During every Bull Market we see a parade of analysts, portfolio managers and talking heads trying to call the top. Screams that the market is a bubble and the end of the world is just around the corner are heard daily. If I look back over my career, I’m sure I’m guilty as well. The end of the world doesn’t happen very often so leaning to the other side over the long run has been more profitable.
Trading Call
Let’s be clear here. I’m not referring to the short term calls made by traders. Some are excellent, most are hideous and many that get it right, will be on air a few days later telling you the market has relieved its overbought condition and now is a buy. If you think you can add value trading the wiggles, than by all means you should do so. I know I cannot.
Secular vs. Cyclical
At this point in the cycle it is important to focus on secular themes. Markets have come a long way so the chances of finding companies at a cyclical troth in earnings is going to be difficult at best. We are in a slow growth economy and growth should trade at a premium. I didn’t say “No Growth.” Organic growth is higher than the headline numbers, especially if you back out fiscal drag from government cuts and the sequester. In a slow growth economy, growth becomes a rare commodity. As you might expect, growth trades at a premium and will continue to do so until we have a recession, a significant market correction or both.
At that point everything I’m saying will flip on its head and we will put more emphasis on the cyclical trade.
Five stocks currently in the Alpha Select Portfolio that have a secular tailwind are Boeing (BA), Facebook (FB), Google (GOOG), CBS (CBS) and Viacom (VIAB)
Boeing (BA) is a perfect example. The world desperately needs light fuel efficient aircraft. The 787 is their signature achievement. Every airline wants one. Pilots want to fly it and passengers want to ride in it. While a slowdown in the economy would dent demand, the secular tailwinds I refer to should continue to support the shares.
Facebook (FB) Google (GOOG) – The secular themes here are fairly obvious as we move more of our lives from analog to digital.
CBS (CBS) Viacom (VIAB) – Content is king. CBS and Viacom along with other content providers are launching streaming initiatives. Many cable subscribers will continue to cut the cord but will watch content via streaming using their cable as nothing more than an internet pipe. (CBS reports Nov 6th and VIAB Nov 14th)
Freeport McMoran (FCX) clearly sits in the cyclical camp and as a commodity producer very dependent on the world economy.
Valuation
October notched another strong gain. While the market certainly isn’t cheap at 15x forward and 16x current earnings, I would hardly call it in bubble territory.
The Fed
The Fed is sending out very mixed messages in the last few weeks. As I see it, one of the first things on the agenda for Janet Yellen if confirmed, is to tighten up the ranks and send out a clear cohesive message. Every month we have a parade of Fed Governors stepping up to the microphone each with a different point of view. Will they just let QE continue until there is an event that forces them to make a change? I hope not, but the history of this organization leads me to believe otherwise.
We are coming into the seasonally strong part of the year but of course why should that mean anything. The seasonally weak part of the year, September and October was up over 7.5%.
As we head into the home stretch for 2013 before making a new purchase ask yourself the following question. Does the position I’m looking to add have a secular theme or tailwind? If the answer is yes, I think you will do just fine.
-David Nelson, CFA
