepticism there, and personally think the results will be negative if Obama elected, but I tend to doubt that will happen (again a personal guess, and hope). But, regardless of who is elected, I expect a severe market tumble around February of 2009. That speculation on my part is based on the concept that banking institutions are likely hiding some of the worst yet, and that it will resurface in a big way. And, my faith in government (or lack of it), says they will try to "regulate" markets further, and government interference can only have negative impacts. Yes, I do wish the government would stop "meddling" with things they know nothing about, and to a great degree, I wish much of the government would be made into private sector businesses, where the activities rightfully belong. OK, the government should continue to control national defense, and infrastructure, but stop right there. There is over-kill on social programs, health care, legal systems, and more,,, all of which could be better managed in the private sector, and the sheer cost of the government should be reduced by 25% in my estimation. But, I am also a realist, and I know that won't happen. We will have more government, more government meddling, and higher taxes, at both personal and corporate levels.

Well, that is part of the economic background, as I foresee it. Ok, to answer some other pressing questions. What will happen to oil prices? This has not been a typical year exactly, as typically, oil sees lowest prices in mid-summer. This year it hit highs in mid-summer. I hear people talking about oil as low as $80 a barrel fairly soon, and some that believe $110 a barrel is more realistic. I believe $125 a barrel is more realistic, and a spike to $160 a barrel is likely just to remind people of that. Yes, I expect that in the next six months, and it may be peaking in about January, would be my guess.

So, in such an environment, I continue to overweight oil and oil service companies. In fact, there will be few changes to my portfolio at all. Despite an earning miss, Weatherford should do well. Smith International should continue to shine. Drillers like Transocean, Atwood, Schlumberger, Nabors, Pride, Haliburton, and others should do well. Fundamentals for natural gas are still improving, so despite taking big hits lately, I expect good things from Chesapeake, Devon, and Abraxas (which by the way changed ticker symbols from ABP to AXAS). I like Chevron, Conoco, and Marathon too, and all for different reasons. First, they hold value pretty well, but they too have taken big hits lately. They are not the best holding for a lab because they do not have fast stock price growth typically, but they are very good long term holdings, and they can serve as place-holders in a stock portfolio, so you can see how other stocks perform relative to them. Marathon is even talking of splitting exploration from it's refinery business to add stock holder value. I may yet be adding positions there too, as it is a well-run company, despite underperfomance of late.

Fundamentals for coal and steel seem to be much the same as they were before too, despite these industries taking big hits in stock prices. Yes, costs for them have been increasing, but at some point, those costs will be passed through, and I expect these stocks to regain some ground too. So, Arch Coal, Accelor-Mitel, Joy Global and US Steel will remain faithful parts of my portfolio.

And, rightfully, or not, I still favor many of the down-trodden. Manitowic is down huge, but reported a 37% gain in second quarter earnings, and still fell, due to disfavor of it's acquistion of another restaruant services company. Terex is also down significantly from last year. Cranes are not my favorite sector, but I am not foolish enough to believe we will not have more construction over time, so they remain in my portfolio. If they shows any signs of rebound, as they should, I would be adding positions there also.

Technology is due for some rebound according to some analyst. I got seriously burnt with some solar stocks in the last round, but First Solar did perform well, and I expect that to continue. Cyrpress Semiconductor can only be called undervalued, as it's stock price is almost solely based on it's solar company subsidairy. Still, it may drop again, as it has been making a recent rebound. Western Digital has been in what Jim Cramer would call "the house of pain", but I still think the fundamentals of both the company and the business have merit. In fact, if I get some extra cash, I would be adding IBM and Google here too, and likely will, mostly for the long term potential I see in them. I will maintain postions in Apple and Research in Motion as they are best of breed currently for telecom equipment providers, but I reserve myself there, and doubt I will be adding positions to these for some time.

I still have a lot of faith in agriculture stocks. You simply can not bet against Potash, Agrium, or Terra Nitrogen. They will add both stock price, and or dividends. I like Deere, as it is a well run company. I wish it had faster stock price appreciation, but it is a good long term investment. Same can be said of Dow Chemical, Monsanto, and a few more.

I like mining as a sector, and I still favor BHP, RIO, and RTP. The sector has been getting killed lately, but being down 30% or more from recent highs, I continue to expect rebounds from these well run comapnies also.

I like shipping as an industry, and Genco, TBSI, and Diana Shipping remain favorites, but I may keep Dryships in a small way. Other shippers stocks will likely be sold to make way for more productive growth stocks.

I find disfavor in health care, banking, consumer staples, and utilities. Health care is just to volatile, and much too much like playing the lottery. Still there are some good companies here, and I may have to add small positions (mostly for the diversification, and I am a great fan of diversification). Consumer staples and utilities are good slow growth long term investments, but in both of these cases, the market will simply outperform them. And I will not go into a tantrum on banking, but I think anyone who invest in banking related stocks ought to be put on a wall and shot. The downfall of this market has been due to mismangement by financial institutions and to reward them in any way, past, present, or future is simply an injustice. I got out of Visa and Mastercard may follow. Not so much that they are bad companies, but they are finacially related, and my conscience hurts me when I think how much that they capitalize on those financially hurting the worst, in many cases. So, if I lose by avoiding these sectors, my conscience is clear, even if I am not ringing the register as fast. I don't expect to lose anyway.

So, in short, I am counting on TIME to cure the ills of the market of late. I had a nice pop up in the last round of the lab from most of these very same stocks, and when the market again comes to it's senses, I expect it to do so again.

So, if wishes were horses, beggars might ride? Well, I wish we had more individual investors, and far, far fewer funds. Either way, I still am of the opinion there is still a lot of money in the stock market sidelines, and when that returns, supply and demand is going to push stock prices up. Yes, in the longer term I am bullish. Even for the short term, I am bullish, but I expect a fairly big hiccup to the down side after the first of the year (my prediction is February).

One might say, well, you have missed a few predictions, and you would be correct. I have gotten into good companies at the very worst of times, and paid the price. I have ridden stocks too long on the way down because they still have good fundamentals. I have gotten out of stocks to only see them rebound later. Learn from my mistakes, as I have tried to. I still maintain, the biggest mistake you could make is to not have positions in fundamentally sound companies. The stock market is one of the few places on earth, where TIME is your friend.

And, I wish I knew how to, or if there is a way to do it in the lab, but I can not think of a better time to be adding positions with stop/loss on them. This market is too volatile not to have some "automatic" sell points, and depending on the volatility of the stock in question, I have two theories there also. If it is not very volatile, warn at a 5% drop and sell at an 8% drop.
If it is very volatile, warn at 8%, and sell at a 10% drop. If I could, I would have this on each and every stock I own right now.

With the market bouncing bearly above bear territory right now, if you have not bought in, I would not wait much longer. Almost assuredly, within two years, it will have made a significant gain for you, even if it is just marginally fundamentally sound. The more fundamentally sound, the bigger the safety net, and greater likelihood of even greater gains.

And probably the best advice I can give you, is to continue to overweight oil (especially oil services), and agriculture (especially chemical companies).

Why? Fundamentals, fundamentals, and fundamentals!

Comments: View Comments |  Friday August 1, 2008