|  | | Price | 42.870 | | | Change | +0.070 | |
Research Wizard
Add to MSN Stock List
Message Board
|  | | Price | 52.840 | | | Change | +1.000 | |
Research Wizard
Add to MSN Stock List
Message Board
|  | | Price | 103.240 | | | Change | +3.790 | |
Research Wizard
Add to MSN Stock List
Message Board
Related Resources
Screen for the best stocks for you
See how MSN Moneys StockScouter rates a stock
Find out today's big trends
Jubak's Journal
Recent articles:
• 5 big tech trends to watch in 04, 12/30/2003
• 10 income stocks for squeezed investors, 12/23/2003
• Clean enough for Buffett, clean enough for me, 12/19/2003
More...
| | Jubak's Journal
10 ways to profit from a dangerous year
Between now and 2005, a lot of big worries -- the dollar's slide, the return of inflation -- could come to a head. Here are 10 stocks to play the trends.
By Jim Jubak
Im calling 2004 the Year of Investing Dangerously. Investors who separate short-term mini-panics from the long-term trend should be able to beat the market indexes. For investors in the right place at the right time, uncertainty and volatility can spell opportunity rather than losses.
The financial markets will climb the traditional wall of worry next year to produce a gain, when everything is netted out, of somewhere less than 10% for the major indexes. But that 10% net gain will come with more than the usual degree of volatility.
Let me take you through five trends that could upset the financial markets and offer you 10 stocks that have the potential to turn that turmoil into opportunity.
My 10 picks for 2004 are:
| Jubaks 10 stocks for a year of investing dangerously | | Company | Industry | Company | Industry | | Canadian National Railways (CNI, news, msgs) | Railroads | Freeport-McMoRan Copper & Gold (FCX, news, msgs) | Copper and gold mining | | Capital One (COF, news, msgs), | Consumer lending | MBNA (KRB, news, msgs) | Commercial banking | | Carbo Ceramics (CRR, news, msgs) | Ceramic materials for oil and gas drilling | Noranda (NRD, news, msgs) | Mining and metals | | Cognizant Technology Solutions (CTSH, news, msgs) | Business software | Patterson-UTI Energy (PTEN, news, msgs) | Oil & gas drilling and exploration | | Expeditors International (EXPD, news, msgs) | Air delivery and freight services | Southern Peru Copper (PCU, news, msgs) | Copper |
|
Worry No. 1: Interest rates spike upward
Why interest rates didnt move permanently and significantly higher last year is the great puzzle of 2003. Everything from a weaker dollar to rising deficits to a strong economy argues for higher rates. Even with the U.S. Federal Reserve holding the line on short-term rates to give the recovery time to build momentum, long-term rates should have moved higher.
But after a brief spike upward this summer, long rates have spent months going nowhere. In recent weeks, they have actually declined. At the end of October, the yield on the 10-year U.S. Treasury note was 4.30%. On Dec. 24, it stood at just 4.15%. Thats just about the same as the 4.14% yield the 10-year notes paid in October 2002, when we were all still asking when the recovery would arrive.
Whats the investment opportunity here? I think investors will spend the year anticipating a rate increase from the Fed. The anticipation, in turn, will keep a lid on gains in the rate-sensitive financial sectors. But I dont see the Fed moving on rates until late in the year. That delay should give the best financial stocks a couple of quarters to score huge earnings gains from the spread between 1% short-term rates and what these companies charge borrowers on their loans.
My picks here are credit card companies such as Capital One Financial (COF, news, msgs) and MBNA (KRB, news, msgs) for two reasons:
- They arent exposed to the slowdown in mortgage refinancings.
- They have the power to raise rates to cardholders when interest rates finally do start to move up.
These companies also should see default rates on credit card accounts stabilize and improve as the economy grows stronger.
Worry No. 2: The dollars stumble turns into a tumble
The U.S. dollar is down nearly 20% against the euro this year and more than 10% against the Japanese yen. The euro is the currency used by most members of the European Union. The dollar has been declining since July 2001. Then, you could have bought a euro for 84 cents. But, on Dec. 19, it took $1.23 in U.S. currency to buy that same euro.
Theres little reason to believe that this trend doesnt have further to run. Merrill Lynch projects that, on the fundamentals, the dollar will fall for the next 18 months, or well into 2005.
Adding to the apprehension is the knowledge that currency moves almost always overshoot both on the upside and the downside because, at some point in their development, they are influenced as much by emotions as fundamentals. Investors dont want to hold dollars simply because no one wants to hold dollars, and that fuels a drop below fundamental value. That last stage, when the dollar falls further than it should before reversing, can lead to a period of intense volatility in the financial markets.
So wheres the opportunity in this somewhat scary scenario? Two places:
Gold and gold stocks, which have been the major beneficiaries of the dollars fall so far, have a lot further to run. As we go into 2004, look for buying opportunities in gold stocks such as Newmont Mining (NEM, news, msgs), Freeport-McMoRan Copper & Gold (FCX, news, msgs), and Glamis Gold (GLG, news, msgs). I already own Freeport-McMoRan in Jubaks Picks (and in my own portfolio), so you know where my preferences lie.
Companies that will see revenue soar with a cheaper dollar. The falling dollar will further stoke the boom thats sweeping U.S. farming right now. Usually that leads to rising prices that put an end to the cycle, but, this time, the falling dollar should keep the boom rolling. Id look to the railroads that haul bulk products such as corn, wheat, and soybeans as a way to take advantage of this trend. My pick here would be Canadian National Railway (CNI, news, msgs).
Worry No. 3: Inflation will come roaring back
I know the arguments for higher overall inflation, and I just dont buy them.
Is inflation likely to be higher in 2004 than in 2003? Yep.
But the world remains awash in excess capacity that this recovery looks unlikely to dent. Because capital is cheap, the world continues to add car and chip and consumer electronics factories even though theres a vast current oversupply of those kinds of plants. The globalization of labor, not just for low-wage jobs but for higher paying white collar knowledge work, guarantees that labor demands arent likely to push inflation strongly upward.
But since the potential for inflation remains real, this worry will be with investors for 2004. When the very volatile short-term economic numbers suggest that inflation may be on the rise, the markets will hammer bonds and push up the price of gold.
How does an investor profit from this? By recognizing that while general inflation is likely to remain low, commodity inflation is real. Driven by the huge demand in China, India and other labor-rich but resource poor developing nations, the prices of everything from coal to nickel have been on the march. My picks in this area are diversified metal mining company Noranda (NRD, news, msgs), already a Jubaks Pick, and Southern Peru Copper (PCU, news, msgs).
Worry No. 4: Energy prices cant stay inexplicably high, can they?
Youll understand this worry better if you remember that Wall Street has spent all of 2003 projecting that oil prices would fall to $25 per 42-gallon barrel or even as low as $18. And it hasnt happened. On Dec. 22, benchmark West Texas Crude was selling for $31.98 a barrel on the spot market. Thats exactly the same price that West Texas Crude sold for on Dec. 22, 2002.
Since no one on Wall Street has a convincing explanation for why oil prices remained so high in 2003, theres very little conviction behind projections that call for lower oil prices in 2004. The consensus on Wall Street is that oil prices will come down in 2004 and the shares of oil stocks are priced for that inevitable fall in the price of a barrel of oil. Still, no one will be very surprised if oil prices behave irrationally for another year.
I think thats indeed extremely likely. The stubbornly high level of oil -- and natural gas -- prices is a result not of the global supply and demand picture that shows an excess supply of oil. Instead, they result from localized supply and demand imbalances -- labor strife in Venezuela and Nigeria, for example.
Here, I recommend going with the cash flow and buying shares of companies that sell products and services to oil producers. Oil producers are currently awash in cash, so theyve got plenty of money for drilling and exploration. Expanding drilling makes sense even if prices fall from current levels to as low as $22 a barrel -- quite a cushion. And oil producers know that theyve got to increase proven reserves and supply after years when low prices led to underinvestment in exploration and production.
My picks: Carbo Ceramics (CRR, news, msgs), the maker of ceramic media used to increase production from oil and gas wells in the process called fracturing, and Patterson-UTI (PTEN, news, msgs), the oil and gas production company.
Worry No. 5: This overvalued market is headed for a big fall
I dont disagree that the some sectors of the stock market, especially technology stocks, are overvalued right now. And Id certainly agree that its normal for a correction to follow a rally of the dimensions that started last March.
But a big drop that leads to a resumption of the full horrors of the bear market? I dont see it. Certainly not in the first three quarters of 2004 while the economy is growing and interest rates remain low.
What is likely is an absolutely normal correction feels like the beginnings of a big drop to some investors. If enough of the folks who have been calling for a market collapse convince themselves that this is the beginning of exactly what theyve been looking for, then the correction could be sharp and vicious.
But short. Theres a tremendous amount of money on the sidelines still hoping to get in. Even many bullish investment advisors and portfolio managers arent fully invested. And its clear that some investors have been taking profits in technology stocks as the year comes to an end.
The odds for a correction go up in January as we come off the traditional Santa Claus rally and enter a period of seasonal weakness. January could be even weaker than usual this year if investors who wanted to take profits in 2003 but who didnt want to pay taxes put off some of their selling into the new year.
How do you play this worry? By keeping some cash handy and a buy list of stocks that you were itching to own but were too expensive to buy in 2003. Two stocks that make my list are: Expeditors International (EXPD, news, msgs) and Cognizant Technology Solutions (CTSH, news, msgs).
With this last worry in mind, Im going to do a little more selling in Jubaks Picks of Gamestop (GME, news, msgs) with this column and hold off on my buying until I see how January unfolds.
Changes to Jubaks Picks
Sell Gamestop
I should have sold these shares earlier when they hit my $18 target.
But noooooo. I had to hold on in the hope that the holiday retail season would push the shares higher. So much for investing on hope. The figures so far show a decent season, but one thats coming in near the low end of expectations. So Im taking advantage of the end-of-year Santa Claus rally to sell these shares with a 28% gain since I added them to Jubaks Picks on May 23. (Full disclosure: Ill be selling my personal position in this stock three days after this column is posted.)
New developments on past columns
The end of the year (and end of the quarter) performance numbers on Jubaks Picks.
Heres how I did against the major indexes:
| Jubaks picks vs. the major averages | | Indicator | 4th quarter 2003 | Full year 2003 | | Jubak's picks | 16% | 45% | | Nasdaq Composite Index | 12% | 50% | | Standard & Poor's 500 Index | 12% | 26% | | Dow Jones Industrial Average | 13% | 25% |
|
Pretty good numbers, but, lest I forget, the three-year (and really ugly) numbers are:
- Jubaks Picks, down 13%
- Nasdaq, down 12%
- S&P 500, down 14%
- Dow, down 2%
For the life of the portfolio -- from May 7, 1997, to December 31, 2003, the results are:
- Jubaks Picks, up 93%
- Nasdaq, up 50%
- S&P 500, up 34%
- Dow Jones industrials, up 45%
As is my practice, I will update these performance numbers at the end of the next quarter in March 2004.
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 in the following equities mentioned in this column: Cognizant Technology Solutions, Freeport- McMoRan Copper & Gold, Gamestop and Noranda.. He does not own short positions in any stock mentioned in this column.
|
