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Now's the Time to Profit from the Slowdown

By Costas Bocelli October 6, 2011 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

Before we get to it, be sure to welcome Jim Nelson today.

If you are at all interested in MPLs, ADRs, utilities, consumer staples or tobacco I believe you'll enjoy following him.

He's also an astute market observer and today he has some quick thoughts on interest rates below.

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For the long term value investor, golden opportunities don’t just pop up every day -- especially when you’re looking for bargain basement deals that can add great wealth to your portfolio. 

Sometimes it takes patience, discipline, and a bit of well-timed fortune to capitalize.  And often, it takes great courage and conviction to pull the trigger, most notably in times like these where sentiment is overwhelmingly negative about the future prospects of the global economy.

Are we in the midst of another one of those rare opportunities?

The market has shown us two great opportunities to pick up stocks at attractive prices since the credit crisis of 2008.

Obviously, the market bottom in March 2009 was that “generational” opportunity of a lifetime for stock market investment opportunities.  It was truly a rare period of time in the history of financial markets.  Unprecedented volatility, systemic risk, deep recession and plain-old fear formulated that market bottom, with the S&P 500 index briefly dipping below 700.

Many investors stayed away.  But some recognized the opportunity and made a fortune.

The rally peaked nearly 13 months later in April of 2010, with the S&P 500 index up 82%.

The stock market had a tough go of it from that spring into the late summer.  Greece needed a bailout, investors lost confidence in Wall Street from the May 6 “flash crash,” and recent batches of economic data began to deteriorate, which threatened the fragile recovery from the recession.

In late August 2010, Fed Chairman Bernanke gave his famous Jackson Hole speech that telegraphed the birth of QE2.  The 600 billion dollar, eight month Treasury bond buying spree essentially placed a floor under risk assets and the equity market.

Again, many investors stayed away while others recognized what the Fed was doing and made a ton of money.

That rally lasted roughly nine months.  While the S&P 500 index was up 30% during that span, commodities and commodity stocks surged and far outpaced the broad markets gains, as inflation spiked and the dollar tanked.  Many of these securities more than doubled in value from the side effects of the Fed’s money creating policy.

Since that latest market peak, it seems that everything’s gone wrong.

The European sovereign debt crisis has been holding the market hostage as it dangles Greece on the brink of default, and puts their entire banking system in jeopardy of systemic peril.

Economic growth has been slowing, and the odds of another global recession continue to increase.  Many emerging markets such as Brazil, India, and Russia are all down greater than 20% and in bear market territory anticipating the worst.

Plus, everyone is petrified that China is heading for a hard landing, and that their Real Estate market and banking system are on the verge of imploding.

My question to you:

Is this yet another opportunity to find some great value somewhere in the midst of all this extreme negative pessimism that is roiling the markets?

S&P 500 Index, weekly chart

 


While it’s true that the broad market can decline further from here without a doubt, no one knows for sure.  After all, it’s the market, right?

We may have found the latest bottom around 1100 in the index, or we may go much lower.  That’s the risk component to trading and investing.

When you dissect this market slide from the recent peak made this past April, the very same sectors and commodities that soared from the QE2 rally have been getting pummeled over the past several months.

“The bigger they are, the harder they fall” ... and fall they did.

Energy, material, industrials and mining have led the weakness, and the reasoning and rationale is certainly valid.  If the global economy is slowing and has a higher probability of recession, then demand for natural resources such as oil, copper, machinery equipment and coal should recede.

Has the selling in these particular sectors been far too pervasive without any regard of inherent value? 

Perhaps, but price is truth, and investors have been dumping commodity stocks at any price regardless of valuation.

In the cyclical commodity space, that seems to be the game.  In this space, valuations get stretched -- far to the upside in euphoric rallies, and far to the downside when they fear the worst of times.

As a value investor, cyclical weakness can be a huge opportunity.  Sure, in the short term there will be massive volatility and crazy swings and you’ll most likely not buy at the absolute bottom.

But the idea is to grab a company that will most likely soar in the next economic upturn, which always happens.  And the upside rewards could far outweigh any additional downside weakness experienced in the short term.

Here's a perfect example of a potential opportunity on a long term value play with an excellent risk/reward profile ...

Alpha Natural Resources, Inc. (Symbol: ANR) is a thermal and metallurgical coal producer in the central Appalachian region of the United States.  They acquired Massey Energy earlier this year.

Energy, and particularly the coal sector, have taken the worst of it as investors have overshot this sector to the downside.

Aside from the metallurgical coal the company produces, thermal coal, which fuels electrical generation throughout the world, is a significant part of their business.  Taking advantage of the depressed stock price bodes well for large gains down the road.

With commodity cyclical stocks, you take advantage of the depressed prices, as you’re sure to profit when they turn.  And when they do, they tend to move just as swiftly to the upside, if not more.

 Daily Chart on ANR

 

The stock closed sharply higher yesterday after recently making a new low earlier this week.  At a glance, it may seem here like trying to catch a falling knife.

You’re in the ballpark, but when you take a look at the 4-year weekly chart, it tells a different story ...
 

ANR has traded multiple times higher than its current valuations today and is deeply oversold.  This is a resource company with a product that is vitally needed -- today, tomorrow and years from now.

By taking advantage of depressed prices during a slowdown cycle, this could be yet another great opportunity for the value investor.

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