What to buy when everything's flying? With the S&P 500 hitting a new 52-week high -- and therefore an all-time high -- this morning, an investor might reasonably ask: What do I buy in these markets?
At 2140, the S&P 500 is trading at exactly 18x FactSet's consensus for 2016 S&P 500 EPS of $118.82. It's actually 18.00x if one wants to go to the hundredths place, so, as a value investor, there's no concern for rounding or measurement error. The market's overvaluing near-term earnings, but that's a scenario that can last for a few days or even weeks. Last August's flash crash should have taught us that irrational exuberance is always met with painful corrections, but this market has a very short memory.
So, if you care about fundamentals, you should look for sectors that have exhibited improving industry supply-demand trends while the market has been rallying. If we go back to the "Dimon bottom" on Feb. 10, we've seen the equity markets rally 18% from the S&P 500's low of 1810, but we've seen certain commodity markets rally in multiples of that figure. Gaining exposure to those markets via their equities is a time-honored way of finding value in a market that seems to lack it. Put another way, you want to look for stocks that are sailing on a rising tide of improved pricing for the commodity underlying individual company revenues.
Three sectors pop to mind instantly when I'm thinking of sectors in which underlying pricing has improved dramatically in the five months since the Dimon bottom.
Dry bulk shipping. Yes, I've mentioned the bulkers many times in my Real Money writings, so I won't belabor the point here. The Baltic Dry Index hit an all-time low of 290 on Feb. 11 and today it closed at 704. Does a 143% increase in freight rates qualify as a massively improved fundamental scenario? I'd think so.
Navios Maritime's preferreds (NM-G) remain my Real Money Best Idea, and there are many other public bulkers that have both common and preferred equities listed in the U.S. In addition to Navios (NM) , Diana Shipping (DSX) , Scorpio Bulkers (SALT) and Star Bulk (SBLK) all fit that description.
Natural gas drillers. The August natural gas contract is currently quoted at $2.73 per million Btu, down a bit from Friday's $2.80 settlement, but up sharply from the $2.19 NYMEX settlement for February. The improvement from the Dimon bottom has been more recent and more pronounced in nat gas than in sister commodities like crude oil. The settlements for March through June all occurred under $2 per million Btu, but that has reversed oh so quickly due to a hotter-than-normal summer and some supply outages from competing energy sources, especially nuclear.
Can nat gas fundamentals change so quickly that a 40% move in one month is less than shocking? Oh, yeah. Commodity traders don't call the nat gas contract "the widowmaker" for nothing. Shorts are crushed just as easily as longs.
So, the names that pop to mind instantly for nat gas exposure are Chesapeake (CHK) , Range Resources (RRC) and Eclipse Resources (ECR) . That's by no means an exhaustive list of shale gas plays, but each of those companies is much more viable -- less "Stressed Out," if you will -- with gas prices approaching $3 per million Btu and I'm not sure the market has full realized that.
Investment banks. Yes, sorry to all my Wall Street buddies, but managing an IPO is really a commodity service in 2016 and leading a follow-on offering takes almost zero skill. We've seen IPO activity accelerate and as the S&P 500 hovers near an all-time high, follow-ons must surely follow.
The flat yield curve is still a concern, so I'd look for stocks in companies that are deal specialists -- Evercore (EVR) and Leucadia (LUK) (via its interest and Jefferies) and also Barclays (BCS) , just because that bank was left for dead after Brexit. The major integrateds -- Goldman (GS) , Morgan Stanley (MS) , JPMorgan (JPM) , Bank of America (BAC) , Citi (C) -- are less attractive here owing to pressure on net interest margins, but stocks of the specialists still seem ripe for the picking. (Citi is part of TheStreet's Action Alerts PLUS portfolio.)
