Don't Expect A Robust Summer Market, But Bargains Remain
David Brown | Jun 04, 2013 12:05AM ET
The week started sluggishly with a little positive kick at yesterday’s closing. All three major indices closed in slightly positive territory, despite spending most of the day in the red. Volume was decent for this time of the year.
We think it is significant that the markets closed up, since two of yesterday’s economic reports were both below expectations. The ISM manufacturing index fell below the sacrosanct 50 level, compared to last month’s 50.7, and construction spending was up from last month’s weak -0.8%. Auto and truck sales numbers, coming in this afternoon before the market closed, were better than expected, with 15.3M vehicles versus last month’ s 15.2M and an expected 15.25M.
Today we get trade balance data and expect some additional weakness there. Wednesday brings us factory orders, which were quite weak last month but are expected to climb back into positive territory, with consensus expectations at 1.4% compared to last month’s -4.9%. We expect slightly better initial jobless claims on Thursday and will wrap up the week with the monthly main employment report, where little change is expected.
Due to last week’s strong consumer confidence report followed by a strong Chicago PMI and the best Michigan Sentiment since July 2007, our overall feeling about the domestic economic situation would rank about 6 on a scale of 1 to 10. Modest growth in the economy should continue for the remainder of the year.
Nevertheless, fears of the Fed slowing its quantitative easing program alongside various other global problems and hot spots keep us from too much enthusiasm about a robust summer market. Last week was a good example, with all major indices down modestly as the markets pulled back from all-time highs.
Based on the better-than-expected corporate earnings announcements in Q1 accompanied by less-than-expected revenue growth on the whole, we consider ourselves a 5 out of 10 on risk-taking in this environment. That said, there are pockets worth investigating for attractive stocks. Small-cap growth (SCG) was the only positive style/cap last week—and note in our market stats below that SCG has led style/caps not only last week, but also the last one, three and six months.
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Large-cap prices are a bit above average valuations, so choose your plays carefully from among Technology (last week’s only positive sector), Basic Materials, and Consumer Cyclicals. As we noted last week, Financials are a significant risk if interest rates begin to edge upward. Healthcare is okay, if earning revisions are strongly positive. Avoid Utilities, Telecom, and Consumer Non-Cyclicals, sectors that are either a little over-priced or are at risk to rising interest rates or both.
4 Stock Ideas for this Market
I selected the following stocks from a search in MyStockFinder:
Meritage Homes Corp (MTH)– Consumer Cyclicals – Small cap
- Homebuilder
- Large positive earnings surprises 3 of last 4 quarters
- PPE 12.4
- More than 50% growth expected long term, including 185% this year and 60% next year
– Telecom – Small cap
- A speculative, very interesting company that went through bankruptcy in 1999, but was bought and resurrected by the highly respected Greenhill & Company (GHL)
- PPE 6.67
- Growth of 12% expected this year and 20% next year
- Read interesting article in Seeking Alpha by Zvi Bar
– Basic Materials – Mid cap
- PPE 12
- Long term growth rate expected to be in excess of 20% per year
- Many analysts’ estimate increases in past 30 days
) – Energy – Mid cap
- PPE 8.6
- Projected 25% growth rate this year and 20% next year
- Many analysts’ upgrades in last 30 days
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