Will the New Year’s Rally be Reversed with a Low Score in the Super Bowl?

December 14th, 2010 by hackel Leave a reply »

Investors are a superstitious bunch, and with superstitions or inkblots, many see patterns that are figments of the imagination. January effect, summer rally (or doldrums), Super Bowl effect (low scores associated with poor stock markets), Yom Kipper rally, Santa Clause rally, or perhaps even an October massacre, may be in the cards for 2011.

I bring this up as we’re in the middle of the annual silly guessing game period, the time of the year when predictions are made and “best of” lists prepared. Investors review their current holdings and get their portfolios ready to take advantage of the upcoming year for which the gun will sound in just a few shortened weeks.  But do investors really need to make drastic decisions based on the calendar, as so many believe? History is not so neat, being more inclined to record a market turn and second derivative change tied to an economic and political event, and not the positioning of the sun. As the table below shows, the month of January has held no special significance over the past 7 years.

During the almost completed year, a good one by historic standards, the S&P was down almost 10% for the year on this past July 2, from which it hasn’t looked back. During February, 2009, the S&P 500 plummeted 43.3%.over its prior year before a furious rally, initiated by-as always-a change in the credit markets.

 

 

Based upon CT Capital’s analysis, stocks, as measured by the S&P Industrials are just slightly inexpensive, although many popular names are ripe for disappointment. There is no such thing as one-decision stocks, a lesson taught to every generation. The new nifty fifty sells at a high free cash flow multiple, and even with their consistent ability to add value thru a return on invested capital higher than their cost of capital, the valuation picture does not provide shrewd investors the incentive to risk capital.  We would therefore recommend avoidance of stocks such as Priceline (PCLN), Netflix (NFLX), and Salesforce.com (CRM).

 

 

We recommend, on the other hand, investors step up their international exposure, as many firms based overseas have valuations similar to what we saw here in the U.S. a year ago, while at the same time, add value via increasing levels of free cash flow. For this reason, the CT Capital portfolio is currently approximately 17% in ADRs. There are also U.S. based firms, like Lincoln Electric (LECO), Fluor (FLR), and Chubb (CB), which offer superior value relative to the S&P, both in terms of valuation and ability to create value for shareholders through a high free cash flow cash based ROIC and low cost of capital.

Related articles:

Disclosure: No positions

Kenneth S. Hackel, CFA
President
CT Capital LLC

Contact Us

Subscribe to CreditTrends.com by Email

If you are interested in learning more about cash flow, financial structure and valuation, order “Security Valuation and Risk Analysis” out this fall from McGraw-Hill.

Advertisement

Comments are closed.