We hold LightPath Technologies (LPTH) starting at $1.40-$1.60 in January 2017 and suggest long-term ...
Sell BorgWarner (BWA)
09/28/2011 2:14 pm EST
That’s hard to answer when you don’t know with any precision how long this rally, which seems to me to be taking a breather today, might run. (My crystal ball is in the shop.) Even with this rally I think this market is range-bound, but I don’t know if the top of the range is the August 31 high of 1219 or the July high of 1344. With the Standard & Poor’s 500 Index closing at 1175 yesterday, September 27, the closer of those two tops is just 44 points of 3.7% from here.
The way I’m approaching this question right now—acknowledging my state of imperfect knowledge—is to think about the fundamentals that haven’t changed.
So, for example, we’ve got a huge rally in European stocks on relief that, apparently, Greece won’t be forced to declare a default on its debt in either September or October. But while another postponement of a Greek default is reassuring to global and European financial markets, it doesn’t fix the basic problems in the European Monetary Union, and we know that we’re almost certain to have to revisit the Greek debt problem in December when the country owes a big payment on its debt.
And we know that nothing in this current rally—which I would characterize as rally on relief that we aren’t going to see the end of the financial world as we know it this month or next—changes the forecast for extremely anemic economic growth in Europe in 2011 and 2012.
In its World Economic Outlook, released on September 11, the International Monetary Fund projected that the U.S. economy would grow at an annual rate of just 1.5% in 2011 and just 1.8% in 2012. Among other depressing conclusions that’s not enough growth to make a significant dent in unemployment.
But that growth rate makes the United States look like a rabbit next to the EuroZone’s snail. The IMF projects that the economies of the euro nations will grow by 1.6% in 2011 and then stagger to a 1.1% growth rate in 2012.
And even those numbers understate the damage inflicted on European economies in 2011. After growing at a 2% annual rate in the first half of 2011, the EuroZone economies will grow at just a 0.25% annual rate in the second half of the year, the International Monetary Fund projects.
To me that suggests that one priority for selling into this rally is to reduce your portfolio’s exposure to the very slow growth EuroZone economies.
Take the auto industry for an example. On September 6 Credit Suisse cut its projections for European auto production to 19.6 million vehicles in 2011. That was a drop from the investment company’s former projection of 19.9 million vehicles. For 2012 Credit Suisse is now projecting European production of 19.7 million vehicles. That’s a scant 100,000 increase from projected 2011 production and still below the earlier 19.9 million projection for 2012. We’re talking no growth here.
Not all auto companies have the same exposure to Europe’s no-growth auto industry. For example, TRW Automotive Holdings (TRW), a stock I’ve put in Jubak’s Picks http://jubakpicks.com/ for its exposure to the demand for more safety content in cars produced in developing economies, gets 51% of its sales from Europe. BorgWarner (BWA), a stock I’ve put in Jubak’s Picks for its exposure to the growing demand for fuel efficiency without the loss of power (through such things as turbo chargers, for instance) gets 55% of its sales from Europe. And the company’s biggest customer Volkswagen gives BorgWarner very concentrated exposure (19% of sales) to slowing auto production in Europe and China.
All else being equal to reduce my exposure to the European auto industry, I’d sell BorgWarner into this rally and keep TRW. That’s what I’m doing today September 28. With this sell of BorgWarner I’d got a 11.5% loss on these shares that I added to my Jubak’s Picks portfolio on January 13, 2011. (If you’re doing this at home and can react more quickly than I can in my online portfolio, you might want to see if we get a bounce from the likely “yes” vote in Germany’s parliament tomorrow on the next stage in fixing the euro debt crisis.)
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of BorgWarner or TRW Automotive Holdings as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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