We are in the midst of the market correction that was anticipated sometime ago. China market crash (9% steep decline: biggest in 10 years) sent the shockwaves to the financial markets throughout the world including the US market. The investor perception about the world economy was the continued, robust growth, especially in BRIC countries (Brazil, Russia, China, and India) prior to the market correction. US economy was also seen to re-accelerate with housing picking up, consumer confidence at all time high levels, and industrials once again thought to outshine. In fact, people were worried about the economy re-accelerating and possible rate hike by Fed going forward as robust economy may bring fears of inflation into investor focus. Energy stocks recovered. Commodity stocks continued to set highs. Cyclical industrial stocks and emerging country stock soared and soared.
In my opinion, the market correction along with recent economic data point to the picture that is quite the contrary to the investor perception that I have outlined above. Chinese market correction shows that emerging market economies have vulnerabilities. As thousands of people lost money on China market crash day, it could weigh on the consumer confidence. In addition, it became also evident that the Chinese government is very concerned about the speculative nature of Chinese financial market. The government does appear to be determined to be control the growth rate to avoid steeper, prolonged recession down the road. This means slowing demand for the oil and commodities. In addition, the housing data out of the US market appears to be showing no signs of recovery. New home sales data remains anemic and the inventories are still at all time high level. Home prices are finally cracking down and this may finally take a toll on the consumer confidence. Manufacturing data looks troublesome: it is in deep slowing down mode. It does appear that the economy is indeed on track to contract although recession would be unlikely scenario in my opinion.
We have a great buying opportunity here after the market correction. The market correction will force investors to rethink their asset allocation in the energy, commodity, industrial and other cyclical names. Techs are cyclical. My recent research as well as contacts with semiconductor industry reveals stagnant market conditions at best. I am really worried about the possible deterioration of the business climate in the semiconductor area. It is definitely hard to be excited about techs at this juncture, especially if the economies in the World are slowing a bit. Upcoming April earning could show difficult earning growth environment for US conglomerates. As such, we should be looking for economically insensitive issues or already beaten down names with negative catalysts already reflected in the stock price as the primary names to focus.
I would consider the following 5 names among FilthyRich ideas.
1) JP Morgan (JPM)
2) Goldman Sachs (GS)
3) Celgene (CELG)
4) Amgen (AMGN)
5) American Airline (AMR)
JP Morgan (JPM) is a premiere large integrated bank in the US. Financials have been beaten down lately amid concerns over inverted yield curve and sub-prime mortgage crisis. However, JPM continues to show robust earning growth driven by the turnaround efforts of the new management team. JPM's exposure to the sub prime mortgage is lowest among peer banks. If the economy is indeed slowing down, Fed is likely to cut rates by the mid-year (with the stock market instability to the downside, it has more ammo to do this). JPM is likely to be a huge beneficiary of the Fed easing. It has Investor Day on March 6th, and the company may possibly address hiking the dividend.
see my recent opinions on JPM
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Goldman Sachs (GS) took a steep fall as investors became concerned about its exposure to Chinese market. Although China may slow its economic growth, its growth is likely to be robust at least till 2008 Olympics. Fed’s easing will also be tailwind for GS. I think it should be the focus stock to buy during this correction.
See my recent opinions on GS
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I like biotechs, especially large cap because their earnings are less impacted by the economic cyclicality. Celgene (CELG) has a lot going for it. Its earning growth is expected to be robust over next two years. Its blockbuster drug Revlimid is penetrating multiple markets outside core segments of MM and MDS. By the end of 1st Q, Revlimid has a chance of being approved for MM and MDS in Europe. I believe this will be a huge psychological boost for the stock. I like the stock at the current level.
See my recent posts on CELG
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Amgen (AMGN) has been beaten down to death. Concerns over competitions in EPO market, negative data with Arnesp with several cancer applications as well as dissapointing Vectibix data in the 1st/2nd line treatment of colorectal cancer has greatly depressed the share price. To make the matters worse, Medicare reform works in Congress, which may potentially limit the use of several AMGN drugs, acted as negative catalysts. How much more the negative news drive this stock downward? Most of the bad news are in the stock price, I believe. As possible economic slowdown and earning deceleration takes the multiple of economic sensitive names lower, AMGN could spark investor once again; the investors are likely to seek valuation support and earning growth stability. AMGN’s earning is expected to grow another 15% YOY and EPS could near $5 in 08, which puts the stock trading with PE around 13. The stock is cheap.
See my recent posts on AMGN
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American Airline (AMR) is a transportation name which is known to be sensitive to the economic conditions. Why then am I recommending this stock? Although economic growth may slow, I don’t think it will head into recessionary state where business and personal travels will be impacted. However, slowing economic conditions could portend reduced oil demand and hence AMR could benefit from reduced fuel cost that will significantly boost its earning in 07. As I stated before, I expect the oil price to be caught in trading range between $45 to $55. If this holds true, AMR could deliver EPS that surpasses $7 a share and the stock is then trading on PE of 5. I like AMR at this level as the stock has pull back from intraday high of $41 to below $35 level.
See my recent posts on AMR
http://investorhives.com...
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I will talk about china names and other stocks if the market condition further improves. However, for now, five names mentioned above seem to be good place to start.
The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)
Please check out the archives for past posting on individual stocks. Also market commentary and weekly communication on the core holding list are available at www.investorhives.com on a membership basis. The membership is free for everyone. Simply apply for filthyrich hive membership at www.investorhives.com. Thank you for visiting my blog.
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