Marketocracy Gurus Dump Diana, Climb Into Cabot (Forbes.com)
Marketocracy April 29th, 2008
Joshua Lipton of Forbes.com writes:
Last week brought more tough news about the state of the U.S. economy, all but confirming a recession with plunging consumer confidence while energy prices soared even higher, unfazed by the fresh news of economic weakness.
Stock market investors decided to stay optimistic, responding to the latest in a deluge of bad news with a collective “So what?”
Perhaps believing that the worst of the credit contraction is over and that central bankers have staunched the flow out of stocks with aggressive rate cuts, targeted liquidity injections and the bailout of Bear Stearns, investors sent stocks higher.
On Friday, April 28, the Dow Jones Industrial Average climbed 42.91 points, or 0.33%, to 12,891.86. That was the highest close for the blue chips since Jan. 3. The Dow rose 0.33% for the week.
The best-performing online investors, Marketocracy’s M100, were busy hunting for smart bargains last week. One area of the market these gurus have continued to favor: energy. In fact, it’s one of the few areas of the market that continues to please investors.
So far this reporting season, earnings are coming in 14.1% lower, on average, than they were a year ago, according to Thomson Reuters. But the story is a bit different when you look at energy. The energy sector is reporting the highest earnings growth rate of any sector at 29% (with 39% of companies reporting as of April 25). If energy sector earnings come in at 29% overall for the quarter, it will mark the highest growth rate for the sector since 2006’s second quarter, says Thomson.
Energy’s strong performance has also helped to make the market look better. Excluding energy, the first-quarter growth rate for the remaining nine sectors would be -20.5%. Longtime market pro Ed Yardeni points out that the sector’s share of the market capitalization of the S&P 500 has increased from a low of 5.4% in November 2003 to 14.3% this April. He now says he wouldn’t be surprised to see energy’s market cap share rise to 25% to 30% by the end of the decade.
Why exactly have oil prices been soaring to new highs? “Maybe all we need to know is that Chinese auto sales are rising nearly 20% per year and that they are buying more SUVs and luxury cars as they prosper,” Yardeni says.
The M100 have certainly become believers, increasing their investments in energy. A year ago, the M100’s energy holdings made up 13.85% of their combined portfolios. Now energy accounts for 24% of their overall portfolios.
One position in the space that the gurus added to last week was independent oil and gas producer Cabot Oil & Gas.
The Houston-based company has operations in the U.S. Gulf Coast, mid-continent, Rockies, and Appalachia. Analysts note that Cabot, which has a market capitalization of about $6 billion, has a very long operating history: It has produced natural gas since the late 1800s as part of its old parent, Cabot Corporation.
Bulls on the stock argue there are a few reasons why investors should consider pushing cash into this stock. Recent discoveries in gas zones in Appalachia and east Texas make Cabot’s properties more attractive. The company’s properties are among the most diverse of the small oil and gas companies, and they are all in North America, which limits the kind of political risk competitors have to deal with when they do business overseas.
Analysts following the stock also write that Cabot’s financial health is better than average compared with other small oil and gas producers. That’s helped the company maintain profitability during industry downturns.
Cabot is a bit pricey relative to its expected growth, with a price-to-expected-growth ratio of 2.81. The industry average is 1.38. But the company does have a much better operating margins that its peers. The stock has popped more than 60% over the past 12 months. It’s now swapping hands for about $58, but that’s still below its 52-week high of $62.
Cabot will release its first-quarter 2008 results on April 30. Ahead of that report, the M100 moved in.
Other buys in the Energy sector last week for the M100 included oil and natural gas producer Arena Resources and independent oil and gas exploration and production company Mariner Energy.
Our gurus were also busy buying stock across the pond, carving out big positions in a handful of exchange-traded funds that track markets in both Asia and Europe. They particularly liked the look of WisdomTree Japan Total Dividend Fund. This is an ETF that tracks the performance of the WisdomTree Japan Dividend index, which measures the performance of dividend-paying companies incorporated in Japan and listed on the Tokyo Stock Exchange. The ETF hasn’t been much of a performer over the past year, down about 9%. But, in the past month, it’s jumped more than 4%.
The M100 are perhaps now banking on a turnaround for the Japanese economy. Earlier this month, the Organisation for Economic Cooperation and Development said it’s seeing a recovery in Japan. The OECD reported that its composite leading indicator (CLI) for Japan was 4.7 points lower than the same month last year. But it did increase 0.4 to 96.7 in February.
The CLI is designed to provide early signals of turning points between upswings and downswings in the growth cycle of economic activity. Recovery is signaled when the CLI is increasing but below 100.
The M100 also liked the look of four other ETFs tracking stocks overseas: iShares MSCI Malaysia, iShares MSCI Japan, iShares MSCI South Korea and iShares MSCI Germany.
The M100 were also just as busy selling last week. One company they no longer consider a sound investment: Diana Shipping, a global shipping company specializing in the transportation of dry bulk cargoes.
The last several years have been terrific ones for dry bulk shippers in general. Surging prices of commodities like iron ore and coal have helped companies like Diana expand margins and grow profitably.
Last year, the company had operating margins of 72.4% and Return on Equity of 23.1%.
But Diana has already enjoyed a monster run, rocketing up more than 50% in the past 12 months and 20% in just the past four weeks. Last week, the company announced that its financial results for the first quarter of 2008 will be released on May 14.
Our M100 decided now was the time to jump ship.
Other top sells for the gurus included telecommunications company Tata Communications, real estate investment trust Medical Properties Trust, biotechnology company Momenta Pharmaceuticals and independent shipping company Euroseas.
Guru Buys:
Cabot Oil and Gas
Arena Resources
Mariner Energy
NRG Energy
Cooper Tire and Rubber
Guru Sells:
Diana Shipping
Tata Communications
Medical Properties Trust
Momenta Pharmaceuticals
Euroseas
Tags: Marketocracy
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