This may be the important issue of The Goldman Guide we have published in the past 3+ years. Read on to find out: why medical marijuana and biotech stock will run and why most stocks in June will fall. Plus, we provide very scary stats, as well as what to buy and what to avoid.

June 2, 2013
Volume 4, Number 5

The Goldman Guide

Are We Headed For The Same Train Wreck?

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Ladies and gentlemen, welcome to the month of June. We have been cautious in these pages the past 2 weeks, and for good reason. If we had to place a wager, we would predict that the market will decline this month but that does not mean there aren’t pockets of buying opportunities among the sectors to avoid. What are they? Glad you asked.  One place it is not is Europe. At all. Period. No ifs ands or buts. Add in slowing growth in China and additional craziness in Japan and it is not a pretty picture. 

Let me explain. While the month started off with a bang it ended with a great deal of conflict, trepidation and fear.  The bigger stocks were hurt more due to macro-economic concerns and that was never more evident than late Friday when the big caps tanked. We expect continued pressure on blue chips and those stocks with meaningful exposure to Europe. After all, the unemployment rate in Europe hit a record 12.2%. If you think that is bad, the youth unemployment rate in 3 countries is over 40%. Check out the chart below from a recent edition of The Atlantic. It is scary. If anyone suggests we model ourselves after these nations, they should be drawn and quartered.

What Stocks Are Working

We have long maintained that the market will continue to rise as long as there is no alternative vehicle in which to put one’s investment capital, and as along as financials hold up. This is why “small” is the place to be. Check out the May performance of the Russell 2000 Index versus the S&P 500 Index, courtesy of BigCharts.com. Both indices rose, but the decline is much steeper for the big stock index, due to the reasons outlined above.

Interestingly, on a year-to-date basis there are two notable segments that have some of the best returns as a whole.  These include the stocks represented in the Dow Jones Biotechnology Index as well as the Dow Jones Travel and Tourism Index. The stocks in these indices have increased by 32-36% since the beginning of the year and we believe they both will continue to enjoy additional accumulation and higher prices.  Coincidentally, (or perhaps not) two of the sectors in which we have been highest on during the past 60 days include leisure and biotech due in part to valuation, seasonality, and favorable news. 

One of the key seasonal drivers for the biotechnology industry is the American Society of Clinical Oncology (ASCO) annual June meeting.  Oncology stocks tend to rise ahead of the annual meeting where a number of firms release key, new data, and are likely one of the reasons why the space has down well of late. The leisure segment, which tends to have a jump in conjunction with the start of spring and summer, has also enjoyed a rise in anticipation of a solid travel and recreation season.

Where to Put Your Money

Before we tell you where to consider putting your money, here is a word regarding June as a whole. From 2000-2012, June has been the 2nd worst performing month for the S&P 500 Index, dropping an average of 1.47%. Moreover, it has only 5 up years out of the past 13 and in one of those years the S&P 500 was up only 0.1%. So, be wary of big stocks, wary of holding onto stocks for too long and do not be alarmed if performance as a whole is poor. The market is conflicted and fatigued and needs rest anyway.

Okay, now for what you have all been waiting for. Here is what you need to be doing. Stay small, stay away from Europe and find themes and segments that are working. Or, you can just follow our lead.

For example, two segments that should have a good week are the biotech space and medical marijuana group of stocks.  In “biotech land”, the aforementioned ASCO meeting has just kicked off and we would closely monitor the site for news and press releases as well as following small cap and microcap oncology stocks that will likely move in sympathy/concert with others presenting at ASCO. 

We should note that the weekend edition (is there any other?) of Barron’s has an absolutely amazing cover story on why marijuana should be legalized (perhaps even) on a federal level in the U.S. We strongly recommend reading it. (http://online.barrons.com/article/SB50001424052748704509304578511261557343002.html?mod=BOL_hpp_highlight_top#articleTabs_article%3D1 )

Frankly, it is a landmark story, especially for a financial publication that historically has a modest, right-leaning bent.  It also touches upon medical marijuana, for obvious reasons. We think medical marijuana stocks will rally in light of this feature and it could have some real legs.  At the least, the stocks should be good for a trade.  If you are unsure as to what stocks to buy in this sector, check out this link:  http://marijuanastocks.com/

I know you are going to think I am a broken record, but there is one stock that benefits from the ASCO meeting because of its oncology treatment under development, and its exposure to the medical marijuana business. So, in essence, you can buy this stock and get a 2 for the price of 1 hit on the two sectors. I won’t tell you the stock but the symbol begin with an “N” and ends with an “X”.  Timing is everything and timing looks good right now.

Finally, one of our low-priced, low-valuation travel/leisure stocks, TravelCenters of America (NYSE—TA—$11.13), is up 16% in the past 60 days. Financials have been improving, business trends ever favorable, and it still trades only 11x FY13 EPS and 7x FY14E EPS. We think it can go to $15 by the end of the summer.

Until next week...