Jubak's Journal Recent articles: • 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 More... | Jubak's Journal 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 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. Related news and commentary on MSN Money 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. The hedge-fund problem And then, there's a third reason for suspecting this rally will lead to profit-taking before too long. Hedge funds, many of which have taken a big beating of late, are only required to let their investors take money out on a set schedule. At some funds, withdrawals are allowed at the end of the quarter. At others, it's the end of the month. With some hedge funds down as much as 6% this year -- much of that in the last 30 days in the wake of the General Motors So what do you do? If you believe that this rally is likely to falter even before it reaches the top of the recent trading range, you buy defensive growth stocks in anticipation of the stock market's rotation back toward safety when the rally ends. Some stocks that fit this bill are William Wrigley Jr. If you believe that this rally will hit the top of the range and go no further, you buy the shares of cyclical growth companies that have been beaten down brutally during the weeks when the market was worried about slowing growth. These stocks fell harder and will rebound more strongly because of that punishment. Don't fall in love with these: you'll be looking to sell when they get near the top of their range. Some stocks that fit this bill are Companhia Vale Do Rio Doce, Caterpillar Technology industries' strange turn If you believe that this rally has a chance to break through the top and keep on going, you look for stocks that began showing strength before the rally of the last few days and that have a fundamental story that supports a sustainable pickup in sales and earnings. Certainly, technology shares would be heavily represented in this group. Something strange happened in the last month: after lagging the market since Dec. 30, 2004, technology industries have dominated our list of best-performing industries. On May 16, data-storage devices, communication equipment, Internet information providers, pollution and treatment controls, semiconductor (broadline), Internet service providers and networking and communication devices all made the top-10 performers list. I'd put technology stocks Applied Films, EMC Since I have my doubts about this rally, I prefer Pentair over Applied Films for Jubak's Picks. The water equipment sector has been hot with mergers and acquisitions activity. 3M And speaking of risk, my next column is on inflation. The working title: "Why everything Alan Greenspan tells you about inflation is wrong." Changes to Jubaks Picks Buy Pentair The logic here is very, very simple. First, in the last year Pentair Buy Companhia Vale Do Rio Doce Companhia Vale Do Rio Doce New developments on past columns Stop loss targets added to Jubak's Picks I'm adding a new tool to Jubak's Picks: stop loss targets. You'll find the first of these in the pick of Companhia Vale Do Rio Doce 5 stocks for an up-and-down year Shares of L-3 Communications Holdings 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 owned or controlled shares of the following equities mentioned in this column: EMC, L-3 Communications, PepsiCo, Schlumberger and Yahoo!. He doesn't own short positions in any stock mentioned in this column. | |||||||||||||||||
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