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Many investors are loath to push stocks higher amid an uninspiring earnings season.
The dull beginning to the New Year, though, may ironically be the signal I’ve been looking for. Investors are turning away from macro issues (Fed policy, global growth concerns) and favoring a focus on equity values. And that’s where you should be able to scoop up some bargains.
In that vein, I suggest you monitor retail stocks. Several companies I recently mentioned — TJX Cos. (TJX), Foot Locker (FL), Lululemon (LULU) and American Eagle Outfitters (AEO) — have extended declines as investor sentiment turns sour on the industry.
But I still think it’s time for intrepid, or longer-term (one-year-plus time-horizon) investors to make new commitments to their favored names in the industry. I’m looking at potentially adding one to my notoriously risk-averse Weiss Ratings Portfolio, in fact.
I am always on the lookout for the new idea that spurs the market, but at heart I’m a pure fundamental analyst. When I’m not analyzing years’ worth of financial and operating data to follow stocks, I spend most of my time following the markets; not just in terms of new financial data, but in terms of expected future financial data.
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| Economically sensitive sectors are the best place to begin adding exposure now. |
You see, the market is always in the process of trying to predict the future of stock values, and the main ingredients in figuring that out is the combination of past operational/financial performance, and future expectations for those measures.
So, the inauspicious start to this current earnings season (it’s still young, mind you) may eventually lead to a fundamentally driven pullback — to the tune of about 6 percent to 8 percent, by my reckoning. That outcome, which I give about a 70 percent chance over the next four weeks, would provide the opportunity to fill in portfolios that are holding a lot of cash.
It can be scary to add risk (aka, buy equities) when the market begins to look — for lack of a better term — riskier. That is just what can happen if companies begin to sour sentiment with tales of woe for their 2014 outlooks. So far, I would say we have not heard a lot of enthusiasm for the upcoming fiscal year, but many companies have yet to report their results.
So why is this man smiling? It’s because by using a battle-proven quantitative model like the Weiss Ratings Model as the foundation to my investing, I can spend more time taking in newly acquired data points (like changes in company managements’ profit outlooks) and anticipating what it will mean for the future of the Weiss Ratings Model’s view.
With that in mind, I can pick not only the thousands of stocks likely to succeed as indicated by the Model, but also to focus on those few dozen that we can use to make a reasonably safe portfolio.
I’ve found in my years of investing that a weak beginning to the year typically foretells a weak follow-through. And this year, even though it’s early in the season (only a little more than 10 percent of the S&P 500 had reported as of MLK Day, but we’re in for a torrent of reports this week), I’m forecasting just that. Luckily, the economic calendar is light this week, so we should be able to glean insights from stock-price movements based simply on what they say as opposed to what they say in the context of a shifting backdrop.
For now, we’re pretty much in consensus on the Ratings team that fundamentals support higher equity values this year. And we are still of a mind that the economically sensitive sectors are the best place to begin adding exposure.
Best wishes,
Don
