Saturday, February 18, 2012

Stocks and Finance - Checkup

So on January 3, I wrote a post about my thoughts on some stocks. Now, it's time to check up on my predictions. So if you would have taken my advice and purchased the companies I mentioned on January 4, how would you have done?

First, let's break it down into 3 categories: Stocks I said to buy, hold and sell.

The buys were: HBAN, PBCT, GE, CHK, HPQ, MSFT, BA, YUM.

The holds were: DUK, AEP

The sell was: BAC

So lets take a quick look at the overall percentage change on these as of the close of the market on 2/17/12.

For the BUYS:

HBAN has a gain of 7.22%. PBCT has a loss of 2.89%. GE has a gain of 3.88%. CHK has a gain of 3.56%. HPQ has a gain of 11.24%. MSFT has a gain of 14.05%. BA has a gain of 1.37%. YUM has a gain of 10.65%.

For the HOLDS:

DUK has a loss of 2.88%. AEP has a loss of 2.86%.

For the SELLS:

BAC has a gain of 38.04%.

Ouch. Well the good news is overall, you would have done very well had you invested in these on January 4. The bad news is that you would have really missed out on one hell of a run up from BAC.

Looking forward, I do believe a market pullback is in the cards in the next month or so. Currently, all the major indexes are at highs unseen for several years. While it is true that the US economy seems to be doing a decent recovery and people are getting back to work, the year end numbers for a lot of companies came in very underwhelming. The estimates were very low - so expectations were that there would be a lot of surprises in companies beating estimates. While several did, many more either just made estimates or missed in either sales, profits or both. This is a material weakness in the overall economy and shows that although things are improving, we are still a long way off from where we can say we have a strong and thriving economy.

With that in mind, the unemployment numbers seem to be coming down - which means more people are applying for credit and spending. Obviously these are things that must happen and be sustained for the corporate earnings to get back to where higher stock prices can be sustained in reality - and not just in future expectations.

So I do have some changes in my overall views on the following stocks - and some new additions to the list. I still believe that HPQ will continue its upward momentum. Meg Whitman is really a great CEO and her leadership alone adds value to the company. GE is expected to raise its dividend again in the fourth quarter of the year. It's financial wing should also start paying internal dividends again - which could add some serious value to the company. As the economy improves, yet housing prices staying fairly flat in most regions, I would like to add some newer buys to the list. Home Depot (HD) and Lowe's (LOW) should see improving sales in direct correlation to the improving employment situation. As improvements/repairs/additions to peoples homes have been either delayed or patched during tough times, with more people getting back to work but still unable to sell their homes, I see a lot of positive momentum for these home improvement leaders. Also, both of these companies have P/E at 20 - which might be seen as a little high, but with increased sales, the 20-times correlation stays with an increase in share price.

With this same line of thinking, banks should be making more loans to people who now may qualify for personal and consumer loans with the additional household incomes. I am keeping a buy for HBAN and PBCT and upgrading BAC to a hold on the news that they are selling it tower in the Boston financial district, cutting its CEO's compensation and making it correlated to the company's performance and it's settling its legal action with the US in the robo-signing fiasco. With all these in mind, I believe its incredible run up YTD will maintain, but probably will not keep its momentum for much further gains.

Utilities such as DUK and AEP seem to have been flat or decreasing so far this year - much as I said in the past post. With a mild winter and record low prices for natural gas, I would maintain a case-by-case review for each company, but with the two I am more familiar with (DUK and AEP) maintain a hold. I do see them holding their current values though. As for CHK, natural gas prices can't get much worse. I still see a lot of potential upside for this company - especially if things with Iran get worse. I am keeping a buy on this stock.

As for the fast food arena, YUM has made a run up to a 52 week high. Adding to this list I will be putting both YUM and McDonalds (MCD) as holds.

Again, I believe that in the next month or so to be a pullback in the overall markets. Personally, I am keeping my powder dry and waiting to buy anything else until this happens. Again, only time will tell if these predictions will hold or not - but I'll be sure to do another checkup on these predictions in around 6 - 8 weeks.


Anonymous said...

Is there any correlation between a devaluation of the dollar and the price of the DOW. Just curious. Seems like the earning capacity and dividend payout on DOW stocks should merit a premium. Also the built in value in the stock assets should adjust the price upward -- since the asset value would stay the same -- if the dollar falls in value. Just trying to think this scenario through.

RJ said...

well i would assume its a possibility. but how is the dollar being "devalued"? if you compare it to other major currencies year to date - lets just look at the Euro, British Pound and Canadian Dollar - we will find the following:

USD/EURO: USD decrease in value of 1.88%

USD/GBP: USD decrease in value of 2.94%

USD/Canadian: USD decrease in value of 2.82%

So in the past 6 weeks, there seems to be a bit of downward pressure on the US currency.

But let's look at how the markets performed during the same timeframe:

DOW increased by 5.99%
S&P increased by 8.24%
Nasdaq increased by 13.3%

The markets way outperformed the devaluing of the dollar during that timeframe, creating real gains relative to the purchasing power lost.

So now I want to bring up some commodities and see if there is a correlation there. For this, it is the past 1 year performance:

Gold has increased 24%
Silver has increased 3%
Copper has decreased by 16.58%
Wheat is down 31.5%
Cotton is down 18%
Live Cattle is up by 8.8%
Hogs are up by 5.1%

As you can see, there does not seem to be much correlation in these at all. And all of these are commodities that are traded in US dollars - which if there were to be a serious devaluing of the dollar in terms of what it can buy, you should see all of these shooting upwards (meaning your dollar is worth less). Instead, it seems to be the markets doing what they should do, not some super inflationary monster creating skyrocketing prices in everything under the sun.


That being said, artificially low interest rates are creating a cheap money bubble all over again. So who knows. In my opinion, with this small population sample, I am not seeing it.

Anonymous said...

Ok. Let's look at what you said. The cost of commodities has gone up. The cost to purchase stocks as measured by the DOW has gone up. If you compare what you were paying for groceries and gasoline last year to this year, you'll find those costs have gone up, too. That means it takes more dollars to buy the same share of the DOW, a commodity contract or a sack of groceries and a gallon of gas. That is what happens when the dollar is devalued. It takes more dollars to buy the same item than it did before. Inflation equals a devaluation of the currency.

Inflation is the tool governments use to cheat the people who loan the government money -- either through debt instruments or bonds. Inflation lets the government pay off debt later in dollars that are worth less (the same dollar won't buy as much when the debt is paid off as when the dollar was loaned out).

The other currencies you cited are being devalued, too. The Euro, Yen, British Pound and others are in free fall with us. It's like a group of skydivers who jumped from the plane at the same time. Sometimes one is crashing faster than the rest. If you measure distance from the ground, the highest ones are "valued" better than the one lower in the sky. The truth is that they are all racing toward the ground.

The one area that appears to be working conversely is real estate because there are more sellers than buyers. But I don't see folks jumping on that investment.

But check out what has happened to rent rates in recent years. And the electric bill. And any other cost related to housing. Up, up, up! That's inflation.

When everything costs more, it means your dollar is buying less and less. Hence, devaluation.

RJ said...

What you say makes sense - a lot of it. And that is usually the arguement for inflation causing prices to go up.

Another way to look at it though is the input costs. Costs such as minimum wage increasing, EPA regulations on energy companies, taxes increasing and subsidies expiring or insurance costs for employees. These costs aren't going to be absorbed by the company - they are going to be passed to the consumer.

Gasoline costs are extremely high right now, but if you look at the price of crude, you will see it at around $100/barrell. That has been a pretty consistent price for gas if you look at how it has fluctuated the past several years. It's been much higher and much lower than $100 at times, but it seems to have found home at $100. Now if you go to the pump, you'll see $3.80 per gallon gas. Now the cost in dollars for a barrell of crude oil is not extrememly high, but the costs for refinement, the local and state taxes imposed (and in some cases raising) and the ethonal subsidy expiring has caused it to seem the value of the dollar is decreasing - when in fact a lot of the increase has to do with input costs rising or government taxes.

The same with energy. With the EPA forcing energy companies to close "dirty" energy plants or forcing them to modernize them with coal scrubbers and other high costs capital expenditures, it forces them to either build new plants altogether and close the dirty energy plants, put a massive amount of money into the current plants or be shut down. Again, these costs are not going to be absorbed by the energy companies - it will be passed to the consumer. So when you get your energy bill it will have gone up - but not because the value of a dollar has gone down, but because of government regulations causing these companies to invest much more and much quicker into new technologies and plants.

So with fuel costs rising - often due to taxes, refinement costs and expiring subsidies (we will take the geopoliticis of the middle east of out the equation because it does affect price but it has nothing to do with currency valuation), energy prices going up because of government regulations and the recent minimum wage increase due to goverment regualtions, of course you will see higher prices that are passed on to you in the store. But it's not necessarily due to inflation as much as it is to it costs a hell of a lot more to truck the food in, keep the lights on, and pay the employees and their benefits.

Now, is inflation going to be an issue? I think so due to the quantitative easing along with 0% interest rates and relatively low taxes for so long. But as long as the US is the only worldwide reserve currency, we have a special advantage in that there will always be a demand for our currency. But once the world wises up and creates a new reserve currency - whether its a basket of currencies, an IMF currency, or China's Yuan - it will be a different story.

But that's the thing about economics, there is never really a single right answer. There are milllions of variables into why currencies do what. Why prices go up and down. Why the stock market goes up and down. All we can try to do is figure out what seems to make sense...and then we are told we're wrong ;)

Anonymous said...

You are a very smart man! I love discussing with you. Make lots of money with your portfolio! And post a picture of that sports car when you get it. I am a bit of a sports car aficionado myself.

P.S. Silver is making a stealth comeback. It's had a great run in January-February. Gold had the larger rally in recent months, but now is slowing its rise.

P. S. S. Just food for thought: India's choice to pay Iran for oil with gold made gold an alternative to the US Dollar as the World Reserve Currency.