If there ever was a perfect example of why you shouldn’t try to time the market, last week was it. From the S&P 500’s closing high on Friday April 29th until Friday June 24th, the S&P had fallen seven out of eight weeks for a total loss of more than 95 points. A “reasonable” person could have concluded that the market’s downtrend would continue and the safe thing to do was to sell out of stocks until things stabilized. If you had followed this “reasonable” course of action, you would have missed out on the market’s largest weekly gain in two years. Last week – out of the blue – the market rose all five days and amassed a huge 71-point gain (5.6%), erasing three-quarters of the prior eight weeks’ cumulative loss in just one week!
Why the gain? Politics. Greece’s parliament passed the austerity measures demanded by the European finance ministers and the International Monetary Fund in exchange for more bailout money. And the U.S. Congress cancelled its summer recess so that it can devote the time needed to reach a compromise on increasing the U.S. debt ceiling before the August 2nd deadline. If a compromise is not reached, President Obama will avoid a U.S. default by playing the “constitutional option,” which rejects the validity of the debt ceiling altogether. Section Four of the 14th Amendment provides that the public debt of the United States shall “not be questioned.” Having a debt ceiling questions the public debt and is, therefore, arguably unconstitutional.
As for the economy, the Federal Reserve released data last month showing that household net worth (line 42) has risen for three consecutive quarters (up $2.7 trillion) despite continued declines in home prices. It’s a little-known fact that home equity (line 4 – line 33) isn’t that important anymore, amounting to only 11% of household net worth. The big driver of household net worth is financial assets like stocks, bonds, mutual funds, pension funds, and life insurance reserves (sum of lines 16, 19, 20-21, 24-25, 27-28) which account for more than half (55%) of total net worth. And on that score, the American public is, on average, richer then it was at the stock-market peak in October 2007.
This increased wealth bodes well for consumer confidence. More confidence means more spending which, in turn, will stimulate businesses to hire more workers, whose added incomes will boost consumer spending even more. Lower gasoline prices will also help, as will as a nearly 17% planned increase in capital spending by corporations.
Big up days sometimes mark a change in industry-sector leadership. To determine which industry sectors may be coming into favor, I examined which individual stocks were last week’s biggest percentage winners. My stock screen filters out relatively low-priced stocks (i.e., under $20) because they often have large percentage moves for no reason other than that they’re illiquid. Based on my research, three of the biggest winners last week were in the Internet and beverage sectors. Let’s take each stock one-by-one:
LinkedIn rose 35.2% last week. I wrote about this professional job networking website when the LinkedIn IPO came out at the end of May. It was incredibly overpriced and I urged investors not to buy while it was trading above $100. It subsequently fell more than 40% all the way down to $60.14 before rebounding 50% back up to $90. The reason for the rebound is two-fold. First, several of the nvestment banks involved in underwriting the LinkedIn IPO initiated coverage with a buy rating and set price targets ranging from $85 to $92 per share. Second, the Internet gaming company Zynga, which offers Facebook-affiliated games Farmville and MafiaWars, filed plans for its own IPO that is estimated to value the company at a mind-numbing $20 billion. Some investors bid up LinkedIn stock on the reasoning that it must be worth a similarly high valuation as Zynga.
Youku.com, China’s version of Youtube, rose 30.5% last week, with almost the entire gain coming on a single day (June 28th). Last Tuesday, the online video company announced a three-year partnership with Time Warner’s (NYSE: TWX) Warner Brothers unit to offer 450 films on a paid-subscription basis to Chinese Internet users. Before the agreement, Youku relied solely on advertising for its revenues, but it is now expected to generate up to 10% of its sales from the Warner Brothers’ deal. The company has never made a profit, but that is expected to change next year (if you can trust Chinese accounting!).
I wrote about Chinese Internet stocks in mid-April just before they topped out. Between April 20th and June 16th, Youku.com lost an astounding 63%, falling from $69.95 down to $26. But even $26 was more than double its IPO price of $12.80 back in December 2010. The stock skyrocketed 161 percent on its first day of trading, the biggest gain for a U.S. IPO since Chinese Internet search engine Baidu.com (NasdaqGS: BIDU) back in 2005.
Want to make your own soft drinks? This Israeli company lets you turn ordinary tap water into a frothy carbonated beverage. The stock went public last November at $20 and it has been off to the races ever since. Last week it was up another 26.8% and is now trading for more than $70. There wasn’t any official news to account for last week’s pop other than the fact that Best Buy (NYSE: BBY) started to sell the company’s soda machine. The stock is heavily shorted by skeptics (4.23 million shares shorted out of a total public float of 11.96 million) so the price rise might have been juiced by short covering.
SodaStream does for soft drinks what Green Mountain Coffee Roasters (NasdaqGS: GMCR) did for coffee. As I mentioned in Buy Small-Cap Stockis Before They Grow Up, Green Mountain was the second-best performing stock of the past ten years with a 6800% gain. If SodaStream performs anywhere near as well as Green Mountain over the next ten years, it’s nowhere near too late to jump on board.
Master limited partnerships (MLPs) have performed spectacularly over the past two years and are likely to continue outperforming in 2011. Unlike volatile Internet stocks like LinkedIn and Youku.com, MLPs pay out massive amounts of cash that cushion their stocks from any market turbulence.
Better yet, MLPs keep raising their cash payouts! Consequently, MLPs are not overvalued. To find out the specific names of the energy MLPs Roger and Elliott like most right now, give MLP Profits a try today!
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