Stock Stocking Stuffers for the New Year
With the stock market at record highs after the post-election stampede, you may think nothing is worth buying now. I get that, especially since the odds of a correction are higher now than they were just three months ago when the S&P 500 Index was valued 7% lower.
But as the old saying goes, “it’s a market of stocks, and not a stock market,” which means it pays to look at stocks individually. Bargains can always be found, but you can’t use the monkey-and-dartboard approach that would have worked over the past seven weeks.
Three broad categories of stocks tend to perform well during the first quarter of a new year. The first category consists of “fallen angels” that have not kept up with the overall stock market or have become oversold. They aren’t always easy to spot since many companies rightfully deserve the beating they have taken and will not soon recover, but some stocks fall out of favor due to temporary reasons, and will soon be on the upswing.
An example of this from last year is Western Digital (WDC), which has seen its share price rise and fall more than 50% over the past three years as excitement over the growth of cloud computing gave way to anxiety over the impending death of personal computers. But a funny thing happened on the way to gallows: WDC adapted through buying its way into the latest wave of mobile storage technology. As a result, its share price has doubled over the past seven months.
The second category of stocks includes companies that stand to benefit from an unforeseen macroeconomic factor. For example, the recent plunge in oil prices was bad for the energy sector, but good for companies that consume a lot of energy, such as airlines. Shares of Delta Airlines (DAL) soared 25% during the second half of 2015 as the price of oil dropped steadily, while Chevron (CVX) stock dropped by roughly the same amount at the exact same time.
The tradeoff: as 2016 got underway Delta was fully valued while Chevron couldn’t drop much lower. So once oil prices started to rebound, CVX gained nearly 50% from its February lows while DAL only this week managed to climb into positive territory for the year. This year’s wildcard macroeconomic event could come from possible trade wars with China and Mexico, or the infrastructure spending program President-elect Donald Trump promises to deliver. So if those things come to pass it could radically change many companies’ prospects.
Finally, there are companies that have performed so poorly that to survive they are forced into restructuring by selling off subsidiaries so they can focus on their core competency. We’ve seen this type of maneuver often recently, such as two years ago when Hewlett-Packard spun off its PC and printer businesses in to HP Inc. (HPQ), while keeping its services operations at Hewlett-Packard Enterprises (HPE).
As expected, HPQ stock has floundered, declining 20% since the split-up, while shares of HPE have risen nearly 50%. More recently, Xerox has followed HP’s lead by essentially doing the same thing. And ConAgra just spun off its frozen potato division so it can invest all of its resources in its higher-margin products.
On page 4 of the January 11th issue of Personal Finance I evaluate these transactions, with advice on which of these newly-created companies is a Secret Santa gift, and which is a lump of coal.