The S&P 500 has hit a bump in the road. There are concerns that a correction of some degree is coming. The very real possibility of that happening doesn't mean there are no opportunities for investors. This article takes a look at Briefing.com stock picks.
The Fundamentals Deteriorate
The S&P 500 index hasn't quite lost its upward trend. It just feels that way.
The index is up 1.4% for the year. But it is down a bit so far for February and up only eight points from levels hit in mid-December. The upward movement has become inconsistent amidst rising doubts and fears.
The concerns are well founded. The fundamentals have worsened as noted below.
1) Earnings growth is slowing in aggregate, with the remaining strength narrowly focused.
2) The interest rate outlook has deteriorated. No downturn in rates is imminent and it is our opinion that rates are more likely to move higher through the end of the year than lower.
3) The decline in energy and commodity prices has stopped.
Fourth quarter operating earnings for the S&P 500 in aggregate will be close to 11%. For the first quarter, that looks likely to drop to 5%. Growth might pick up a bit in the second quarter to about 7%, but the slowdown is real.
The seemingly strong growth in the fourth quarter also masks the fact that the financial sector is accounting for close to 8% of the 11% growth. Almost all other sectors are struggling with near flat growth.
The consensus opinion is still that the next move in Federal Reserve policy is likely to be towards lower rates. This is highly questionable.
Any move in rates is a ways off, but on Friday no less than three Fed officials noted the continuing risk of rising inflation. The Fed policy statement still says that the "extent and timing of any additional firming" (emphasis added) is uncertain. Economic growth is strong and labor markets tight. If inflation picks up at all, the Fed may be forced to raise rates late this year.
The outlook for the 10-year note yield is similar. Our view is that the good economic outlook and prospect for steady to firming inflation means that the yield is more likely to end the year closer to 5% than 4 1/2%.
One final fundamental to be concerned about is that the favorable trend in commodity prices has ended. Lower commodity prices the past half year have been highlighted by the substantial drop in oil prices.
In recent weeks, oil and other energy prices have bounced, grains have continued higher, and even lumber has come off its lows as the housing market has stabilized. Commodity prices won't provide the same beneficial impact to the inflation outlook as in recent months.
Briefing.com Portfolio
Amidst the worsening fundamentals, it will be harder for investors to ride an upward wave with stock holdings. The market action could be very choppy.
In this environment, we suggest a look at the Briefing.com Active Portfolio. This is a list of stocks chosen by Briefing.com analysts as having the potential to outperform the market over the next six months or longer.
The performance since inception of the portfolio in late 2003 has been outstanding.
The page lists current picks and their performance. A list of picks no longer on the current list, with their performance history, is available via the link at the bottom of the list.
All but two stock picks are up, and several have been outstanding performers for years. Immucor, added in 2003, is the strongest performer. Grant-Prideco and News Corp have also posted very good gains.
All of the stocks on the current list remain suggestions for the possibly choppy period immediately ahead. Recent additions H&R Block and eBay, along with Cisco, which was added to the Portfolio in February 2006, are all noteworthy. Comments explaining the rationale for each stock are listed below the portfolio, with the email address of the analyst covering the stock.
Other Picks
Two other columns, Ahead of the Curve and Bargain Hunting, also cover stock selections and techniques and present stocks for consideration.
The Ahead of the Curve column follows a number of stocks over a longer period of time. These include Immucor, Business Objects, Verizon, Abbot Labs, Cree, Hyperion, and RightNow. The Bargain Hunting column has recently taken looks at Corning, Goldman Sachs, and a number of retailers.
What it All Means
It would not be at all surprising for the market to retreat in the weeks ahead. The focus has been on the positives in recent months, but could at any time shift to the negatives.
One possible scenario is that a single bad inflation number, such as a core CPI at 0.3%, could shift underlying sentiment. Suddenly, it might appear as if inflation is picking up (possibly with rising oil prices) amidst stronger economic growth. That could mean talk of the Fed raising rates even as earnings growth is slowing. The fashion could quickly turn to everything bearish.
That is just a scenario in the risk outlook, but it is important to remember in the markets that change is frequent and often rapid. Conventional wisdom can get turned on its head quickly.
During such times, it is good for investors to hold high quality stocks with strong fundamentals and good long-term business models. The Briefing.com Active Portfolio provides a list of stocks we believe meets these standards.
High-flying stocks such as Google and Apple have hit the skids recently. It may be time to look at stocks that could plow through some market turbulence and provide value over the long term. The Briefing.com Active Portfolio is designed to continue to provide stock selections that do exactly that.
Overall
stock market and economic views.
