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Jubak's Journal
Recent articles:
• 10 ways to profit from a dangerous year, 1/2/2004
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5 stocks whose turn has come
I think the stock market will rotate away from technology in 2004, so I went looking for stocks signaling they may be part of that trend.
By Jim Jubak
Want to know what stocks are going to go up in 2004?
You can look at what was hot in 2003. That works in many years. Stocks with momentum are likely to keep on climbing. On the fundamental side, one positive earnings surprise is likely to be followed by a second. And, on the technical side, high momentum stocks draw new investors as they rise.
But 2003 ended with what looked like rotation. The Nasdaq Composite (COMPX) index, which had led the Dow Jones Industrial Average ($INDU) for most of 2003, lagged slightly in the last quarter. (The Dow ended the quarter up 12.7%; the Nasdaq was up 12.1%. For the year, the Nasdaq was up 50%; the Dow just 25%.) Investors looked like they were selling some of the best-performing names in the technology sector in favor of cyclical stocks. For example, in the days from Dec. 1 through Dec. 24, cyclical Caterpillar (CAT, news, msgs) gained 9%, and tech sector leader Intel (INTC, news, msgs) fell 8%.
Though the two stocks reversed course in the last two weeks of the year, I still think rotation is likely to continue into 2004. But its by no means clear what investors will rotate out of or into. Theres still belief that the technology sector leaders of 2003 are overpriced and due for a correction. But many cyclicals and basic materials stocks are now looking pricey, too. And some analysts are calling for a resurgence of the blue-chip consumer stocks that lagged the market in 2003.
I'm looking for stocks, not sectors
Rather than trying to coax my crystal ball into predicting the best-performing sector for 2004, Ive gone hunting. Ive been looking for individual stocks that have not just lagged the market but have been hovering near their 52-week lows and have shown signs in the last month of getting up off the canvas.
Here are my five rotation winners for the first half of 2004:
- W.W. Grainger (GWW, news, msgs)
- Newell Rubbermaid (NWL, news, msgs)
- William Wrigley Jr. (WWY, news, msgs)
- Enbridge Energy Partners (EEP, news, msgs)
- Kraft Foods (KFT, news, msgs)
Finding these stocks wasnt easy. I initially tried building a screen that would look for stocks trading near their 52-week lows and that were building strength. But when I built a screen looking for stocks that showed a combination of five signs of increasing strength, I got just five names out of the entire stock market.
So instead, I kept a few basic criteria intact from screen to screen but varied the signs of strength that I was using, in order to find stocks that showed two or more -- but not all five -- strength indicators.
The criteria that I kept steady from screen to screen included:- Market capitalization -- more than $1 billion.
- A closing price on Dec. 24 no more than 20% above the stocks 52 week low.
- An increase in institutional ownership over the last month.
That combination of factors would assure me of liquidity, low price and increasing strength in each stock. Then, I varied that screen by adding and subtracting other strength criteria. (To see what happened with the core criteria, click here.)
4 ways to hunt for rotation winners
Screen No. 1: For my first screen, I added requirements that the spread of earnings estimates had decreased in the last month and that insiders had been net buyers in the last month. A decrease in the spread between analyst estimates is often a sign of increasing certainty about a companys prospects. Add that certainty to institutional and insider buying and I thought youd have a pretty good indication of increasing strength.
This version of the screen netted me W.W. Grainger and Newell Rubbermaid. (You can see this screen by clicking here.)
Screen No. 2: I kept the basic criteria but used a different mix of added strength rules. Instead of looking for a decrease in the earnings spread and net insider buying, I looked for a decrease in the earnings spread and an increase in the stocks relative strength rating over the last three months from its longer six-month rating. That would give me stocks that were moving up in their performance against the rest of the market.
This version of the screen gave me Newell Rubbermaid again and William Wrigley Jr., the chewing gum company. (You can see this screen by clicking here.)
Screen No. 3: I kept all but one of the previous screen's criteria, replacing the search for stocks with a decrease in the spread of earnings estimates with one for stocks with an increase in analyst earnings estimates over the last month.
That screen netted me Enbridge Energy Partners. (For this screen, click here.)
Screen No. 4: Finally, I ran a screen that kept the improvement in relative strength in the last three months from the six-month reading and substituted net insider buying for an increase in analyst earnings estimates.
That screen produced Enbridge Energy Partners and Newell Rubbermaid again and added a new name, Kraft Foods, to my group of five. (See this screen by clicking here.)
As always, screens are just a starting point. A screen is simply a tool that lets an investor focus time-consuming technical and fundamental research on a smaller set of names.
Why these five stocks show promise
In the case of these five stocks that are trading near 52-week lows but showing signs of growing strength, the most important research job is understanding what might be driving that increased strength.
Enbridge Energy Partners: What seems to be driving the stock of the No. 2 operator of pipelines in Canada is a deal to buy 615 miles of pipeline and 9.5 million barrels of storage capacity from Shell Pipeline for $131 million. The deal, announced Dec. 22, will increase the number of customers that Enbridge can serve and the amount of oil that it can send over its system -- both of which will add to earnings and profits. Analysts have upped their estimates for Enbridge Energy Partners 2004 earnings per share by 9 cents a share in the last 90 days on top of an increase of 13 cents a share in their 2003 estimates. All that means more cash to pay the current 7.4% yield and to increase future dividends.
Newell Rubbermaid: Shares of the manufacturer of Rubbermaid and related housewares products was among the five worst performers in the Standard & Poors 500 index ($INX) in 2003. Id attribute the stocks recent strength after so much weakness to:- Its cheapness.
- The possibility that earnings and revenue will turn around in 2004.
The shares trade at just 15 times projected 2003 earnings of $1.47 a share. In 2004, Wall Street analysts are projecting that earnings that have been in a steady decline in 2003 -- down 7% for the year according to projections -- will finally stabilize. Id bet that the institutions that are so heavily accumulating the shares believe that a decent economy in 2004 will let Rubbermaid Newell show better than the 1% earnings growth analysts now project for 2004.
W. W. Grainger: The story seems to be a bounce off a bottom produced by an earnings warning. On Dec. 15, W. W. Grainger, a big distributor of maintenance supplies for businesses and institutions, announced that fourth-quarter 2003 earnings would come in near the low end of previous projections of $2.43 to $2.51 a share. The Wall Street consensus estimate for the quarter at the time of the announcement was $2.45. For 2004, the company said it would earn $2.45 to $2.70 a share. The Wall Street consensus had been $2.73.
That bad news made the stock really cheap, however. W.W. Grainger recently traded at just 19 times projected 2003 earnings per share, not bad in this market for a company projected to grow earnings by 10% a year over the next five years and one thats headed into a much better economy for its business customers.
William K. Wrigley: This stock seems to be a pure case of rotation. After a year when investors did well by owning stocks with no earnings, sentiment seems to be swinging toward stocks with rock-solid growth numbers.
Wrigleys earnings growth for the last five years has averaged 9.2% annually; over the next five years, analysts project earnings growth of 11% a year. The shift in sentiment isnt huge yet: The 3-month relative strength for the stock has climbed to 23 from a six-month relative strength reading of 19. But the trend clearly bears watching.
Kraft Foods: This one seems to be a combination of the same kind of rotation that is lifting Wrigley, plus hopes for a turnaround at an underperforming business. Growth has been what can only be called lackluster, with earnings projected to decline by 1% in 2003 and to grow by just above 1% in 2004.
Im not sure that the ouster of co-CEO Betsy Holden on Dec. 17 and the installation of her co-CEO counterpart Roger Deromedi as head of the whole operation is enough to shake the company up. But Wall Street has voted in favor of some change, almost any change, over the status quo with strong buying of the stock. Relative strength has climbed to 49 for the last three months, well above the 17 reading for six-month relative strength.
I think the rotation that we started to see at the end of 2003 is real. And stocks like these will be the strongest performers in the first part of 2004.
However, you dont have to buy the stocks on this list, after your own due diligence, to profit from them. Together theyre a great indicator of the course of this stock market. If they keep moving up as January unfolds, then, yes, weve got a full scale rotation on our hands. If they fall back and decline relative to the leaders of 2003, then the rotation was just a brief flurry, and were back to something like the old pattern.
Stay tuned.
New developments on past columns
3 food stocks face a leaner, meaner world
Shares of Smithfield Foods (SFD, news, msgs) have been hammered by the discovery of the first case of mad cow disease in the United States. Smithfields stock has declined 8% since Dec. 22 and 12.5% since Nov. 28. Id expect continued pressure on the shares as Wall Street analysts worry about the effect on the next quarterly earnings report of the ban on U.S. beef exports to markets like Japan. While the company is a far bigger processor of pork than beef, recently about 40% of profits have come from the beef unit.
Wall Street already was concerned about tough pricing in the hog market and the pressure that has put on short-term margins. So, in the short run, Smithfield isnt likely to do much for a portfolio. For investors able to look beyond the next quarter, however, this remains a food company on the right path to growth in sales and earnings.
Investors with a long-term perspective should consider using current troubles to add to or begin positions in the shares.
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: Smithfield Foods. He does not own short positions in any stock mentioned in this column.
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