Jubak's Journal
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• 5 stocks aided by rising prices, 5/18/2005
• Get ready for a nice growth surprise, 5/17/2005
• A 'safe' investment turns dangerous, 5/13/2005
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5 growth stocks for a weak-kneed rally
The current rally is a tide strong enough to lift only some boats. Make a mistake and you'll find your stock sinking. Here are five stocks that should weather the uncertainty.
By Jim Jubak
In my last column, I argued that we're headed for a growth surprise on May 26 when the U.S. Department of Commerce issues revised economic figures for the first quarter of 2005. Because of the way the growth rate is calculated, it's almost certain that the revised figure for Gross Domestic Product growth will be higher than the 3.1% growth initially reported.
In anticipation of the news, stocks rallied on Monday, Tuesday and Wednesday as investors came to realize that the market had become too pessimistic about the economy and sold off too far.
Ordinarily I'd be happy about that. It would be confirmation that my basic sense of the market's direction was accurate, and I'd get set to buy into the rally as it continued.
A short-lived rally?
But this isn't an ordinary market, and I'm not happy that the market has moved before I had my buys in place. You see, this isn't likely to be a very strong rally or to last all that long. And the gains of the first half of the week -- 324 points on the Dow Jones Industrial Average ($INDU), for example, from the close on May 13 to the close on May 18 -- take us about halfway to the most likely top for this rally.
What you do now depends on your assessment of where we are in the current rally. If you believe that this rally is even weaker than I project, you should be buying defensive growth stocks to get set for the pullback that's just around the corner. If you believe that this rally is about half over, you should be looking for cyclical growth stocks that were strongly beaten down when the market corrected from the high for the Dow Jones industrials on March 7 through the low for that index on April 20. And if you're more optimistic than I am about the length of this rally, you should be buying the technology and other high-growth stocks that have led the market in recent days.
Growth stocks that fit the bill
In this column, I'm going to give you a spectrum of five growth stocks -- Procter & Gamble (PG, news, msgs), Companhia Vale Do Rio Doce (RIO, news, msgs), Schlumberger (SLB, news, msgs), Applied Films (AFCO, news, msgs) and Pentair (PNR, news, msgs) -- that span the range of those opinions. In other words, something for everyone. And then I'm going to add two to Jubak's Picks to align that portfolio with my own read on risk and reward in this market.
I love rallies that are strong enough to lift all boats. When everything goes up, stock markets are very forgiving of mistakes in picking individual stocks.
Now, I love rallies that stretch on for months and months so that I've got plenty of time to make a decision to jump on board, then second-guess that decision, and finally buy -- in time to catch a good part of the run-up in profits.
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Beached by the tide
Unfortunately, the rally that resumed this week isn't either of those. It's strong enough to lift only some boats; make a mistake in stock selection and you'll either be left behind by the tide or, worse yet, find your stock painfully sinking after bad news. And the averages are likely to peak relatively soon. I don't think the growth surprise later this month will be enough to touch off another strong rally. In fact, I think we're stuck in a trading range, and the gains of the first half of this week are about half the gains that we can expect in this rally.
I've got three reasons for thinking that.
First, my read of stock market momentum in 2005 shows me that stocks are stuck in a trading range between a top of 10,941 for the Dow Jones industrials (set on March 4) and a low of somewhere between 10,012 (the April 20, 2005, low) and 9,750 (the Oct. 22, 2004, low). At the close of 10,464 on May 18, the Dow Jones industrials were about 480 points, or 4.6%, from the top of that range.
The pattern on the Nasdaq Composite, ($COMPX) index is similar. The top of the recent range is somewhere around 2,178 (the close on Dec. 30, 2004), 2,088 (the close on Jan. 14, 2005) or 2,071 (the close on March 4, 2005). The bottom is either 1,908 (the close on April 15, 2005) or 1903 (the close on Oct. 14, 2004). At the 2,031 close on May 18, the market is 6.4% off the April 15 bottom and just 7.3% from the Dec. 30, 2004, top.
Of course, markets climb through the top of price channels all the time, and thats one reason why I believe this rally is limited to the top of the recent range.
Secondly, stocks are, for the moment, choosing to ignore the Federal Reserve. Reports of stronger- than-expected economic growth may produce a rally, but worries that growth will be so strong that the Fed will be forced to jump rates by a half a percentage point when it next moves will depress stocks. As long as the Fed is in a rate-hiking/inflation-fighting mode, it will be hard for investors to sustain optimism about stocks for too long.
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