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Where to Find Today’s Opportunities
03/29/2012 10:15 am EST
Energy and technology are sectors that should continue to perform well in this market, says Elliott Gue, who explains his reasoning and shares a couple of picks.
What do you look for as a stock picker and sector picker when you’re going through and starting that top-down research? What is it that sets you looking for specific opportunities, or even sets the red flags up for you and places to avoid?
Well, one of the things I look at first is really the macro picture. I think it has been extremely important in recent years, because most of the trading in stocks has been driven by the macro outlook. Shifts between different sectors have been driven by macro.
In 2011, we had the cyclical stocks outperforming earlier in the year. Then, when people became concerned about Europe, that all reversed, and it was really the defensive consumer staples and whatnot that were outperforming.
A lot of the sector selection is driven by my macro outlook, and what I see for the US and the major economies of the world, and what I see in credit markets. Credit markets have been a big driver of stocks and the stock market in general in recent years.
Is what’s going on in Europe in terms of sovereign debt troubles, is that starting to have an effect on the interbank market? Are banks becoming reluctant to lend to one another, like they were back in 2008, which turned into a horrible credit crunch, or is it not really much of a concern? Those are the types of areas that I would look at to decide what sectors to get into.
And what sectors do you see as being the places to look for opportunity now?
Well, right now, a couple of sectors I like are the two top-weighted sectors in my newsletter: energy and technology. Energy, I think, is a sector that was out of favor for much of the second half of last year, although there were certainly pockets that were doing well.
What we’ve seen in the US, some of the major indicators I look at—like the leading economic indicators that are published by the Conference Board—are definitely showing that the US economy is perking back up.
Now, we’re not seeing the employment numbers, which have to be watched very closely. I like to look at the initial jobless claims that come out every week as well as things like average hours worked. Don’t just look at the unemployment rate. This is based on a lot of estimates, and is highly volatile and not particularly reliable.
It’s what we call a lagging indicator. Unemployment tends to go down after the economy has started improving. If you look at how many people are getting fired, initial jobless claims, how many hours they’re working per week, typically when they are hiring people, they first stop firing people and then they’ll start getting their existing people to work harder—we all know that…until the economy picks up, then they start actually hiring new people. Those are some of the things to look at.
Right now, we see the US economy getting better generally. Not great. It’s not going to be a fast growing economy, but a lot better than it was a few months ago. It looks a lot better than it was a few months ago.
The TED spread, which is the credit markets, which I look at very closely, is a measure of the interbank lending market—what rates are like in the interbank lending market. It’s been coming down very aggressively since the beginning of the year, indicating that banks are not having trouble borrowing money from one another.
I think some of the fears in Europe, the jitters, are dying down. They have a three-year lending window from the ECB that allows banks to access pretty much unlimited liquidity over a three-year period with pretty dodgy collateral. That’s really alleviated a lot of the concerns about liquidity.
That drives me to some more cyclical sectors like energy. Let’s look at it. Oil prices outside the US are at $117 a barrel. Oil prices in the US are $100 a barrel.
Companies like services firms, like Schlumberger (SLB), look very attractive right now. There is a big ramp-up in oil and gas drilling activity. That’s going to be really good news for Schlumberger, because they’re going to provide a lot of the services related to that.
Technology has been a bright spot. We’ve seen strong spending growth on things like smartphones. Smartphone penetration globally is on the rise. It’s driven strong growth for companies like Qualcomm (QCOM), which is one we recommend.
Also, if you look at earnings numbers for the fourth quarter, it wasn’t a great quarter for the S&P as a whole. But more than 80% of technology companies beat their earnings estimates. More than three-quarters beat on sales. That’s pretty strong. I think that’s another sector to look at very closely.
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