Jubak's Journal
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5 stocks ready to ring in 2006
The year-end rally has been strong, but looks ready to fade. As investors dump hot technology and consumer stocks, corporate spending will drive the new winners.
By Jim Jubak
Now what? We're within shouting distance of a change in market leadership. If you're looking out even six months, the time horizon of my weekly picks for CNBC, this isn't the time to chase the winners in this rally but to look ahead to the first half of 2006.
I think it's time to think about taking some of the profits from this end-of-the-year rally in the technology and consumer sectors and putting them to work in the stocks of companies that produce goods and services for corporate customers.
The stock market is in the midst of one of its traditional year-end rallies.
Leading the way have been technology stocks such as Marvell Technology Group (MRVL, news, msgs), up 19% in the last month, and Komag (KOMG, news, msgs), up 28%; and consumer stocks such as Amazon.Com (AMZN, news, msgs), up 22%, and Williams-Sonoma (WSM, news, msgs), up 12%.
Time to look ahead
But that's old news, even if this rally does have another three to six weeks of life left. You'll find the new news -- the news that's likely to drive the stock market in the first half of 2006 -- in a number that came out on Nov. 29. Orders for durable goods -- that's stuff like airplanes, construction equipment, and production machinery -- climbed 3.4% in October. That's a huge rebound from the 2% drop in September. Orders for non-defense capital goods -- an indicator of investment by companies -- was even better, climbing almost 7% in the month.
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Business investment, rising at a strong 10% annual rate over the past two years, looks like it will keep going, and maybe even pick up speed as we go into 2006.
That's important, because the trends driving the current end-of-the-year rally are running out of steam.
The technology stock rally at the end of the year is driven by seasonal trends. The fourth quarter is always the strongest quarter for earnings in this sector -- which sends stocks higher after the seasonally weak second and third quarters. But first-quarter earnings are often a letdown after fourth-quarter numbers. Stocks that rally in December on projections of fourth-quarter earnings can wind up looking pricy in light of January's projections for first-quarter results.
The consumer sector, another pillar of this rally, is also running out of fuel. The real estate boom -- in housing prices and in home refinancing and home equity loans -- has made up for very slow income growth and a huge surge in energy costs. But housing prices are now leveling off, which means that consumers won't be able to increase their borrowing against the value of their real estate holdings in order to keep spending.
Corporate sector to the rescue
That leaves the corporate sector to keep the economy chugging along. Fortunately, the sector is up to the job. Balance sheets are in good shape -- clearing the way for more capital spending. Profit margins are solid after the cost-cutting of the last few years. And demand, even with the possibility of a slight retreat in consumer spending by U.S. consumers, looks good in 2006. Good enough at least to lead companies that have been reluctant to spend on expanding capacity or adding new equipment for the last few years to put a bit of those profits to work. That's especially true when the capital spending buys equipment or services that can help lower costs.
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