Dow 17,000 is Meaningless and 3 Market-Beating Picks
|Written by Rob Goldman|
The financial and mainstream press are falling over themselves to write about the significance of the 17,000 mark recorded by the Dow Jones Industrial Average late last week. Don’t believe the hype. The record is practically meaningless. However, this week’s longer than usual edition of The Goldman Guide is not. Here are key highlights:
THE PRESS IS DEAD WRONG
Every news outlet in the country is touting the Dow Jones Industrial Average record of 17,000 as important. They could not be more wrong.
Look, I know that it hit a record and the 17,000 figure is supposed to be an important psychological number. This is especially the case for retail investors and the belief in many circles is that it could be a trigger for John Q. Public to increase their equity exposure, thus driving an already frothy market valuation higher.
Here’s the rub. The real measure is the S&P 500 Index, not the Dow. Yes, the Dow hit 17,000, a new record. But, in the grand scheme of things it is no great achievement. After all, it means that the DJIA is up 3% for the year. Whoop-dee-doo.
On the other hand, the S&P 500 Index, which is already up 7.4% year-to-date, is just 15 points from the 2000 mark. Once it achieves that level, a new record will be reached there as well. In my view this index is a more important measure.
First of all, if ever there was a magic, psychological number, it is 2000. Investors are more likely to be fixated on that. Moreover, that excitement could be fueled further in the near term by the start of Q2 earnings season this week. Wells Fargo (NYSE –WFC), now the largest mortgage and auto loan lender, reports on Thursday and this stock is now an important barometer of major consumer spending, especially housing.
Still, we believe that the rise in the S&P 500 will be short-lived following a brief rise in response to investor sentiment.
The S&P 500 Summer Doldrums
This is due to the fact that the 2000 mark has such an impact on our psyche that upside will exist for big stocks, but remain muted before declining to pending, frothy valuations
Based on last week’s closing prices, the Dow now trades 15.3x this year’s EPS forecasts. At “2000”, the S&P 500 Index will trade at 16.9x this year’s EPS. That is bordering on flat-out expensive and could prompt profit-taking. Plus, history has shown a couple of things that do not bode well. For example, when indices meet record round numbers (like 2000), they tend to drift incrementally lower in the following weeks and sometimes months.
Separately, recent history shows that when upside performance occurs this time of year it can be fleeting. We note that since 2010, the S&P 500 Index has averaged a 2.7% rise in July. But, the rise is a bit deceiving as it has usually followed a weak June, only to decline sharply in August. The average August decline in 2010, 2011, and 2013 was just under 5%.
What Lies Ahead
So what does all this mumbo jumbo mean for the rest of the summer?
If we had to guess, we believe that the (seasonal) near term upside for the S&P 500 is around the 2020 level with downside nearing the 1900 mark or lower. After all, as evidenced by the chart below, the jump in this broad market is on low volume—not exactly a bullish sign. Selling August calls or buying August puts on the S&P 500 Index seems like a good idea, especially if euphoria sets in.
As for small caps, we maintain that they will outperform larger cap issues, but the chickens will come home to roost for this group as well. Their performance also tends to be very weak in August in recent years before beginning their annual trek markedly higher later in the year. The chart below demonstrates that microcaps are mired in even lower volume than the broader market. In our view, this trend will not reverse itself until year-end.
What Lies Ahead, Part II
In last week’s Guide we highlighted a patriotic small cap USA Technologies (NASDAQ—USAT—$2.11). http://www.goldmanresearch.com/20140629796/The-Goldman-Guide/top3-predictions-for-q3.html. The stock reached a peak return of 6% for the week while the new core Market Monitor ETF pick PowerShares Buyback Achievers (NYSE—PKW—$45.53) hit a new high for the week. Both equities look primed for more gains. Here is a link to the ETF blog: http://www.goldmanresearch.com/20140701798/Daily-Blogs/why-i-bought-this-stock-buybacks-etf.html
Speaking of gains, you would be wise to consider buying shares of Manhattan Bridge Capital (NASDAQ—LOAN $3.48). We profiled the company a month ago, and cited it again here after news that the company increased its dividend. The stock reached a peak return of 47%, and now that it sold off slightly, the stock is extremely attractive again. LOAN is due to pay a $0.07 cash dividend to shareholders of record as of July 10th, with the dividend due to be paid on the 15th. At its current price, the annual dividend yield is 8% and I believe that the stock could jump another 20-25% in the coming months based on fundamentals, thereby providing investors with a solid total gain. Check it out here: http://www.goldmanresearch.com/20140610784/Daily-Blogs/big-dividend-yield-on-exciting-microcap.html
Launched in May 2010, The Goldman Guide is a free weekly publication of Goldman Small Cap Research and is written by Founder Rob Goldman with contributions from the GSCR contributor team. This non-sponsored investment newsletter seeks to provide investors with market, economic, political and equity-specific insights via an action-oriented, straight to the point approach. No companies mentioned in this newsletter are current sponsored research clients of the Company or its parent, With rare exceptions, all companies or investment ideas mentioned in this publication are publicly traded stocks listed either on the NYSE or the NASDAQ. Goldman Small Cap Research members and contributors’ bios, certifications, and experience can be found on our website: www.goldmanresearch.com .
This newsletter was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces non-sponsored and sponsored (paid) investment research. Goldman Small Cap Research is not affiliated in any way with Goldman Sachs & Co.
The Firm’s non-sponsored research publications category, Select Research, reflects the Firm’s internally generated stock ideas, along with economic, industry and market outlooks. In virtually all cases, stocks mentioned in Select Research offerings are listed on the NYSE or the NASDAQ. Publications in this category include the weekly newsletter The Goldman Guide, daily Market Monitor blogs, Special Reports, and premium products such as The 30-30 Report.
Opportunity Research reports, updates and Microcap Hot Topics articles reflect sponsored (paid) research but can also include non-sponsored micro cap research ideas that typically carry greater risks than those stocks covered in Select Research category. It is important to note that while we may track performance separately, we utilize many of the same coverage criteria in determining coverage of all stocks in both research formats. Please view the company’s individual disclosures for each engagement, which can be found in company-specific Opportunity Research reports, updates and articles.
All information contained in this newsletter and in our reports were provided by the companies mentioned via news releases, filings, and their websites or generated from our own due diligence. Economic, market data and charts are provided by a variety of sources and are cited upon publication. Stock performance data is derived from Yahoo! Finance. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence.
The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, other firms, or other financial news outlets. Goldman Small Cap Research relied solely upon information provided by companies through filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research report, update, article, blog, note, or newsletter is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed. This newsletter does not take into account the investment objectives, financial situation, or particular needs of any particular person. This newsletter does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with the FINRA or with any state securities regulatory authority.
ALL INFORMATION IN THIS REPORT OR NEWSLETTER IS PROVIDED “AS IS” WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.
For more information, visit our Disclaimer: www.goldmanresearch.com.