The “Trump Bump” will soon come to an end, and earnings will once again drive stocks higher or lower. Bulls think 2017 S&P operating earnings could hit $130 per share. Who knows if this happens? Even in times of relative stability, it’s foolish to predict the markets—and probably the only thing everyone can agree on these days is that our current situation is far from stable. There are too many variables, including uncertainties about the policies President-elect Trump will put forward, to have any clue where the market will wind up at year’s end. Will Trump succeed in cutting the corporate tax rate or start a crippling trade war with China? Will he “repeal and replace” the Affordable Care Act or throw the whole healthcare sector into chaos? Your guess is as good as mine, and anybody who claims to know is probably a partisan hack or a salesperson, or both.
One thing we can be sure of is that, as always, a handful of big movers will disproportionately impact the indexes in 2017. Last year Nvidia was that stock. I wish I knew what this year’s breakout name will be, but all I can offer with some certainty is that even if the indexes post another year of low double-digit increases, more stocks will struggle than flourish. Quite a few businesses could vanish altogether. Avoiding these laggards and soon-to-be zeroes is just as important to investing success as scouting for potential five or ten baggers. And one of the best ways to do so is to identify larger secular trends.
Wall Street has always been captivated by controversial companies, controversial leaders, and controversial mergers. Tesla’s shocking offer to buy SolarCity on Tuesday featured all three, so it was no surprise that the deal instantly seemed like a bigger story than the presidential race, gun control, ISIS, and Brexit. It even managed to make the last controversial company that dominated headlines, Valeant Pharma, seem like an afterthought.
A few people have written in asking my opinion of the deal. The short answer is, I believe investors are well advised to avoid both stocks like the plague. As separate entities, these companies are wildly overvalued story stocks with a good chance of going broke. Together, they will form one wildly overvalued story stock with a good chance of going broke.
Last February, I wrote a thought exercise of sorts for CNBC.com weighing the stocks of the number one and two companies by market cap at the time, Apple and Exxon.
Apple, as you may recall, had just turned in one of the greatest quarters in history, annihilating estimates with record smashing iPhone sales. Its stock had shot up to $128/share, and just about everyone expected it to climb higher. Pundits were breathlessly debating how soon Apple would become the world’s first trillion-dollar company. Exxon’s stock, by contrast, was $88/share and not many people were touting it as a buy. Oil prices had crashed to $50/barrel, from over $100 less than a year earlier, and a recovery was seen as unlikely.
Despite these factors, I wrote that if I could buy only one stock between the two and hold it for the long term, Exxon was a better choice than Apple. A quarter later, as both companies prepared to release earnings again, I reiterated my preference for the energy giant.
In theory, Wall Street analysts are paid to predict the future earnings of the companies they cover and use those predictions as the basis for their stock recommendations. In reality, this is not always how the game works. Often, analysts seem to forget that earnings and earnings growth have always been the mother’s milk of stock prices over the long term. Instead, they focus on short term price fluctuations, lowering ratings when a company’s stock drops, even as its earnings estimates rise.
Make no mistake, as I’ve repeatedly warned, most stocks making the 52-week low list are there for good reason. The large majority of them are heading lower, and many will cease to exist. Conversely, most stocks making 52-week highs are likely headed higher. However, profitable exceptions to these rules do exist. With a little digging, investors can exploit the imbalance between the Street’s short-term perception of a company, as reflected in its stock price, and its long-term prospects, as reflected by its earnings outlook.
Two high profile commodity companies filed for bankruptcy last week. The first was St. Louis-based coal producer Peabody Energy (BTU). Peabody was the latest coal producer to file, following Arch Coal, Alpha Natural Resources, Patriot Coal, and Walter Energy. BTU quickly fell below $1 on the news. Just a few years ago, Peabody’s market capitalization exceeded $20 billion. On Wednesday, Houston offshore oil producer Energy XXI (EXXI) joined Peabody in bankruptcy court. Four years ago, EXXI was a $32 stock. On Thursday, the day after it announced its bankruptcy filing, it closed at 12 cents.
Ever since oil cratered to $26/barrel on February 11th, prices have steadily inched higher. West Texas Intermediate has now climbed into the $40/barrel range. Not surprisingly, energy stocks have kept pace, with many service companies and independent producers hitting year-to-date highs. Unfortunately for some energy firms, however, this recovery will probably be too little, too late.
A few months ago, I wrote about strong insider buying and how it can be a promising sign for a company’s future stock performance. Last week, JPMorgan Chase’s CEO Jamie Dimon paid $26.6M for 500,000 of the company’s shares at $53/share. That’s about as strong as insider buying gets. The news immediately boosted the bank’s stock. It closed yesterday at $58, though it is still down 12 percent YTD versus a 6 percent decline for the S&P 500 and a 16 percent decline for the S&P 500 banking sector (KBE).
To his credit, Dimon has consistently bought large amounts of his company’s stock over the years, and his investments have always turned out well for him. Many analysts believe his latest purchase could signal a bottom for the financial sector. Does that mean investors should follow Dimon into JPM and other bank stocks?
After a rough start to the new year, a lot of investors might be tempted to buy into “fallen angel” companies at or near all-time lows. They’re not hard to find. In the tech sector, GoPro and Fitbit, two profitable and recently public companies, have taken major hits. GoPro is down 90 percent from its all-time high. Fitbit has lost two-thirds of its peak value. Another sector where investors might be looking to buy low is energy, where scores of service and exploration companies are down 90 percent or more. Established names like Denbury Resources, Forbes Energy, Gastar Exploration, Basic Energy, Bill Barrett, and Ultra Petroleum, among others, have all been creamed, and could seem like bargains.
First off, I’d like to thank everyone who bought a copy of Dead Companies Walking this year. I had a great time writing the book and it was fun hearing from folks who seemed to enjoy reading it, as well. I probably wasn’t able to respond to everyone who contacted me about it (though I tried), but I appreciate the kind words that many people sent my way. Thank you!
As for the markets, investors have had more than their fair share of emotional and actual volatility in 2015. After all the huffing, puffing, and cussing, the S&P and the Dow are more or less flat. That doesn’t surprise me very much (I expected modest gains for the indexes, at best). But a number of things have surprised me this year, some quite a bit. Here’s my list of the five biggest events of 2015, in order of earth-shattering importance:
A few months ago I traveled to Houston and wrote about the increasingly upbeat mood I encountered at the energy companies I visited there. I came away from that trip thinking that well-managed service and exploration firms might be attractive investments. Many had declined 40-60 percent in response to oil’s decline from $104 last summer to the low-$40s by late fall. As oil prices rose past $60 this spring, I suspected these stocks could eventually rally.