As the final step in my annual-to-semiannual macro review, I look at sectors and industries to determine which are leading and which are lagging the stock market by a large margin. I often find that some sectors that do not show up in my traditional stock-screening methods have performed in a manner that gives valuable economic information, and may provide investment opportunities. When you tend to have your head down in individual company reports, you can miss trends and data that can improve your understanding of the big picture, as well as factors that may affect stocks you already own.
Searching the list of top performing sectors, I see predictable groups like Luxury Goods. During the early days of the recession, this sector dropped off a little as the wealthy curtailed spending for the sake of appearances, but they are back with a vengeance. Those who have money, spend money. Companies like Coach (COH) and Tiffany & Co. (TIF) are doing very well. Barring a deep double-dip recession, that is not going to change. The stocks are too rich for me to buy, but I do not suggest shorting them either. Momentum types might want to have these stocks on their radar screen, too.
One group that was initially a huge surprise is Recreational Vehicles. The group has performed extremely well and with high gas prices and a cautious consumer, that does not appear to make much sense. When I dig a little deeper, I see that companies like Arctic Cat (ACAT), Polaris (PII) and Harley-Davidson (HOG) have done well, while a traditional RV company like Winnebago (WGO) is still struggling and its stock price is languishing. Motorcycles, snow mobiles and jet skis all fall under my addictive lifestyle banner and are seeing pent-up demand emerge as the economy becomes less horrible. These companies may face tough comparisons next year as demand flattens and gas prices remain high.
One group on the non-performers list that is interesting is long-term care facilities and providers. Intellectually, this group should be booming. Demographics are strongly in its favor as the population ages and long-term heath care becomes more of a concern. But rate reductions from Medicare and aggressive claim processing to avoid what Medicare officials deem over-treatment are hurting most of these companies. Should the Supreme Court throw out health care reform, most analysts feel that this would be another negative for the industry. Many of these companies use a lot of leverage, and that's where my interest lies. I am far more interested in the debt and potential recovery rates of long-term care companies than I am in the equity. It is worth investigating potential high-yield and distressed opportunities in this group.
Looking at the rest of the nonperforming groups, there are no real surprises. Coal- and natural gas-related companies are on the list as those commodities prices have declined. I'm watching these two sectors closely. Most of the stocks are not cheap enough on a price-to-book value basis yet, but I am confident they will get there. So far, my two major longs in natural gas are Penn Virginia (PVA) and EXCO Resources (XCO), but I expect to add to that list as the year goes on. So far, I have not bought any coal stocks but I expect that to change by the end of the year as well.
In spite of the news and trading action in larger regional and money-center banks, community bank stocks have not rallied much. The ABA Community Bank Index is still down almost 7% on the year and over the past five years has fallen by almost 50%. The Trade of the Decade is still very much viable and I am still selectively buying stocks across the group.
I find the macro picture very much in line with the micro view uncovered by single-stock screening and investigation. When I stick my head up each year and take a macro look, I scribble down my findings and create a mythical macro fund to track over time. Last year, my imaginary macro fund was long the dollar and Japanese banks, which worked out pretty well. This year it would be long Japanese and British banks, community banks, cotton, coal, uranium and natural gas. It would also be long high-yield debt in long-term care facilities. It would be short electric utilities and recreational vehicles.
It will be fun to track how these picks work out over the next year, but more important, I have gained insights and information that will help me select potential safe and cheap stocks that can return in multiples, not percentages.
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