Jubak's Journal
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5 stocks to make the trend your friend
There are times when it's not too late to take advantage of a trend in the stock market. For instance, there still are ways to make money from the falling dollar.
By Jim Jubak
Ever had this happen to you? By the time you had figured out the trends driving the stock market, the individual stocks and sectors most likely to benefit from those trends have already climbed to nosebleed heights. This happens to all of us more than wed like to admit.
Take this market, for example. Heres one trend: Stocks are clearly climbing because oil prices are falling. Unfortunately, if youre just figuring that out, youve already missed the big gains in transportation and chemical stocks. Trucking profits rise when fuels costs fall and just about every chemical product starts as oil. The Dow Jones Transportation Average Index is up 20% this year, and the Dow Jones U.S. Chemical sector index is up 9.5%, while the Standard & Poors 500 is up 6.5%.
For latecomers to a trend, the choices seem to be to buy near what may be a top -- and hope that it isnt -- or move on and hope for better luck catching the next wave.
But before you close the book on current trends as potential profit sources, you need to remember that trends like these play out for more than a week or two. Oil prices are likely to stay at these levels or drift slightly lower for well into 2005 as the speculators betting on higher prices continue to unwind their positions.
Its only the most obvious ways to profit from a trend like this, the no-brainer winners, that are gone. To make money now on trends like falling oil prices, rising interest rates or a weaker dollar, you'll have to think beyond the obvious. If you do, youll find there are still plenty of profits.
In my Wednesday appearance on CNBCs "Morning Call" I recommended three stocks that are solid but less obvious ways to make money from declining energy prices, climbing interest rates and a weak dollar.
Overblown worries in South Korea
Kookmin Bank (KB, news, msgs) is a play on falling energy prices.
Higher prices for oil and natural gas are a worry in the United States even though we still produce a sizeable, although declining, amount of both commodities. Imagine then the concern in a country like South Korea, which produces none of its own oil or gas and where the economy depends on keeping export costs low enough to compete in global markets.
Earlier this year as oil prices climbed, and climbed some more, the fear in South Korea was that higher energy prices would crimp Korean economic growth. That, in turn, sent Korean bank stocks tumbling as investors fretted that business lending would slow or, worse, that the banks wouldnt be able to collect on their commercial loans. Kookmin Bank, the countrys largest lender with a sizeable portfolio of loans to small and medium-size businesses, saw its share price drop by 37% from Feb. 13 to Aug. 2. The stock has since recovered about half that loss as the fall in oil prices has lessened fears of an economic slowdown. But the stock still is 16% below its February high.
When homebuyers turn to ARMs
Washington Mutual (WM, news, msgs) is a play on rising interest rates.
There's no doubt that higher interest rates will put an end to the boom times for mortgage lenders. Rising rates will mean fewer home owners refinancing, and fewer fees for originating refinancings will flow to mortgage lenders. Rising rates also will put an end to the extra income that comes from selling bundles of mortgages to other investors. As interest rates fell, those mortgages saw their value rise. So its no wonder that a huge mortgage lender like Washington Mutual has seen its stock pummeled this year. The shares were down 19% from Nov. 24, 2003, through this years low on Aug. 12 at $37.63.
But the bad news is already in the stock, and the good news from rising interest rates isnt. What's the good news? With interest rates climbing, homebuyers are likely to turn to adjustable rate mortgages (ARMs) in greater numbers. That may seem contrary to basic logic. After all, who wants to take out an adjustable mortgage when rates are climbing? But with homebuyers stretching to purchase every square foot of house that they can afford, and more, ARMs that let buyers lower their initial payments by deferring part or all interest payments gain a competitive edge. In this interest rate environment, Washington Mutual, one of the biggest ARM lenders, should be able to gain market share and add new mortgage assets at a strong pace. Our StockScouter rated the shares a 7 out of a possible 10 on Nov. 17.
Fewer imports
Nucor (NUE, news, msgs) is a play on the falling dollar.
Think of it this way: Every decline in the dollar makes foreign steel more expensive in the United States and gives this U.S. steelmaker room to raise prices. Not that Nucor needs help. The steelmaker's sales grew by 31% in 2003 and are projected to pop by 70% this year.
Analysts have been predicting that 2004 would mark the cycle's top because more imported steel would lead to lower prices. With the dollar falling, thats far less likely. And if the Chinese decide to let their currency, the yuan, rise even slightly against the dollar, U.S. manufacturers like Nucor will be the main beneficiaries.
With cash flow rising, investors can also look forward to continued dividend increases. Nucor has increased its dividend by 10.2% annually over the last five years. Our StockScouter rated the shares a 10 on Nov. 17.
And, of course, as always, I have two more exclusive picks for CNBC.com on MSN readers.
2 exclusive picks for CNBC.com
Valero Energy (VLO, news, msgs) is a play on falling oil prices.
How can an oil company profit from falling oil prices? By being a specialist in refining the difficult to refine sour crudes that OPEC is pumping in increased volumes in an effort to keep global demand from outrunning supply.
Crude oil prices climbed, before falling, on tight supplies. Prices of finished petroleum products such as gasoline and jet fuel have been boosted even higher by a shortage of refinery capacity to crack heavy Middle Eastern crude oils, which is an increasing portion of global supply as older U.S. fields pumping sweet crude are exhausted. This has increased the profit margin that those few refiners that can handle heavy, sour crude get.
Valero isnt passively waiting for flows of sour crude to increase so that its profits will rise. The company has been buying refining capacity and increasing the percentage of its output that comes from sour crudes to an estimated 70% this year from 50% in 2003. Our StockScouter rated the shares a 9 on Nov. 17.
Made in the U.S.A.
Phelps Dodge (PD, news, msgs) is a play on the falling dollar.
If Nucor will benefit as a falling dollar cuts competition from steel imports, then Phelps Dodge, the worlds second-largest copper producer, is a play on rising profit margins as the dollar falls. What distinguishes Phelps Dodge from its competitors is the location of its mines. Unlike Freeport McMoRan Copper & Gold (FCX, news, msgs), Corporacion Nacional del Cobre de Chile, Grupo Mexico (GMBFX, news, msgs) and Southern Peru Copper (PCU, news, msgs), Phelps Dodge produces the majority of its copper from mines in the United States. This puts it in an ideal position to profit from a falling dollar.
As the dollar declines, the dollar-value of the companys foreign sales increase due to currency exchange rates and any pickup in market share that results from cheaper prices for U.S. copper. And since Phelps Dodges costs are largely priced in dollars due to the location of its mines, the company doesnt see a corresponding increase in expenses. This double-barrel benefit offsets worries that the copper cycle will top out this year as new supply comes on line and Chinese demand tapers off. In the short run, the weaker dollar is likely to offset any negatives from those developments. Our StockScouter rated the shares a 9 on Nov. 17.
Please remember, the picks I make on CNBC are all short-term with holding periods of no more than six months.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak didn't own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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