Apple, the Major Indexes and Cyclical Leaders


Wisdom from the NFL

Apple, the Major Indexes and Cyclical Leaders

GM is Red Hot!


Something made me think of the stock market this past weekend that I think you’ll find interesting. I’m a huge NFL fan (go Pats!) and so was naturally watching some of the mindless pregame shows on Sunday. As the game approached, Fox ran a short, brief interview with Pete Carroll—head coach of the Seattle Seahawks—from the night before the game.

Most of the chat was meaningless coach speak: We play where they tell us to play, injuries are part of the game, and so on. But the last question was about what Carroll was going to tell the team before the game. I thought he had a great answer.

He said (I’m paraphrasing): We’re not focused on winning or losing, we’re focused on playing the way we’re capable of playing. If we do, we’re going to put the onus on the Falcons to play their best to beat us.

Now, to be fair, Seattle lost 30-28 (though it was one of the more entertaining games I’ve seen in many years), but I really think investors need to take a similar approach. In football, of course, there are many things outside your control—the weather, the refs and their often frustrating calls, the bounce of the ball after a fumble or tipped pass, and so on. But most things are under the control of the players and coaches, and by doing those things well, they’ll win far more often than not.

It’s the same deal with the market. Let’s face it—none of us knows what the market is going to do tomorrow, or whether that stock you just bought is going to be upgraded or downgraded, or how exactly your favorite name will react to earnings. Yet these unknowable things can have a big impact on your P&L in the short term, just like a bad pass interference call or some howling wind that pushes a field goal wide right can cost you a game.

However, if you focus on what you can control when it comes to investing—your position sizing, market timing, buy and sell criteria, etc.—you’re going to come out ahead in the long run ... just like the football team that focuses on its assignments, proper tackling, and reading the coverage. Doing the fundamentals correctly really will help you come out ahead.

All of this is really another way of saying something that I wrote a while ago—if you’re trying to improve your investing, focus on the process, not the result. Any day or week might see you doing all the right things and losing money, while your neighbor brags about buying some speculative stock that zooms higher, handing him big gains.

But in the long run, only those investors who have a reliable game plan—and stick to it—are likely to make any real money over time. It’s something to keep in mind as the headlines involving Washington, D.C., Europe, the economy (and whatever else comes at us) in the weeks ahead.

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Before I get to my stock pick, I want to touch on the stock everyone is still talking about—Apple (AAPL). Shares have sagged below the 500-level this week on reports that the company has cut component orders for its iPhone 5 due to sluggish demand. But this week’s slide isn’t the issue; it’s only the latest leg on a relatively vicious decline that began in mid-September.

Not surprisingly, I want nothing to do with AAPL here; the stock is trending lower and, importantly, growth at the company is slowing markedly, with analysts seeing this year’s bottom line rising just 10%. I know the stock is cheap and I’m not arguing AAPL is headed for a major decline. I just think there are better places for your money while the market is heading up.

Moreover, what’s interesting is that because Apple is still such a heavy weighting on the major indexes, it’s masking the real strength of the broad market! Look at the two charts below—one is of the regular S&P 500, which is currently hitting its head on resistance near 1475. The other is the “un-weighted” S&P 500, where every stock is weighted equally, instead of by market cap. You can see how the un-weighted S&P 500 is already decisively out to new highs and looking very healthy.

My point: The broad market is much stronger than the S&P 500 and (especially) the Nasdaq would suggest. I continue to see the strength broadening out, but it’s worth noting that many industrial, transportation and other cyclical names are still super-strong.

So, with that in mind, I want to write about a well-known company that’s in the midst of a major turnaround. I’m talking about General Motors (GM), which, after coming public again back in November 2010, suffered a wicked decline in the ensuing years, falling from a peak around 40 to a low of 19 a year later. But the stock then bottomed out over many months—it held support at 19 in October 2011, December 2011 and again in July 2012—and is now red hot.

Why the GM strength? Here’s what I wrote about the company on January 7 in Cabot Top Ten Trader:

“Most people will be puzzled at how such an old, huge, disliked company can show up in Top Ten. But it shouldn’t be that hard to believe at all; GM is one of the stronger stocks in the market for three simple reasons—it’s dirt cheap, it’s finally out of the control of Uncle Sam and business is very good.

“The company’s December sales report, which was just announced last week, was up a decent 5%, but that marked the best December for GM in five years. In fact, new car sales for the industry as a whole grew double digits last year, continuing their recovery from the Great Recession ... yet they still remain about 15% to 20% below their pre-2008 levels. It’s similar to the housing industry—with business still at relatively depressed levels but headed in the right direction, odds favor upside surprises. As for GM in particular, it earned about $3.25 per share last year, but that should jump toward $4 this year as business recovers, leaving the stock with a P/E of less than eight times earnings.

“Lastly, the company is set to shake free of the government’s grip; it’s agreed to buy back the remaining shares from the U.S. Treasury, which, if nothing else, helps investor perception in a big way. The stock’s not going to double in a few weeks, but as turnaround stories go, we think GM has what it takes to be a winner.”

The stock bolted from 25 in mid-December to 30.5 on Monday on the heels of the good news. However, shares did take something of a hit following dismal sales results in Europe (Ford reported similar numbers, so it was an industry-wide thing). I do think GM could continue to pull back and consolidate for a bit, but I’m not expecting a major retreat; my gut tells me these turnaround, cyclical stocks are still relatively early in their lift-off phases, and so likely won’t need deep 15% or 20% retreats going ahead.

Bottom line: I think GM (and Ford (F) for that matter) looks buyable around here, though you could consider taking a smaller-than-normal position in case the stock’s retreat deepens in the days ahead. 

Get more information on growth stocks featured in Cabot Top Ten Trader here. 

All the best,

Michael Cintolo
Editor of Cabot Market Letter
and Cabot Top Ten Trader

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Michael Cintolo can be found on Google Plus.

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