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Time to Step Into the Fertilizer Rebound - POT, MON, MOS

It’s been one of the best bullish trends since the end of last year, and is supported by the fundamentals (2 for 2). Better yet, there’s still a ton of room to recovery before these stocks even begin to challenge their prior highs.

I’m talking about fertilizer stocks… 2007’s heroes, one of 2008’s many disasters, and one of 2009’s - so far anyway - big winners.  The group has everything I like… strong technicals, earnings, and a future. Let’s look at each, and then drill down into some individual stocks you may want to latch on to.

Technicals

The chart of the S&P 1500 Fertilizer Index says it all pretty plainly. The industry’s stocks are up 40% off of December’s lows, and have just pushed off the lower edge of a bullish trading range (framed in the chart). The rebound off the support line really shouldn’t matter to long-term investors, but every little bit helps - these names are 7% under the recent peak.

Best of all, the group - as a whole - isn’t apt to run into a headwind of prior highs until it gains another 57%.

Fundamentals

The average forward-looking P/E ratio is 11.8, which isn’t fantastic, but could be worse…. and it was, just a few months ago. With a handful of one-time charges taken out of the equation, even the history doesn’t look that rough.

On the other hand, there’s still a boatload of disparity here… they’re not all the same. It’s not hard to choose one over another though. Hint: Most of the estimated future EPS figures are fairly plausible when compared to current or past earnings rates. There’s the key to finding the values. Well, that and the forward-looking price multiples.

Comparisons

Just as the overall results are all over the map for these companies, the underlying stocks are surprisingly unalike as well.

As boring as they are, the only names in the group that (1) haven’t completely run away, and (2) are at least holding up are the big guys… Potash, Mosaic, and Monsanto. There are other worthy charts in the bunch - AGU and CF to be precise - also worth considering. All the rest don’t look quite as compelling, and/or there’s a question regarding company performance.

Still, overall, we rate the fertilizer industry a ‘buy’.

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Today’s Worst Small Caps Could Be Tomorrow’s as Well - CHSI, UFPI, SKYW

Don’t hear me wrong - all sectors, sizes, and industries stunk today. A few small caps, however, really got whacked. In some cases, I think today’s pounding is parts of a longer-term punishment that’s best left untouched unless you’re looking to short some of these tickers. Here’s today’s bottwom dwellers… the five worst small cap (from the S&P 600) groups.

The distributors I’m not concerned about. Tey’ve had a good week, and a  good year to boot, so I’ll give ‘em a break. I’ll also give the office REITs a break too, since the intermediate-term results are decent.

The rest of these small cap industries though…. well, from a technical standpoint, it looks like they’re poised to sink some more before rebounding

Each take is labeled, so if there’s a certain group you’re curious about, feel free to go straight there.

Life & Health Insurance

The S&P Small Cap Life & Health Index peaked a few weeks ago after a solid March/May rally. I don’t see any hints on this chart that we’re going to make a rebound in the near future.

The stocks that make up the index include AmeriGroup Corp. (AGP), Catalyst Health Solutions Inc. (CHSI), Healthspring Inc., (HS), just to name a few. All their charts look the same though - overextended, and now entering a corrective period.

Could solid fundamental results stop this technical pullback before it gets started?

You could make a decent case for a couple of exceptions, but I don’t see results improvement that would actually matter… the stocks are cheap at current levels, and forward-looking P/Es look even cheaper. What’s left to improve? And, that’s the problem.

Perhaps nobody trusts the estimates. Or, maybe investors are just sick of one-time charges that appear to not just be one-time charges. It doesn’t matter either way… the stocks are falling despite decent valuations.

That said, I’ve still got insurance names on my list of long-term (very long term) undervalued picks

Forestry and Wood

Owning small cap forestry and timber stocks like Deltic Timber Corp. (DEL) and Universal Forest Products Inc. (UFPI) hasn’t been easy in May. The S&P Small Cap Forest Products Index is down 21.4% so far, and the month doesn’t end for two more days.

Like the life and health insurance group pullback, there’s not much technical evidence a rebound is in the works. This was one of those tortoise-like humps that usually put things into motion for weeks.

As far as valuations go, honestly, I’m surprised any of these stocks managed to rise at all. Analyst estimates - if they’re right - show these stocks are ridiculously expensive. And, I think the estimates are closer to being right than not.

Point being, Deltic and Universal Forest could be trouble for a while.

Airlines

Another bad month for airlines - what a surprise.

The S&P Small Cap Airline Index is off by more than 14% for May so far - and is one of the biggest losers year to date as well. As you can see on the chart, the index is also trapped in a bearish trading range  (and recently retreated from the upper edge of that range).

Nope, it’s not looking too good here in terms of the technicals.

It’s sad, too. Many of these airlines are very well run, and a few have remained profitable. Also, with oil hovering at palatable prices, I’d like to believe these companies and their stocks would get some love at last. That’s what I get for thinking.

SkyWest is the only true airline that’s an S&P 600 constituent, so to make the industry analysis meaningful, I’ve dissected all the small caps tagged as airlines.

The numbers tell the harsh tale.

Could the economy be the problem? Maybe, but some airlines managed to turn a profit, so I don’t want to generalize too much. Like I said earlier, some of these companies are well run, while others aren’t. It looks like the well-run airlines are being dragged down by the poorly-run airlines. Seeing as how they usually move as a group, I can’t be optimistic about any of these airlines until the majority of them start to improve… and that’s an economic function.

If you still want to jump into an airline stock though, Allegiant Travel Co. (ALGT), SkyWest, and Atlas Air Group Inc. (AAWW) have the right fundamentals, though two of them fall short in the technical category. Atlas Air Group looks like it’s rising more than falling though.

Hawaiian Holdings Inc. (HA) is also on the rise, but there’s only a minimal amount of information regarding the company. That can make it tough to keep tabs on.

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Recessions Good For Movies and Video Games? Think Again

With the recession now playing the back nine, and after watching Activision-Blizzard (ATVI) turn in an incredible quarter, and after seeing The Walt Disney Co. (DIS) post some disappointing numbers, I think I’ve heard about all I can take from the “the recession is helping movie and video game revenue” crowd.

I don’t mind their perseverance or conviction; I admire it actually. I’m simply bugged by those proponents waving some hand-selected numbers out to serve as verification of the truth. If a strapped consumer truly is steering towards low-end entertainment and away from expensive venues, then the majority of the data will support the argument. Frankly, it doesn’t. Hear me out.

Yes, Activision-Blizzard earned $189 million in Q1 versus only $43 million from Q1 a year ago. That’s impressive.

Proof that video games are prodded when things are monetarily tight? Keep reading.

A similar story can be told for movie-goers. Though $8.00 a pop is a ridiculous ticket price, it’s cheaper than a $50 dinner or an $800 weekend getaway. And, that’s the explanation given for this year’s (to date) box office success. So far this year, movie revenues are ahead of last year’s total by 17%, once again ‘fueled by the recession’.

So far the numbers all support the theory, no? Unfortunately, that’s where most investors would stop getting facts and just smugly dive into their favorite stock pick.

Fortunately, I have the rest of the story.

If a recession is good for video game sales, what happened to Electronic Arts Inc. (ERTS) last quarter? Their Q1 operating loss widened from $37 million to $62 million on the heels of a 24% dip in revenue. EA makes video games too, and clearly the recession isn’t a boon for them.

The reason Activision did so well…. the company also launched the latest edition of the Guitar Hero series in Q4, which could have spilled over into Q1. The company also offers the subscription-based online game World of Warcraft, which has a cult-like following…. of paying customers. It would be hard to screw that franchise up, other than by just not selling it.

If a recession is good for movie revenue, what happened to Disney? Disney studios’ Q1 income came in at a a paltry $13 million…. a joke compared to the $377 million raked in during Q1 of last year. Looks like the recession isn’t good for all the studios…. just some.

[Side note: Disney's theme parks? The ones that cost $69 to get into? Between the two, attendance during Q1 was basically flat. I guess the consumer has a little more discretionary cash than he acts like he does.]

It’s at this point most investors would rightfully argue that Disney’s movie line-up in early 2008 was far netter than 2009’s.  And, those same investors would argue EA Games didn’t have the advantage of working with Guitar Hero and World of Warcraft. I don’t disagree at all, which is the whole point…… low-end entertainment’s success has nothing to do the recession - it’s just that some companies are delivering what the public wants.

My apologies for getting a little harsh, but I feel strongly about the lesson. I shudder when investors make errant assumptions, and I get downright terrified when the assumptions actually lead to a profit - it gives investors an unhealthy degree of confidence.

To anyone who has made the assumption described above, I submit to you that you should ask a few basic questions before buying into the buzz:

1. Do video game sales specifically improve in a recession, or do they just grow all the time in any environment?
2. Do box-office takes actually improve in a recession, or do they just grow all the time in any environment?

If you want to argue that the industries are recession-proof or recession resistant, that’s fine. That’s an important distinction to make though….the difference between “recession-resistant” and “thriving because of a recession”. If you believe the latter, you may want to get out of these stocks at the first sign of a recovery, which would be a mistake if the former is actually the case.

By the way, to answer the two questions above, video game sales have gone up every year since 2000, which includes the 2000/2002 recession as well as the 2008 recession. They also went up every non-recession year, so it would be dangerous to link a cause and effect.

Box office takes since 1990 (19 complete years) have gone up every year except 1991, 2005, and 2008. Of those three, only one (2008) is linked to a recession. So again, it would be difficult to assign a cause-and-effect relationship now.

As an investor, it can pay to get the facts.

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Credit Re-Freeze Headed Off at the Pass

We’ve talked about how a rising TED Spread and a rising Libor-OIS Spread were hints that the credit markets were starting to freeze up again without ever having fully unthawed. Well, the idea is back in focus again today, as a re-freeze was stopped just before it got started.

Here’s the deal - the rising TED Spread suggested the perceived risk in interbank lending was increasing, while the rising Libor-OIS spread hinted that funding for loans was more and more limited. Neither spread had reached ‘dire’ levels yet, but right now the economy can’t afford even the slightest mis-step.

Well, there’s good news on that front. Last week week - and so far this week - the TED Spread as well as the Libor-OIS Spread have started to fall again. It wasn’t the Geithner plan that prompted it, as the spreads started to fall before the plan was announced. However, it was likely to be Geithner’s plan that kept the overall de-thaw going before it fully reversed and clogged the credit market again.

Here’s the TED Spread chart….

….and here’s the Libor-OIS Spread chart.

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A ‘Perfect Economic Storm’ For Metals, Mining Stocks

I won’t go into all the same detail I did with the Investopedia story, but I do think this is an important enough (and potentially fruitful) idea to merit looking at breifly here. If you want the whole story, click here to read “Metals and Miners Dig Up Ideal Conditions“. Here’s the need-to-know premise…

I think we’re truly at the onset of a cyclical bull market, and an economic growth phase. The two aren’t always synchronized, though it looks like they are going to be now. Yes, this slight optimism puts me in the minority; for some reason many of the more prominent forecasters expect things to stay terrible in perpetuity. I disagree. More importantly though, an economic recovery will mean greater demand for “things”, most of which are made of metal. Last month’s increase in durable goods orders is a piece of evidence to that end.

Point being, demand for base metals and specialty metals could be cranked up.

The other dimension is wildly low interest rates rate now…. which the Fed can’t do a thing about, otherwise Bernanke & Co. risk upsetting an already-fragile economic recovery effort. Caught between a rock and a hard place, the lesser of two evils is simply letting rates stay low and dealing with - inflation. That’s right, exceedingly low interest rates and billions of dollars flooding the economic system is going to crank up inflation in a way most of us have never seen.

Guess what benefits from inflation though. You got it - commodities, basic materials, metal. Higher prices means margins are widened, but those higher prices will be supported by renewed economic strength.

So, that’s the fundamental side. What about the technical side? (Remember, I’m long-term oriented, but charts tell me as much useful information as the fundamentals do.)

Here’s the S&P 1500 Diversified Metals and Mining Index. I love the way these stocks got beat up last year, leaving behind some nice values. Even more than that, I love the shape of the reversal effort. This is a ‘U’ shaped transition, as opposed to a ‘V’ shaped move to a bull trend. The former is usually sustainable, especially when as well-paced as this trend is. The latter is usually not a sustainable reversal, meaning you’re getting in about the time everyone else is getting out.

In the article I mention a few companies you may want to look at. One of them is already in the BP portfolio.

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Overseas Wireless Stocks Are Better Bets.

Wireless stocks have been on my radar more than usual of late, mostly because they’ve been going higher while the rest of the market has been, shall we say, a little less reliable? The S&P 1500 Wireless Index is up about 40% since the beginning of the year, versus the market’s decline of 10% despite the recent rebound. Normally I’d worry about an inverse relationship when the overall market is falling - when the broad market starts to rise, the group in question starts to fall. In this case though, the wireless stocks have continued to rise.

I bring it up as a foray into my recently-posted Investopedia article “Wireless Stocks Won’t Stay Tied Down“, which pinpoints some of the specifics of why and where the industry is doing well. Namely, I mention that foreign wireless carrier stocks are really attractive right now (for good reasons). The stocks I look at are China Unicom (CHU), Mobile Telesystems (MBT), TELUS (TU), iPCS (IPCS) and Telemig Celular (TMB), with a specific look at the P/E ratios.

Now, what I didn’t say in the article….

The challenge in writing for Investopedia is that I can’t use graphics (and charting is a major part of my investing strategy), and Investopedia likes to adhere to a strictly fundamental approach. Fine, but the fundamental snapshots can’t quite explain what’s so attractive wirless stocks are right now, or why. The nearby chart can do both pretty quickly.

The S&P 1500 Wireless Index fell 83% between its 2007 and its 2009 low…. a ridiculous and undserved beating. The market seems to have figured out the error though, and is making up for lost time. Many of thse companies sailed through the recession without a second thought, and without giving up any revenue of earnings. It’s the chart, however, that got my attention - look at the dip, and then look at how firm the last few weeks have been.

Anyway, I’m adding one of these foreign wireless stocks to the official BP portfolio.

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‘Made in China’ Refers to Money

If Chinese Premier Wen Jiabao is only half right, his country will still foster GDP growth of 4%. What a great problem to have. Granted, it’s still not the growth rate we’ve seen in years past, 8%, but I’ll take it. More importantly, I think we all need to be taking a little larger piece of Chinese pie for our portfolios.

And which stocks are your best bets? Those are below. First, some Chinese food for thought….

• In Q4 of 2008, the United States’ GDP shrank at a rate of -6.2%, For the same quarter, China’s GDP ’shrank’ at an annualized growth rate of +6.8%. (It ’shrank’ because it had been growing as fast as 14% at one point in 2007.)
• Year-to-date, China’s market is down 14.3%, while the U.S. market is down about 23.7%. Neither is ‘good’, but on a relative basis it sure seems like their stocks have less of a bearish tide to deal with.
• China is planning a one potent stimulus…. a lot more potent than the United States’ stimulus. The proposed $586 billion stimulus China has been discussing is about 20% of their GDP. Every $1 trillion worth of stimulus for the United States is about 8% of GDP. Granted, the U.S. stimulus price is ever-changing (higher), and the Chinese stimulus is still in question. Even if China’s is shaved and the United States’ swells, they’re still doing more on a relative basis.
• China’s budget deficit this year will be about 3% higher than their GDP., while the United States deficit for 2009 is on pace to exceed GDP by about 12.3%.

And, some stock you may want to consider:

Aluminum Corp. of China (NYSE:ACH) - The implosion of aluminum prices have just about drop-kicked the company, but that’s a good thing in a way…. the stock is priced rock-bottom, and if the recovery happens sooner than later, this is a big-time value.

China Mobile Ltd. (NYSE:CHL) - The Chinese are as glued to their cell phones as anybody else is. Even with the slowdown, the earnings forecast for 2009 still leaves CHL with a projected P? of around 10.0.

Mindray Medical International Ltd. (NYSE:MR) - A 63.6% increase in domestic revenue, and a 103.9% increase in overseas revenue? Full year earnings were up 48.7%. What’s not to like. 

China Energy Recovery Inc. (CGYV: OTCBB) - If there are two things China is doing now, it’s still burning coal, and no trying to do it cleanly. China Energy builds waste heat boilers that make coal burning factories and plants more efficient and environmentally-friendly… one of the country’s massive initiatives. The company doubled revs last year, and is primed to do so again this year.

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Booze May Be Recession Proof, But It’s Not Currency Proof

Liquor, casinos, guns, and butter. All are supposed to be recession proof industries - great investments when times are tough. The problem is, that’s not good enough when you’re an international beer company, and relying on brisk overseas sales.

By now you may be aware Molson Coors (TAP) had a poor quarter. Year-over-year earnings fell 44%, from 94 cents to 52 cents. The market of course sent shares into a tailspin.

The selloff was probably deserved, but not for the conclusions jumped to by most investors. What really happened wasn’t quite as bad as it may seem on the surface. In the same quarter, Molson also paid for a big chunk of the cost of the MillerCoors co-venture. Once the one-time charges and discontinued operations charges are stripped out, earnings only fell from 73 cents to 57 cents. That’s only a dip of 22%, which still isn’t great, but isn’t bad either.

What the market really didn’t grasp was the effect of a rising dollar. In short, a stronger dollar hurt results, as a great deal of Molson’t business is international business. In fact, the company says about 55% of the earnings decline (about 10 cents of the adjusted 16 cent loss) is due to currency fluctuation. So, one could argue that earnings really only fell about 6 cents….. though I’m not one who would actually make that argument.

From my perspective, a loss is a loss is a loss. The reason is irrelevant. I don’t harbor any ill-will towards Molson, but as an investor, I also have to call a spade a spade.

None of this is really my point though. My point was to highlight how a stronger dollar is taking a real toll. As investors, we should respond to that.

In Molson’s case, considering globel been consumption trends rarely waver, I think it would be wise to start looking at Molson’s competitors that don’t have a problem with a strong dollar.  Of course, those are foreign brewers. Their beer prices are now far better to their local consumers than Molson’s prices are.

I name two specific foreign brewers I like in my recent Motley Fool article “Is Molson’s Bottle Half Full or Half Empty?” You can get more details about the whole message there.

Anyway - and as always - I want to post a chart of the brewer industry and its components. Very few sites, including Motley Fool, really lend themselves to my stock picking style which is based equally on charts and fundamentals. However, I think it’s important to know not just what your stocks “should” be worth, but whether or not they’re actually moving that direction. (You only make money if your stock goes higher, regardless of whether it’s undervalued or not.)

Here’s the S&P 1500 Brewers Index.

Needless to say, these stocks have been getting crushed starting at the beginning of the year. Relentless. Based on the sharp decline alone I’d be interested in seeing if any of these names are poised for a short-term pop. How did things get so bad so fast?

Here are the individual stocks’ percentage changes for the entire beverage (brewers + soft drinks) industry, also starting at the same time … at the beginning of the year. The tickers are listed/ranked to reflect their year-to-date results. Coca Cola Enterprises (CCE) looks like it’s breaking away, while Molson (TAP) was struggling even before the bad news was out.

Boston Beer’s (SAM) strength surprises me, though the broad weakness of the other alcohol stocks also surprises me for the opposite reason.

This chart isn’t particularly telling. Usually there’s more intra-industry divergence than this, but now there’s not a clear leader from any segment (except, ironically, Boston Beer).

Bottom line - this is still a shaky industry. I picked a couple for foreign brewers for fool.com, and I feel good about them. However, those two foreign brewers are also a hedge against further rises in the dollar’s value. The other companies represented on this chart are apt to experience problems comparable to Molson’s.

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Airline Stocks: Big is Bad, Small is Good

There’s no better arbiter than actual results, which is why you may want to steer clear of large cap airline stocks and wade into the smaller ones.

Bottom line - the ‘majors’ like Delta (DAL), Southwest (LUV), American (AMR) and the rest of the big carriers were unprofitable for their last reported quarter; most were unprofitable for the entire year.

High oil prices are the culprit, right? Maybe, but high oil prices didn’t seem to be a problem for the smaller (and some foreign) arilines like Alaska Air (ALK), Ryanair (RYAAY), and SkyWest (SKYW). And don’t forget, oil prices dropped - precipitously - starting in July, so it should have been that tough to handle it. [After all, it was the passenger 'surcharges' paying the extra fuel costs.]

Those three smaller or regional airlines I mentioned all posted an operating profit last quarter, and 2 of the 3 posted a net profit. The third one may have been able to post a net profit had it not been for their fuel cost hedging losses.

The article I wrote for Investopedia offers all the details and any actionable ideas. Plus, there are some stunning performance stats to go along with the recommendations.

What I didn’t get a chance to say in the article was that the majors are indirectly telling is there’s simply too much bloat (high-priced, non-productive employees) being carried. Obviously it is possible to run an airline profitably, as seen with the smaller regional names. In fact, on a relative basis, smaller outfits should actually be dealing with higher expenses (airport access fees, fixed overhead costs, etc.).  There’s more to their problems than just oil prices.

Anyway, you can check out the Investopedia article “Smaller Airline Stocks Are Taking Off” here.