Now, knee-deep in November, we are getting the outlines about how this year is going to end and what stocks are going to be bought on any deep going into the homestretch. You can see it just by paging through the charts, as I like to do on Sundays. The collection of "what's working" is so powerful -- some would say so extended if they were bears -- that they are imprinted deep in the money manager psyche.
What stands out?
First, and the strongest by far? Healthcare and healthcare-related companies away from the major pharmaceutical companies. The outperformance of everything in this group is so strong that it's almost freakish.
It's almost dangerous not to be overweight in these stocks going into the end of the year. Of course this group's strength is a bit of a conundrum. Those money managers who think that our economy is very strong would never choose to be big in these stocks. But if a money manager takes a global perspective and considers European weakness, Chinese slowdown and now a new Japanese recession, then the dialogue changes and these stocks are ideal counters to worldwide weakness.
Now considering the heights with which this Allergan (AGN) situation has arrived with the potential Actavis (ACT) bid, you can say that anything that looks or acts even remotely like Allergan, with its ophthalmological franchise and Botox businesses, is going to go higher. That stock, which has more than doubled from a year ago, shows that even after a big run the company remained undervalued to another company and I think that's the undercurrent of the whole group. Put simply, every CEO in this industry wants to buy the other companies in his industry and be a consolidator, and the consolidator will almost immediately be rewarded with a higher stock price. When you consider that Valeant (VRX) and Actavis have been terrific performers as long as they have remained acquisitive, it explains a lot about what's going on in the group. How many groups have solid earnings and ample takeover prospects, where both the acquirer and the target go up? This is about it.
There are so many strong stocks in this group that it's hard to distinguish among them. For example, any medical equipment company -- Bard (BCR), Becton Dickinson (BDX), Medtronic (MDT), Edwards Lifesciences (EW) -- you can throw darts at them and they will hit. Or how about the absurd moves -- only way to describe them -- in Henry Schein (HSIC), DENTSPLY (XRAY) and Patterson Companies (PDCO) -- all three decent growers with high price to earnings multiples that are loved beyond belief. I recently interviewed Stanley Bergman, the CEO of Schein; while the company did have a nice acceleration in sales, the market has simply decided that this company and its ilk are wonder growth stocks.
The health maintenance organization cost containers are periodically met with downgrades, but it doesn't matter. They are widely perceived as big winners under the Affordable Care Act and these endless valuation downgrades just aren't taking hold.
But the best of the best? The same as always, the trio: Cardinal Health (CAH), AmerisourceBergen (ABC) and McKesson (MCK). These three companies can never do anything wrong in the eyes of Wall Street. Nothing. They are simply worshipped for their consistency and their constant beating of numbers. I have to tell you that if I were at my old hedge fund, I would simply be buying deep in the money calls on all three or the ride to year-end, that's how entrenched they are on the buyside of the ledger. I would add that calls on Edwards Lifesciences, long one of my favorites, would be terrific, too. Who doesn't want to show that they owned a position in a stock that's gone up 89% this year?
The second group that seems to know no bounds now? Retail. I think it took a little while for it to dawn on people how profound the decline in the price of gasoline is for these companies. Between weather and Amazon (AMZN), many of these companies haven't had a break in years. But if you look at the stocks of Wal-Mart (WMT) and Target (TGT), long the laggards, you can see something really exciting developing here. These one-time growth stocks are growing again. Now I think that when Target reports this week we will still see plenty of problems. I don't expect that Brian Cornell has gotten his hands wrapped around all of the issues, dowdy stores, poor food selection, and the ridiculous Canadian expansion where they opened 125 stores in one year.
Just that latter problem is pretty intractable, at least in the face of it. Consider that Nordstrom (JWN) worked hard for years to make its first Canadian incursion, a store in Calgary, a winner from the get-go. One store! Target could be in retreat for years.
But it might not matter. Both Macy's (M) and Nordstrom guided down and it didn't matter. Wal-Mart rallied huge on a percent comp gain. The dollar store stocks have rallied mightily even as they battle over Family Dollar (FDO). Both Dollar General (DG) and Dollar Tree (DLTR) seemed bent to go higher in part because either one wins in this low gasoline environment. I was incredulous that someone would downgrade TJX (TJX) and Ross (ROST) this week as they are prime beneficiaries but then again the analyst had a hold on them for much of this run so credibility is in question.
It's not just apparel retail or dollar retail. The auto parts retailers, namely O'Reilly Automotive (ORLY), the always maligned but ever powerful Autozone (AZO) and even auto retailers CarMax (KMX) and AutoNation (AN) are being lifted by gasoline. It is not at all ironic that Ford (F) and General Motors (GM) act terribly: they are huge international companies that are part of the larger morass that drives people toward the domestics anyway. In other words investors would rather play Ford through Carmax and GM through Autonation any day of the week.
To me the market has anointed a clear winner here, too: Costco (COST). It is the one to own calls in as managers pile into it to show their brilliance. Oh, and if it stays cold, then the one to own is North Face parent, V.F. Corporation (VFC), although that's a common stock play, not an options one as that doesn't have the volatility required for a good call trade.
Restaurants, the twins of retail, all act well. I like Jack in the Box (JACK), which reports this week as well as Chipotle (CMG), Fiesta Group (FRGI), Mcdonald's (MCD), Brinker (EAT) and Darden (DRI). All in all, though it is really hard for a restaurant to screw it up in this environment.
It's always difficult to figure out what people will do with those spare dollar but the market's saying that besides discretionary goods, there will be materials and equipment bought to make their houses better. Stanley Works, Whirlpool (WHR), Sherwin Williams (SHW), Jarden (JAH), Keurig Green Mountain Coffee (GMCR), these are all part of that thesis. We will learn more when we hear from Home Depot (HD) and Lowe's (LOW) later in the week but all of these are getting a second wind once associated with lower rates, but in a much more profound way because everyone gets to take advantage of the gasoline decline but not everyone gets approval for a refi.
As long as gasoline goes down, airlines will go higher. They are all systems go and while I know we aren't used to seeing these stocks have multi-quarter runs, you're your principal cost goes down sharply while you are raising ticket prices because of demand then your stocks are going to be cheap pretty much no matter what. American Airlines (AAL) is trading at 8x an estimate that I think will prove way too low. How is that something not worth owning?
There are other much loved stories in the transports. The rails can't do any wrong even when they aren't blowing the numbers away...and they aren't. UPS (UPS) preannounced a weak number and the stock barely blinked while FedEx (FDX) was flat. These are amazing developments in themselves yet people seem almost inured to amazing developments.
Everything else is pretty "smattering," as a smattering of insurers keeps going higher, as well as semiconductor equipment stocks as well as a few standout techs: Apple (AAPL), Microsoft (MSFT) and Yahoo! (YHOO). Some industrials have a halo: notably, 3M (MMM), Snap On (SNA), International Paper (IP), Honeywell (HON), and Illinois ToolWorks (ITW) -- I would buy them into, say, Japanese related weakness.
And people like a couple of consumer product groups stocks in part because they, too, benefit from raw cost and transport decline: Kimberly (KMB) and Pepsico (PEP) standout as does Dr. Pepper Snapple (DPS), Mondelez (MDLZ), Procter (PG), and Clorox (CLX). I think these fit well if you think that the U.S. could be slowing down or if you think the oil decline's caused by weakness in demand, something I disagree with, but to each his own.
All in all, the charts say one thing and one thing only: weakness must be bought and these are the groups you buy into. It's the way of the business; always been always will be.
