Investments I’m Watching…When To Buy?
Whenever we get stock movement you will get an opportunity to buy some quality investments at attractive prices. First, keep an eye on the macro events to give clues on where to look.
Since the start of 2012, there has been a rotation among sectors. The previous stocks in the dog house, Financials, are now the darlings. Since the start of the year, Bank Of America (BAC) is up over 75%. This is little consolation to those who may have bought BAC when it was trading over 40 a few years ago. Investments like these that have been beaten down so much can make big moves like this simply on whispers or hunches that the economy is improving. Financial stocks as well as consumer discretionary, and energy are considered to be economically sensitive. When the economy does well, these companies should do better because demand increases.
But are things really getting better? The question I would ask is why shouldn’t they? After all the trillions of dollars of stimulus that was released into the economy you would think that some kind of demand would develop. One sign of improvement that is surprising to the upside is automobile sales. The U.S auto sales figure is on track for over 14 million in sales for 2012 (up a lot from the low of about 11 million in 2009). Some analysts that I have listened to on Bloomberg radio think that number may still be too low. We could talk about the inevitability of the slowdown in China, which has been in the news for a few months. This does affect the U.S. since aggregate demand, exports and commodity pricing are very much affected by what is going on in China as well as the other emerging market countries. This story is still playing out but the long term trend for the emerging markets is still intact.
The reason why this is important is not because I’m an economist (I’m not) or because it helps me to be a better stocks picker (it doesn’t). It helps to understand the reasoning why stocks may be moving. Stocks that move are a good thing because if they don’t move, how will you be able to buy them cheap or sell them high?
Recap of 2011
The trade for 2011 was the dividend trade. A good example of this is that boring sector, Utilities (XLU), which handily beat the market last year by 15%, over 17% if you add in dividends. That’s a big move for a sector that is primarily income oriented and low beta. How about 2012? It’s gone completely the other way so far this year, XLU is now under performing by the S&P500 index by over 16%. There was a lot of chatter about dividend stocks becoming a “crowded trade” and XLU is an example of that.
Is this confirmation that things have really turned around such that the market wants to buy high beta stocks? Judging by the market moves, I would say that it’s too early to tell. The rotation that has happened so far isn’t really that big of a move, it will take more time to see if this move sticks. There is still the issue of what happens when all the stimulus is removed as well as other policy issues such as tax policy, any changes to fiscal policy to handle long term debt as well as the aggregate growth story in the emerging markets.
How To Watch Investments
Whenever the market moves or a rotation occurs, it can present an opportunity to make great investments.
The way to make great investments is to find great investments and buy them when they are selling at a discount. Let’s assume that you have a list of investments that you would love to own, but are too expensive right now. Create a watch list of all of these investments.
Here’s a list of investments I’m watching, and would love to own:
Sunoco Logistics Partners (SXL)
Utilities Spyder ETF (XLU)
Kinder Morgan Partners (KMP/KMR/KMI)
New Jersey Resources (NJR)
Plus..the stocks that are in my portfolio currently
How To Buy Them Cheaply
Good companies become good stocks when the price becomes attractive. How do you know when to buy? The way to buy these kind of stocks is to use a very simple technical analysis technique. For these kind of high quality companies, you may not get much of a window to buy them, so you need to be on the watch. Out of the list above, the one that is developing nicely into a trade is New Jersey Resources. Here’s a summary of what they do:
New Jersey Resources Corporation (NJR) is an energy services holding company providing retail and wholesale energy services to customers in states from the Gulf Coast and Mid-Continent regions to the Appalachian and Northeast regions, the West Coast and Canada. The Company operates in three business segments Natural Gas Distribution, Energy Services and Midstream Assets.
The long term results for this company speak for themselves:
- 52 years of paying dividends.
- 17 years of increasing the dividend.
- Stock price increased 14 out of the last 15 years, including a >10 year streak. This is actually quite rare for a stock to be up 10 years in a row.
- Dividend yield: 3.5%.
- Long term consistent growth, stock is up 120% last 10 years, almost 400% last 20 years.
Look at this long term chart:
The way to use technical analysis is to find a break in the long term stock price trend using the 50 day and 200 day moving averages (EMA). Here’s what they look like on Google Finance. The RED line is the 200 day moving average, while the GREEN line is the 50 day moving average:
When I look at this chart, you can see in the past the 200 day EMA is a good time to buy into this stock. Recently, it looks like the 50 day EMA was more of a support. At today’s (Mar 22,2012) price of $44.26, we can see that the 50 day EMA has already been breached. I will look to establish a position near the 200 day EMA of $40.09. At that price, the stock would have a dividend yield of 3.8%.
Where will the markets be headed next? Who knows! Whatever happens, use the volatility to your advantage by watching closely the stocks you want to own.