You can find good ideas anywhere, as long as you know where to look for them. Right now I see two places that make a ton of sense to find them, and they are at polar ends of the spectrum: the new high list and the new low list.
First, let's deal with some first-class irony. If you take out the companies that are in the process of being taken over, you will find that last week we had an equal number of new highs and new lows, 60 apiece. Extraordinary.
Second, the breadth of the two lists is extraordinarily narrow, although the bears should take notice that there are a heck of a lot more sectors on the new high list than the new low, as the new low is almost entirely oil and gas.
Third, there are no classically "cheap" stocks on the new high list. Most of them are selling with price to earnings multiples in their mid 20s, even as they have single-digit growth. That's very expensive when the average S&P 500 stock, which grows as fast or faster than many of these stocks, sells at 18x earnings.
The new low list has inconsistent PEs, in part because they are meaningless when it comes to the energy stocks and they are not, in general, all that revelatory as a sorting mechanism.
So how do we make money with these lists? Let's split them up.
First we look at the groupings in the new high list to see what's being favored and perhaps why they are being favored.
I see eight groups that have significant new high activity. I will break them down for you by preponderance and then suggest why they are winning and then give suggestions for the best of each, knowing that the situations are all relatively in flux but, for the most part, we have seen the earnings so the risk is a tad lower than otherwise.
1. The food and beverage portion of consumer packaged goods is the top performing group with the most participants on the list. Three reasons:
- They are huge takers of commodities and everything commodities is in freefall, as we know from the prices of these commodities and the new low list.
- This group has the most mergers and acquisitions activity, with Mondelez (MDLZ) being just the latest in a long line of activist-stirred food pots.
- This group's prominence suggests that the economy is much more weak than the employment numbers impute, and a few Fed hikes will throw us right back in the soup.
I am beginning to believe this is the predominant major chord of the market, which means all of these stocks, whether they be Kellogg (K), General Mills (GIS), Mondelez, Campbell Soup (CPB), Hormel (HRL), Dr Pepper Snapple (DPS), McCormick (MKC), Brown Forman (BF.A; BF.B) and Constellation Brands (STZ) should be bought on any weakness, especially the higher yielding stocks. My suggestion here is to buy White Wave (WWAV), which isn't on the list and which I hold in the Action Alerts PLUS charity portfolio that I co-manage. White Wave reported a very strong quarter Friday, reminiscent of the last quarter of Constellation Brands, and it got hammered like Constellation. A few days later it started roaring again. White Wave, the natural and organic powerhouse, remains the most attractive company in its industry other than Hain Celestial (HAIN). I also would buy General Mills right here because of a brilliant product line refresh to more natural and organic, as well as its more domestically based offerings. It is the Clorox (CLX) of the food business, another I like but it has to pull back after last week's explosion higher.
2. Med-tech has been a popular theme for ages and ages, and it's always been led by Stericycle (SRCL), Bard (BCR) and Becton Dickinson (BDX). This group's tricky because there are always going to be some that are in the doghouse. That's when you want to load up the boat. For example, for ages Baxter (BAX) had been right up there with Bard and Becton, but then it had a couple of years' rough patch. It took dramatic action and split itself up, with one part immediately getting a takeover bid and the other drawing an activist a few days later. My suggestion, a most consistent company that wasn't on last week's list: Henry Schein (HSIC), which is a rare five points from its 52-week high. Vertex (VRTX), Amgen (AMGN) and Regeneron (REGN) are all on the biotech portion of the list, but Celgene (CELG) is not. That's a mistake; it's selling at 10x the 2020 projection. Call me a buyer off $12 from its high of $140. These stocks are, again, like the first group, rallying because a Fed tightening is expected to hurt the industrials and slow the economy, causing year-over-year earnings improvement that these companies will give you pretty consistently.
3. The home theme is alive and extraordinarily well, mostly furniture but also materials to build homes. The odd thing is there is only one home builder on the list: Horton (DHI). I would prefer Lennar (LEN) for its breadth and strength of management. Although it sells most of these goods, Lowe's (LOW) is not on the list and has a lot of room to move. Stanley Black & Decker (SWK) reported good numbers, but not good enough numbers versus the cohort and that's a buy down $7 from its $111 high. This group reflects the desire to invest in the increasing worth of your home -- scarcity value, higher rents and improving job growth -- and I don't think it will be knocked a kilter from the first rate hike. I don't think it can survive a quick second one, though.
4. Travel and leisure's strong, but only the bargain portion. It's a weird dichotomy going that makes the group tricky: Priceline (PCLN), Expedia (EXPE), Royal Caribbean (RCL) and Carnival (CCL) are emblematic and they represent bargains, even up here, part of the new frugality theme I like so much. But there are no hotels, airlines or restaurants on it save Chipotle (CMG), which is distinctly a special situation. How is that possible? It is hard to figure. I should add that the only retailer on the list of note is Ross Stores (ROST), which is also a bargain basement outfit. Either investors collectively don't believe that oil is going to stay down -- something that the new low list, with its plethora of oils belies ¿ OR it's because those areas are now price competitive among each other and have lost their luster. The consumer remains suspect unless he or she is taking a bargain trip. The only way I can explain it.
The next four groups in the new high list are here.
