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Sector
& Industry Outlook for Q4 |
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Any
new hot spots we should be aware of now that the fourth quarter is here?
Actually, there are a handful of interesting sector and industry charts
suggesting bullish days may be ahead.
Just to be clear,
this isn't a multi-year outlook. On the flipside, this isn't a slew of
'swing' trade ideas either. We're analyzing weekly charts, so the time
frame in mind here is on the order of a few weeks to a few months (though
any of these trends could develop into a multi-year rally).
 Telecom
Yes, you read
that right - we're a little bullish on telecom despite the fact
that the group has been the biggest laggard since March.
What gives?
Two things.... the chart, and a clarification of which telecom stocks are
actually responsible for the recent weakness for the sector.
The nearby chart
is of the S&P 1500 Telecom Services Index, which specifically excludes
wireless stocks (where possible). By default, this means the index represents
some of the much smaller 'local' telephone companies like Cincinnati Bell
(CBB) and Centurytel Inc. (CTL), which boast some impressive P/E levels.
Though the group
as a whole - using the index as a proxy - was down last week, we've
seen higher lows since last year, while the ceiling at 110 has remained
under attack. If the index can crack that resistance line once and for
all, we're looking for the 'land line' names to be unleashed. Just think
small, as the big guys like AT&T (T) don't look terribly impressive.
 Food
Retailers
Booorrrrring.
We
know. But hey - rising stocks are exciting no matter what kind of stocks
they are. In fact, we're willing to bet many of you wished you had owned
a few of these names last week.... it was one of the few indices to actually
make a gain.
Much like the
telecom index, the S&P 1500 Food Retailer Index has been making higher
lows while contending with a horizontal resistance level at 130.
A bit of a warning
about the stocks in the group - there's a bizarre degree of disparity from
one to the next, considering they're all doing the exact same thing with
the exact same cost structures. Worse, undervalued stocks in this group
are fully capable of falling, while overvalued ones can keep rising. There's
not a lot of logic to it. So, just check out the charts before doing anything.
 Consumer
Electronics
You don't have
to look too long at the nearby chart of the S&P 1500 Consumer Electronics
Index to see why we're interested and optimistic. It was one of the few
groups to make gains last week, but it's been making gains pretty consistently
since late February. There were a few minor pullbacks here and there, but
each of those was met with a rebound made on even higher volume.
That said, in
the interest of complete awareness, the only current constituent of the
S&P 1500 Consumer Electronics Index is Harman Intl. Inds. (HAR)...
the high-end stereo manufacturer.
So why not
just say we're bullish on Harman and post a chart of HAR instead? The
purpose of this exercise is to find bigger trends, and extrapolate where
possible. Not that Harman is necessarily unworthy, but if Harman
is seeing better days, might the micro caps that aren't part of the index
be seeing better days as well?
As a matter
of fact, many of them are. Nivis Intellimedia Tech. Group (NIV) has been
rolling along nicely, while Zvue Corp. (ZVUE) and Socialwise Inc. (SCLW)
may be on the verge of breakouts. Just be cautious .... though the winners
are high-octane stocks now, the group is still hit and miss.
 Distillers/Vintners
This is a sheer
momentum play, cemented in place by last week's huge volume. Though most
of the volume surge was induced by Constellation Brands Inc. (STZ), as
with the electronics group's strength, we can infer more than one of these
companies is doing equally well.
That being said,
Constellation does seem to be the strongest name in the bunch, from
a fundamental as well as a technical perspective. The U.K.'s Diageo
PLC (DEO) is doing pretty well too, yet is still at reasonable valuations.
And any sectors
or industries to steer clear of? A couple may be worth avoiding....
 Fertilizer
In late 2008
and early 2009 it looked like Potash Corp. (POT), Monsanto Inc. (MON),
and Mosaic Co. (MOS) had a shot at pulling out of their slump. Over the
last eight weeks though, the S&P 1500 Agricultural Index has made a
slow and persistent rollover... the kind nobody even notices at first,
but notices well after the fact. Moreover, the bearish momentum is building.
Though it's
the chart itself that leads us to our bearish stance, the underlying fundamentals
are the reason this weakness could persist through the rest of the year.
In a nutshell,
fertilizer companies bluffed, and lost. Rather than lower prices in 2009
(like everybody else did) after a ridiculous commodity price runup in 2008,
fertilizer prices didn't budge this year. Fertilizer companies figured
the farmers would pay up, and if they didn't, the companies would at least
boast strong margins on a smaller top line.
Well, it backfired.
Farmers scaled back on fertilizer use by about 30% this year, yet crop
yields were actually higher. It forces one to wonder if the likes of Monsanto
and Mosaic overestimated their value to the farming industry. In any case,
while margins remained firm, the market didn't particularly care for sinking
top lines.
Even more recently,
the holdout was broken when Potash and Mosaic finally decided to sell potash
at $460 per ton versus the holdout price around $800. That may hurt margins,
but should increase volume. Investors weren't impressed by that
decision either though, as these stocks have continued to sink.
In short, these
companies blew it until the next growing season starts, which won't be
until next year... and that's only if more farmers decide to restart fertilizer
programs.
 Paper
Products
It was no big
secret the early 2000's ushered in an era of 'too much capacity' and 'not
enough demand' for paper and packaging stocks. And, the industry more than
paid the price... particularly when input (commodity) prices skyrocketed
between 2004 and 2007. All these stocks/companies suffered, and many of
them aren't here today thanks to bankruptcy or acquisition.
As all those
so-called green shoots started to pop up earlier in the year though, so
too did the bargain-hunting within the paper and packaging industry. The
end result? Once again, euphoria surpassed reason. The S&P 1500
Paper Products Index rallied 300% from March's low... a move that could
never be justified by any corporate results, current or forward-looking.
Almost needless
to say, now that the trend has buckled (see the chart), we're expecting
these stocks to give back the bulk of their gains made earlier this year.
By the way...
If you haven't
already, it's probably a good idea to start taking partial - if not full
- profits on any of the healthcare ideas prompted by our bullish
call on the sector from June 19th. It was a good run, but we've started
to see many of these stocks falter.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
