My Own Analyst

ETF Pick

I am going to be published in Investors Business Daily next week, sharing my "best idea" for ETFs in 2013 along with other idiots prognosticators:

GDX has had a rough 2012, declining in value by 11%, despite a modest 6.4% advance in the price of gold and a 16% advance in the S&P 500. This poor performance is nothing new, as the ETF has been flat for the past five years, about the same as the S&P 500, despite the gold price almost doubling.

 

Gold stocks have lagged the price of gold because of an investor preference for one of the largest and most liquid ETFs available, the SPDR Gold Trust (GLD). Profits for companies in GDX have been hurt by high labor and energy costs, leading to modest 12% declines in earnings in 2012 despite 7% sales growth. 2013 earnings are projected to rise 39% year over year.

 

If gold prices flatten or fall moderately, GDX could still fare well because it’s trading at historically low valuations. GDX currently trades at 1.6 times book value, well below its five-year average of 2.6 times. It has a price-to-forward earnings ratio of 10.5, well below its five-year average P/E of 36. By contrast the S&P 500’s current 13.5 P/E ratio is just slightly lower than its 14.6 five-year average. GDX sports a five-year earnings growth rate of 50% vs. 9% for the S&P 500. The three largest holdings, which account for about a third of the ETF’s assets, have P/E ratios ranging from 7 to 13.  Additionally, many of the stocks are now paying dividends, some linked explicitly to the price of gold. The ETF yields a fairly generous 1.5%, as of Nov. 30.

Valuations are cheap enough that it could perform reasonably well in the muddle-along scenario, but it might do exceptionally well should the economy pick up beyond expectations and trigger fears of inflation. If gold prices rise, I expect GDX to produce high returns as investors look to hedge inflation risk and opt for the cheap miners. GDX looks to be a much better hedge than Treasury Inflation-Protected Securities (TIPS), which offer negative real yields currently (i.e. investor receives a return below inflation). Rising earnings and dividends could lead to very strong investor demand.

 

New ST Trade

I added GDX to the CG/B today.  Here is the research piece that explained my rationale ( Download GDX 021612).

I have spent some more time looking at the larger gold miners - you are welcome to look at this spreadsheet I sent to a client ( Download GoldMiners).  I think the GDX is a good way to go, but clearly one of the stocks is always going to be better (and one will be worse).  I don't really know these companies, so I am actually kind of happy with the GDX as a way to play this theme.

I think the timing is good.  This trade will expire on 3/2 if the target or downside aren't exceeded.

• Target: 58.60 (+4.50)
• Stop:  52.80 (-1.40)

 

Energy

I am typically a bit skeptical about Energy, especially oil prices, which I view as a little high these days.  With that said, I am more optimistic about the stocks these days.  In CG/B, I own CVX, and it's cheap and I like the chart.  In Top 20, I have been way wrong on this recent plunge in gas, but I view the downside as now rather limited and was willing to add CRR.  I mentioned HP positively (I like this one a lot!), and I have added it to the watchlist (though I have followed this one for years (great management, best-in-breed company).  I also added LMNX, by the way (pulled CPN and MFLX).  That one reports soon.  I can see a 28 price a year out, so it's very interesting.  More on that one another time.

This morning in Sector Selector ETF, we trimmed IWC (micro-caps) and XLI (industrials) to add some energy exposure through XLE.  It has lagged Industrials and Materials badly - I think it's mainly the gas issue but also some challenges in refining.  I don't mean to imply super-bullishness - it's still not my favorite sector (Tech and Financials), but I see an opportunity here in a new bull market (I should say reaccelerating bull market) to take some more exposure.  In SSETF, I hung onto Financials and Emerging Markets - sticking with those big exposures.  Of course, Small-Cap, even after the little trim today, remains the biggest bet, but the other two will define the near-term sucess or failure relative to the S&P 500.

I like the market action the past few days.  We fell a little short of the 134 resistance in SPY and a little short of the 129 SPY support.  We are working off some short-term overbought, but things look excellent to me here technically.

Conference Calls

I am in the process of uploading conference calls to Invest By Model.  For your convenience, I will share them as well.  The SSETF is the shortest at about 20 minutes, while the Top 20 runs about an hour.  My feelings won't be hurt if you fast forward or skip altogether.  I also published some extensive written comments to the Invest By Model Blog

 

Economic/Market Outlook:  Download 2012 Market Outlook 12-31-11

Top 20:  Download Top 20 - 2012

Conservative Growth/Balanced :  Download CGB Outlook 2012

Sector Selector ETF:  Download 2012 Sector Selector Outlook

New ST Trade

Forget BAC - nothing but bad luck trying that one on several occasions...

XLF is trading just above 13 (13.03).  I like the idea of buying it here with a target of 13.75 and risk to just 12.70

MedTech Slammed

STJ is down big, but it's the whole group, specifically anything related to heart or ortho.  Wells Fargo analyst is apparently out with a report that 11 states will now begin auditing 100% of procedures in an attempt to reduce/eliminate unnecessary surgeries.  I haven't seen the report or the news directly, but this is why there is a high-volume sell-off.  My back-of-the-envelope calculation is something like a 5% hit to STJ earnings based on an assumption that 20% of their overall sales is subjected to a 10% slowdown. 

 

Other tickers:  MDT, BSX, SYK, ZMH, VOLC

RPG

Eric asks:

Alan: Have you ever taken a look at RPG? It seems to match many of the XLK top holdings as well as many in XLG with a better chart for YTD, 1 year, 2 years, and 3 years than XLK/XLG (and, for whatever it is worth better Morningstar ratings). I have parked some of my non top-20 holdings in RPG. ETFs often have overlap in holdings, and I will definitely consider signing on to your model but I like RPG.

Rydex S&P 500 Pure Growth replicates a certain sub-index of the S&P 500.  When I described all the different slices and dices, I didn't really get into the "growth" vs. "value" aspect, but that's another category.  You must not appreciate my tendency towards mean-reversion or value rather than momentum.  It's probably a great diversifier for what I a doing in Top 20! 

At .35% expense ratio, it's a tad on the expensive side.  Over time, I am not sure that it behooves you to own this over the S&P 500 either, but it certainly can outperform over various time-frames.  You would have been buried had you invested in this in 2000-2002.

VWO - Nice Bounce

You probably know I have a soft spot for Emerging Markets and continue to believe that investors are underestimating the potential there.  I moved up support to 49 this weekend on VWO, so I was a little disappointed to see the slight penetration in the bad tape yesterday.  This morning, though, it looks to be opening near 49.75 (10 minutes before the open).  It's not out of the woods, but this is a nice recovery.  As I look now, I would probably revise my support level to 48.

 

WAG Only In-Line

Over the weekend, I suggested buying WAG going into today's report.  It gapped up with the market yesterday, and now, with the report out, is back to where it had closed Friday in the pre-market, trading 41.  At this time, it looks like the short-term call wasn't so great.  I continue to hold the stock in CG/B.  I was hoping to see a move to 45, but this doesn't seem like the kind of report that will deliver that type of instant gratification.  Support remains 40 and then 37.50-39.

Same-store-sales rose abut 4% on both the front-of-the-store and prescriptions.  Sales were slightly higher than expected and earnings came in at the consensus.  Cashflow generation is massive, and the company is continuing its share repurchase activity. 

I will listen to the call - no guidance was provided in the press release. 

VWO - Looking Quite Strong

Emerging Markets are an asset class that I currently like.  There are two ETFs that allow investors to quickly and cheaply "own the market".  Both are based on the MSCI Emerging Markets index.  iShares offers EEM, while Vanguard offers VWO.  I prefer the latter, as it is married to a large mutual fund, which gives an advantage in my view in seriously down markets, though that's a remote scenario.  The other reason is that the feel is lower.

Here is VWO over the past two years:

 

Before I get back to the fundamentals, let's look at the technicals.  As you can see, this is a bull in a consolidation.  The blue line near the bottom indicates that it has outperformed the S&P 500 by 29% over the past two years, but over the past year they have been in line.  More recently, it has performed better after hitting a low in relative strength about the time we added it to Top 20.  While the S&P 500 has been in retreat, this thing has been holding steady.  In fact, compared to Friday March 11th, it is currently up (in the pre-market - 46.50 bid).  If it can clear 46.80, the next stop should be 50.

So, why do I care about the Emerging Markets?  Quite simply, more growth for less money.  There has been a lot of hype over the years, and it is true.  The difference now, though, is that there are some concerns and investors have given up.  Maybe it's because there is less need to escape the U.S.  Notice how the VWO is flat since a month after our rally began on Labor Day.  We have seen large outflows from these funds.  Another issue is that several of the countries are trying to slow growth.  I see a big disconnect - U.S. investors continue to pile into Industrials on the hopes that they will export into these markets.  The most likely scenario is continued strong growth and strong currencies (the other way to win here).

Here's the deal though, let me say it again:  More growth, lower valuation.  The index isn't perfect - it has a bunch of big stocks in it like Petrobras, Vale SA, Samsung, Gazprom, Taiwan Semi, China Moblie, and America Movil.  The Top 10 names, though, make up less than 19%.  You get China, Brazil, Korea and Taiwan - everything else is less than 10%.  You can get more info here.  The index has a forward PE of about 11 compared to 13.5 for the S&P 500.  Historically, the index beats us, but its because of growth in earnings, not PE expansion.

This year, I expect PE expansion, though to 13 (and 15 on the S&P 500).  This gets a target of about 62, but we need to remember that emerging markets are very volatile.  Unlike our market, which is huge, they are really much smaller.  When times are good, they can rally 50% or more.  So, my call for 62 is conservative in my view.