Tuesday, April 19, 2011
Which sector is expected see the most net income growth in 2011?
Finance? Tech? Oil and Energy?
How about Basic Materials?
Net income is projected to grow an impressive 35% for the Basic Materials sector in 2011, the most of any sector. In comparison, the S&P 500 is expected to see net income growth of 15% in 2011.
As Goes the Economy...
Part of the reason for this exceptional growth is the inherent cyclicality of the sector. For instance, during the global recession in 2009 the Basic Materials sector saw overall net income fall a whopping 50%. But as the economy began to pick back up in 2010, net income skyrocketed a remarkable 72%.
With global growth expected to continue in 2011, the Basic Materials sector should continue to soar.
Despite an incredible rebound last year and a bullish outlook for this year, the sector trades at just 13.9x 2011 earnings, the same as the S&P.
Two of the major components of the Basic Materials sector are the metals industry and the agriculture industry. Commodities like gold, silver, copper, iron, sugar, corn and wheat have been soaring, contributing to much of the overall growth in the sector.
Not Just Metals & Ag
While metals and ag may grab all the headlines, one major sector component that often gets overshadowed is the chemicals industry.
The chemicals industry is an integral part of the global economy, converting raw materials into more than 70,000 different products. Just like metals and agriculture, chemicals have benefited from surging global demand, which has led to rising prices and record profits.
There are several chemical stocks with enormous growth projections and reasonable valuations. Here are 4 set to soar in 2011:
Kronos Worldwide Inc. (KRO) manufactures titanium oxide pigments. TiO2 is a fine white powder used in products like paints, plastics and paper to give them maximum whiteness and opacity.
The company reported excellent fourth quarter results in March. Revenue jumped 24% year-over-year to $373.3 million on higher prices and volumes in all markets for TiO2. EPS came in at 66 cents, 3 cents ahead of the Zacks Consensus Estimate. This was up from 11 cents in the same quarter in 2009.
Estimates have been soaring off the strong quarter, sending the stock to a Zacks #1 Rank (Strong Buy). The Zacks Consensus Estimate for 2011 is $4.37, up from $3.48 sixty days ago. This represents 131% growth over 2010 EPS.
Despite the remarkable growth prospects, shares trade at just 13.3x forward earnings, a discount to the industry average of 14.8x. Its PEG ratio is an attractive 0.7.
PPG Industries (PPG) is the world's leading coatings and specialty products company. It provides products for the construction, consumer products, industrial and transportation markets and aftermarkets. The company was founded in 1883 and is headquartered in Pittsburgh.
Estimates have been steadily rising as the company has delivered an impressive 11 consecutive positive earnings surprises. The Zacks Consensus Estimate for 2011 is currently $6.35, representing 22% EPS growth over 2010.
Valuation is reasonable with shares trading at 14.6x forward earnings, a slight discount to the industry average. The company also pays a dividend that yields 2.4%. It has paid a remarkable 450 consecutive dividend payments dating back to 1899.
It reports its results for the first quarter on April 21. PPG is a Zacks #1 Rank (Strong Buy) stock.
Olin Corp (OLN) operates in two business segments: Chlor Alkali and Winchester.
The Chlor Alkali division manufactures chlorine and caustic soda, sodium hydrosulfite, hydrochloric acid, hydrogen, potassium hydroxide and bleach products. The Winchester division, which accounts for about one-third of total revenue, makes ammunition.
Estimates have been soaring since the company reported Q4 EPS of 45 cents, crushing the Zacks Consensus Estimate of 5 cents. Olin's results were driven by better than expected volumes and pricing in both segments.
Also shares jumped on the Q4 earnings beat, valuation is still attractive for this Zacks #1 Rank (Strong Buy) stock. Shares trade at 14.7x forward earnings, in-line with its peers, but its PEG ratio is only 0.67.
Like PPG, Olin Corp has been around since the 19th century. It was founded in 1892 and is based in Clayton, Missouri. The company has paid 337 consecutive quarterly dividends. It yields 3.2%.
Huntsman (HUN) manufactures differentiated chemicals for a myriad of industries around the globe. Approximately 39% of revenues come from polyurethanes.
The company has strung together three consecutive positive earnings surprises, including a 26% beat in the fourth quarter of 2010. Revenues for the quarter jumped 17% year-over-year as each segment saw higher average selling prices and most saw volume increases.
Estimates have been rising off the strong quarter, sending the stock to a Zacks #1 Rank (Strong Buy). The 2011 Zacks Consensus Estimate is $1.41, representing 69% growth over 2010 EPS.
The 2012 consensus estimate has also been rising. It currently stands at $1.79, corresponding to 27% EPS growth.
Shares trade at just 13.6x forward earnings, a discount to the industry average of 14.8x. It pays a dividend that yields 2.0%.
When you come across headlines touting soaring metal and agriculture prices, remember that the chemicals industry is booming too. These 4 stocks all have rising estimates, attractive valuations and are expected to see exceptional earnings growth in 2011.
Keep in mind, however, that the industry is heavily dependent on global economic conditions, and a downturn in economic activity would send these stocks plummeting.
Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.
The Financial Times had a loud headline this morning on their main page proclaiming the end of monetary easing. They said:
“An end to global monetary policy easing is on the horizon, with the US Federal Reserve set to signal it will cease asset purchases at the end of June.
When the rate-setting Federal Open Market Committee meets on April 27, it is unlikely to limit its options by ruling out asset purchases beyond the second $600bn “quantitative easing” programme – or “QE2” – that is due to finish by the end of the second quarter.”
While the credit ratings agencies are stealing the headlines this is the more important story today. If the QE2 trade is ending today’s market action is fairly consistent with what I would expect to see. Equities are falling, bonds are rallying and the USD is rallying. This is not even remotely consistent with concerns over a sovereign debt problem in the USA. What this is consistent with, is the end of the QE2 trade. As I stated last week, the US dollar will be the primary tell for the end of the QE2 trade. Today’s rally in the dollar is sending a loud message. Clearly, it’s unwise to extrapolate from one day’s market action, but as we inch closer to June the market is likely to become more volatile and these signals are going to become more pronounced.
After trending higher for the past nine months, Apple (AAPL) has really hit a rough patch recently. As shown below, today the stock has broken below key support and to a new 2011 low, and it has clearly formed a new downtrend channel. The stock is now $44 below its all-time high made in February, so it's got quite a bit of work to do to get back to that level.
The commodity bull has shown little sign of running out of steam – until now. Prices began to stumble as soon as a note from Goldman Sachs, the American banking giant, whizzed around trading desks across the globe last week.
The broker advised clients to close its profitable "CCCP" play, which involved investing in a basket of crude oil, copper, cotton, platinum and soybeans. The commodities team, led by Jeffrey Currie, argued that after gaining 25pc since December, the risks to the trade had changed.
"Although we believe that on a 12-month horizon the CCCP basket still has upside potential, in the near term risk-reward no longer favours holding these assets and we are recommending closing the position," Goldman said.
Commodities traders read this as the investment bank calling time on commodities for the time being. Goldman said that even though it was closing copper and platinum trades, "the structural supply-side story remains intact, and we would look for new entry points" – or, in other words, buy again if the price falls.
Tens of thousands of investors have piled into commodities in recent years, spurred on by stupendous returns – funds such as JPMorgan Natural Resources and BlackRock Gold & General have proved popular. However, the move by Goldman Sachs raises the question: is now the time to take profits?
There has always been an investment case for holding commodities – recent research from JPMorgan found that they were a hedge against rising inflation and improved returns while reducing volatility.
Commodities outperformed equities and bonds by 10pc when economies were in a late expansion phase, and marginally outperformed when economies were in the early expansion phase just after a recession, JPMorgan said. The only time they lagged other assets was towards the end of a recession.
Commodities are still volatile beasts – just ask investors who piled into oil stocks as crude marched towards $147 a barrel in 2008, only to come down with a jolt as the price plummeted to $60 – and then rose again to today's $125 a barrel.
Neil Gregson, the co-manager of JPM Natural Resources, was unconcerned about the Goldman note because, he said, it did not affect the long-term rationale for commodities, suggesting that private investors ignore the sell signal too. "Goldman's is short-term trading call," he said.
Mr Gregson added that commodities were driven by supply and demand – and that a lack of supply would continue to support prices.
"The market is pricing in that commodity prices have peaked, and that's why many shares are cheap. We also don't think that prices will fall."
Fidelity was also banging the commodity drum not so long ago, but it is unfazed by the Goldman move. Its portfolio models continue to indicate that, with inflation remaining high and economic growth also recovering in the developed world, commodities will tend to do well.
Ayesha Akbar, a portfolio manager at Fidelity, said: "Since we first suggested that investors might want to consider commodities for their portfolio, they have done well. I believe the case for their inclusion in a portfolio remains valid."
She added: "Oil prices are factoring in a risk premium on geopolitical concerns and, at the moment, this does not show much sign of abating. But commodities are about much more than oil – agriculture also features and many items such as soybeans have lagged and may be due a rebound."
One of the key drivers of the commodity boom has been China, so whether the bull run ends will depend on whether that country's economy stalls too.
"China is an important consumer of industrial metals such as copper, and if you believe, as I do, that China is closer to the end of its rate tightening than the beginning, then there is potential for demand to increase from here," added Ms Akbar.
In addition to the demand argument, rock-bottom interest rates and quantitative easing programmes from China, the US and Europe flooded the market with easy money and gave a huge boost to real assets such as commodities.
Christopher Aldous of Evercore Pan Asset said: "We took full advantage of these opportunities from April 2009 by including general and agricultural commodities in most portfolios. Our exposures are centred on two exchange-traded fund securities, the Lyxor All Commodities ETF and the ETF Securities Agriculture ETF.
"Since we first bought the latter in portfolios it is up by around 60pc. And the All Commodities has done pretty well too, with a rise of 45pc. We are now starting to take profits on the Agriculture ETF in case good harvests in Russia and the US take the shine off the prices of corn and wheat, which represent about 40pc of the index."
Of all the commodities, gold continues to shine most brightly for investors and, with the economic uncertainty set to linger, demand is likely to stay strong. The price hit a record high on Friday of $1,479.
Iain Stewart of Newton, another fund manager who is dismissive of the Goldman note, continues to warm to the precious metal because of the economic outlook.
He is in a cautious mood on the outlook for markets as a whole, and is surprised that stock markets have remained resilient despite the economic and political uncertainty. He expects inflationary conditions to remain as governments have no choice but to keep stimulating economies; as a result he advocates exposure to real assets, such as commodities, energy and natural resources, in addition to shares.
He holds both gold exchange-traded funds (ETFs) and gold-related shares, and will do so until interest rates rise sharply.
Mr Gregson takes a similar view. He admits that making the right call on gold is "tricky" but says a perfect storm – low interest rates, a financial crisis, turmoil in the Middle East and a volatile dollar – has created the demand to support the price.
"Interest rates rising and a stable dollar could create a headwind for gold," he said. "But gold equities are very cheap. We have not trimmed any of our gold exposure recently."
Several metal analysts believe it is a racing certainty that the price of gold will continue to rise. Research from metals consultancy GFMS suggests that gold prices could break through the $1,600 barrier by the end of the year, given worries over inflation, a weak economic recovery and the growing turmoil in the Middle East.
Barclays Capital continues to believe that high demand will remain strong to support the gold price.
Private investors have been pouring money into ETFs tracking gold but, even if the investment demand for gold wanes, Barclays believes that jewellery demand from India will act as a cushion.
Suki Cooper of Barclays said the same could not be said for silver. "Given silver's heavy reliance on investor interest, price action is likely to remain volatile," she added.
Mr Aldous has yet to play the gold card and admits that he has missed out on some handsome gains as a result, but he has no plans to invest now.
"With hindsight, gold and precious metals, particularly silver, would also have been a fantastic investment," he said.
"Both now look very overextended and we feel it is too late to jump on the inflation worries bandwagon. In fact, our investment in US listed property ETFs outperformed precious metals in 2010, proving that all that glisters is not necessarily gold."
Goldman Sachs may have called time on commodities for the moment but it would seem that many disagree – none more so than Glencore, one of the world's leading commodities traders.
It has announced plans to float on the London and Hong Kong stock exchanges in a £37bn deal – one of the biggest public offerings in history.
Brewin Dolphin, the private client investment manager, said some of its clients were likely to be interested in the listing and was confident that the commodity story would not run out of steam.
"It is definitely still a solid story," said Nik Stanojevic, an analyst at the company. "I have always said that it is going to be a lumpy journey and volatile. The supply side is still constrained and many companies are cheap because the market is discounting commodity price falls."
He added: "If those falls fail to materialise then the equities will perform well."
But Ms Akbar said investors jumping in now needed to be realistic. She said: "While entry into commodities now is not as attractive as it was, say, at the end of last year, we could still see pretty decent returns from here."
So why has the US not filed a notice of default yet?
Because the actual debt that matters for legal purposes is the debt "subject to the limit", which is $52 billion less than the total debt primarily due to $10 billion held at the Federal Financing Bank, and $41 billion in unamortized discount: a number which fluctuates in time depending on how much over or under par bonds are issued, but which ultimately will be zero at maturity of all debt (haha). In other words, as of today, the US Treasury has dry powder for just another $41 billion in issuance, or just over your average 5 Year auction. This can be seen best on the following chart from the Treasury where the total debt line has just passed the limit.
So what does this mean for near term issuance? Also per the Treasury, there is a total of $55 billion in debt paydown in the next week primarily in bill redemptions, offset by $14 billion in issuance in the last week of April. The problem is that this week also happens to be a major tax refund week. We anticipate that tax refunds will likely total between $20 -25 billion net over tax revenues. Which means there will be a net cash need of about $75 billion. As we ended Thursday at about $30 billion, Friday's cash balance (released at 4pm by the FMS) could be very critical to determine if the Treasury will be forced to come up with some emergency form of 11th hour cash raise. It also means that the debt ceiling clock is ticking ever louder. The Treasury will have capacity for one more full weekly auction, to be completed in the first week of May, and then it is game over.
Update: cash as of Friday was $58 billion. With $55 billion in cash out this week and who knows how much of refund funding, it could get mightly close...
The Nasdaq showed the impact of today's announcement the best; a powerful gap down against Friday's higher close, a sell off which fed off this momentum, but a recovery which took the index back to its open price, although well off where it finished Friday. Higher volume ranked as distribution, but relative to the volume selling in Large Caps it wasn't so bad. Technicals, not surprisingly, worked their way lower.
The S&P took some solace from defending former channel resistance turned support. Unfortunately, there was more volume selling than in the Nasdaq and it did close below its 20-day and 50-day MAs.
The Dow made the best of a rough day, recovering enough to actually finish above its 50-day MA. Volume registered a strong distribution day. Technically, it's not as bad as other indices. So, despite the selling, it still has a chance of breaking resistance (slimmer that chance is becoming).
The Russell 2000 held its 50-day MA in what was a relatively quiet day for the index. Unfortunately, strength in Small Caps is a requirement for this rally - particularly if it's to fulfill its weekly expectation for a breakout.
The semiconductor index is the one to watch. Despite trading in a tight range - like the Russell 2000 - it has a very weak technical picture. It looks primed for a test of its 200-day MA.
So for Tuesday, keep an eye on the semiconductor index. It might be the index to provide the most traction for shorts and a guide as to what lies ahead for other indices.
Oil fell sharply on Monday after ratings agency S&P revised lower its U.S. credit outlook to negative and OPEC ministers said high crude prices could place a major strain on consumer countries' economies.
Although it affirmed the United States' "AAA" credit rating, Standard & Poor's said there was a risk policymakers may not reach agreement on how to address the country's long-term fiscal pressures.
"The U.S. debt situation got a reality check this morning from the move by S&P," said John Kilduff, partner at Again Capital in New York. "Only precious metals will be seen as attractive in the aftermath of the outlook downgrade."
OPEC ministers voiced their concerns at a meeting in Kuwait, where Nobuo Tanaka, executive director of the International Energy Agency, said the IEA already was, "seeing some indication of the slowdown in demand, and it's alarming."
Saudi Oil Minister Ali al-Naimi said a global economic recovery remained "patchy", while his Kuwaiti counterpart added that high oil prices threaten to become an economic burden for many big consuming countries.
Oil earlier felt pressure after Saudi Arabia on Sunday confirmed it had cut output by more than 800,000 barrels per day in March because of weak demand for its crude.
Brent crude for June fell $1.84 to settle at $121.61 a barrel, having slipped to a session low of $121.
U.S. crude for May fell $2.54 to settle at $107.12, after slipping as low as $106.54. The U.S. May crude contract expires on Tuesday.
U.S. equities fell more than 1 percent on sovereign debt fears on both sides of the Atlantic. .N
Equities and oil also felt pressure from another Chinese bank reserve hike over the weekend, the latest move to control inflation that could curb demand growth.
Most commodities fell, hit by S&P move and concerns over Chinese demand. One exception was gold -- seen as a store of value -- which shot to a record near $1,500 an ounce.
S&P said there is a 1-in-3 chance it could cut its long-term credit rating on the United States within two years.
"This new warning, this time from S&P, highlights the need for the U.S. to take better control of its fiscal destiny if it is to avoid higher borrowing costs and maintain its central role at the core of the global economy," Mohamed El-Erian, chief executive at Pimco, which oversees $1.2 trillion in assets, told Reuters.
WIDENING DEMAND CONCERNS
China's hike to banks' required reserves, the fourth this year, added to investor caution about economic growth.
Crude fell early last week after Goldman Sachs (GS.N) and other key forecasters warned high oil prices were eroding demand. It rebounded late in the week on encouraging U.S. economic data and a steep fall in U.S. gasoline inventories.
The euro posted its biggest one-day decline since November against the dollar as concerns increased that Greece will be forced to restructure its debt and as sentiment against aid grows in Europe.
A stronger dollar can pressure oil prices by making dollar-denominated crude more expensive for consumers using other currencies and by drawing investment to foreign exchange markets for better returns.
AFRICA/MIDDLE EAST SUPPLY THREATS
Lingering threats to Africa and Middle East oil supplies that helped spark prices to recent, 32-month peaks, remained.
Forces loyal to Muammar Gaddafi bombarded Misrata, Libya's third-largest city, Clashes broke out in Yemen and thousands demanded the overthrow of Syrian President Bashar al-Assad in escalating unrest.
Oil investors also eyed Nigeria, where rioting took place in northern cities after a contentious election, according to the Nigerian Red Cross.