Today is Thursday, May 17, 2012

Stock Funds

Markets may need more than nine years to reach October ‘07 highs

History indicates that the Standard & Poor’s 500 index probably will need more than nine years to rise 131% from its March 9 low of 676 to it’s October 2007 high of 1565, Peter J. Tanous writes in today’s Wall Street Journal.

The question:

How to not pick health and medical stocks

Some stockpicking gurus are worth following and some are not.

Don’t pay much attention to mutual funds’ portfolio managers who brag about outperforming the market even though their fund was down 28% last year and they charged their investors 0.83% of their assets to hold their money.

Barron’s Online today interviewed such a portfolio manager about his top health and medical stocks. While he had some interesting and spot on comments about health care stocks, I wouldn’t buy any of his biggest holdings at the moment. Their technicals are weak, and some of them have questionable fundamentals.

Never buy a fund’s top holdings just because the fund has a lot of shares of the stocks. You don’t know when the stocks were bought or at what price. And you don’t know whether the stocks have been sold since the list was compiled or whether they are on a list of stocks about to be sold. You need to look a stock’s current fundamentals and technicals before buying it.

Barron’s listed 10 of his top holdings: ALXN, AMGN, BAX, CEPH, DNA, GILD, MHS, TEVA, VRTX and WYE. Their daily charts are here.

Their point and figure charts are here.

Click on a chart to see a gallery of hourly, daily, weekly and point and figure charts.

As a result of the overall market’s declines since early last week, many of these stocks have weakening daily and weekly charts. A few have bullish price objectives on their point and figure charts, but they’re correcting.

And since the market is bearish long term, it pays to avoid all but the fundamentally and technically strong stocks. And there aren’t many to choose from because it’s almost impossible to forecast the economy or the stock market at this time.

Of these stocks, two present possible fundamental problems.

Genentech (DNA) is a takeover target. It’s price may be inflated because Roche is trying to buy the shares of DNA that it doesn’t own. Given the likely transaction price of $99 to $105 and the current price of $87.47, there’s not a lot of upside potential compared with the downside risk that the stock will plunge if the deal doesn’t go through as speculators expect.

Medco Health Services (MHS) is a middle man in the prescription drug business, and the new Congress and president may make its life very difficult. Also, some of its clients may try to take their business in house.

I’m also bothered by the fact that Wyeth (WYE) is the only stock in the group paying a decent dividend of about 3.25%.

What to do? Watch these stocks. If one that looks promising shows technical strength on its daily, weekly and point and figure charts, it may be a good speculation, assuming that the overall market looks fairly bullish.

I don’t own any of these picks.

For educational purposes only. Investigate before you speculate. I am not recommending any trades and take no responsibility for how others trade stocks, ETFs, commodities or anything else.

 

October’s bear market drains $200 billion from major pensions; employers want bailout

Major employers are asking the government to bail them out of their obligations to their pension funds, which have shrunk by some $200 billion in the last month as a result of the plunge in stock prices.

This is just another indication of how little institutional investors’ cash is on the sidelines, waiting to jump on a sustained rally. The market rallied 889 points, or about 10%, Tuesday, and fell in the last 12 minutes of trading Wednesday, putting the Dow Industrials down 74 points for the day.

The key lede graphs from Bloomberg:

Oct. 29 (Bloomberg)—A trade group whose members include Lockheed Martin Corp., Dow Chemical Co. and General Motors Corp. is pressing Congress to help close a record $200 billion deficit in U.S. pensions created by this month’s global stock-market collapse.

The Committee on Investment of Employee Benefit Assets is kicking off a lobbying effort today to delay provisions of the Pension Protection Act that it says will force companies to drain cash flow to comply with funding rules set to take effect next year.

Where were the portfolio managers who allowed their pension funds to lose all of that money? Why didn’t they sell stocks when they saw them begin to lose value? They’ll give a lot of reasonable sounding explanations, but they failed to preserve their pension funds’ capital.

Now the employers want a bail out? How will that go down in Congress? This will be another opportunity for Congress to nationalize corporate America.

 

This mutual fund manager likes Baxter (BAX), Express Scripts (ESRX) and Cigna (CI)

Paul Alan Davis, co-manager of the Schwab Health Care Fund (SWHFX), tells Barron’s Online that three of his favorite health care stocks are Baxter (BAX), Express Scripts (ESRX) and Cigna (CI). A paid subscription is required and worth it.

The fund’s 10 largest holdings are JNJ, BAX, ABT, PFE, AMGN, MRK, BDX, ESRX, MDT and LLY. Their daily charts are here. Click on a chart for a gallery of charts for the stock.

I own BDX and LLY.

For educational purposes only. Investigate before you speculate.

Growing number of under funded pension plans won’t have cash to invest in cheap stocks

Wall Street is slowly waking up to the cash shortages at the nation’s pension funds, which normally invest about 60% of their assets in stocks. As a result of the some 40% declines in stock prices and even bigger drops in commodity prices over the last 12 months, once over-funded pension plans suddenly are under funded.

This means that they don’t have cash to invest in stocks, and employers may have to pore more cash into their employees’ pension plans just when cash isn’t so easy to come by.

For investors, this is just another piece of bad news. Not only are many pension plans suffering from recent stock and commodities markets declines,  mutual funds and hedge funds also are hurting for cash because their investors are withdrawing billions of dollars from those funds.

Similarly, college endowments have suffered from the recent declines in stock prices and probably have little cash available to buy what many analysts think are over sold stocks.

So the question remains, who has all that money that stock market bulls contend is sitting on the sidelines waiting for the right time to buy?

Certainly, individual investors who have been withdrawing billions from mutual funds and hedge funds have cash, but do they have enough to turn today’s bear market into a bull market?

Only time will tell.

Huge cash withdrawals from mutual funds are bad news for stocks

The Wall Street Journal’s Monday edition catches up on the mutual fund withdrawal story here.

It adds to concerns that mutual funds don’t have much cash available to buy stocks even though they are oversold.

Impact graphs:

No Quick Turnaround
The tough news likely won’t be over soon.

“The recent selloff of the equity markets will likely pressure earnings growth for the asset managers throughout 2008 and into 2009,” wrote Fox-Pitt Kelton Cochran Coronia Waller analyst Roger Smith recently. The firm has downgraded AllianceBernstein, Affiliated Managers Group Inc., T. Rowe Price and BlackRock.

Analysts have suddenly turned negative on the industry. J.P Morgan Chase noted asset managers are “under material pressure” and “a good place to avoid near-term.” UBS AG has said it is now “cautious on the group.” Goldman Sachs Group Inc. recently downgraded asset managers to “neutral” from “attractive.”

Poor fund performance, of course, is why investors are fleeing. The average stock fund’s return declined 11% in September, the worst one-month return since August 1998, according to Lipper Inc. The average U.S. diversified stock fund is down 27% in the past month.

Twenty-four of the 25 biggest fund companies nationwide were recently posting stock and bond fund asset declines this year, according to Financial Research Corp.

In addition to Janus (JNS), which I wrote about last Thursday, the story mentions T. Rowe Price (TROW) and Black Rock (BLK). Their charts are here.

I don’t own these stocks.

For educational purposes only. Investigate before you speculate.

 

Stocks could go 15% to 20% lower, but some think a bear market rally is near; why I bought CAT

Stock pickers quoted in the financial press this weekend seem to be more bearish than bullish, but, as BusinessWeek’s Amy Feldman reports, some impressive folks thinks the market is offering rare buying opportunities.

To me, the big question is whether hedge funds, mutual funds, endowments, sovereign wealth funds or other institutional speculators have enough cash to rally the markets. Many institutional speculators are being forced to liquidate highly leveraged positions and sell stocks and commodities to fund redemptions and margin calls. And other institutional investors have ridden the bear market all the way down unwilling to get out while the getting was good many months ago.

Using Morningstar.com’s premium screening tool, I found very few mutual funds that had 60% or more of their money in cash as of their last reports, most of which were made in July. One was Gabelie ABC Fund, which had 61.1% of its money in cash as of June 30. It will be interesting to see how that changed in the third quarter.

With almost no stocks in uptrends, it’s way to early to buy unless you just want to take a fling at bottom fishing, as I did in a small way last week. I bought Caterpillar (CAT) Friday because its dividend yields almost 5% and it’s trading at about 5.4 times earnings. It closed Friday at $33.30, way down from its 52-week high of $85.96 and below Morningstar’s estimated fair value for the stock of $72.

Even though a recent survey of CAT’s dealers showed they’re pessimistic about the next 12 to 18 months, Congress is on the verge of passing a $300 million stimulous package that focuses on rebuilding the country’s infrastructure and helping distressed cities and states. That looks like it might be good for CAT, which makes earth moving and road maintenance equipment.

I plan to hedge this trade by selling deep in the money January covered calls.

CAT’s very bearish charts are here.

For educational purposes only. This is not a recommendation. Investigate before you speculate.

Investors are dumping cash-poor mutual funds, forcing funds to sell stocks

If mutual funds had gone to cash at the beginning of the bear market, they would have money to invest now as the market searches for a bottom.

Many stocks look cheap to money managers, but they can’t buy because they’re still having to sell stocks to raise cash to pay off investors who’ve redeemed their mutual fund shares, according to Morningstar.com.

Morningstar blames investors who appear to be selling at or near the bottom of the market when they should be putting money into the markets.

But Morningstar’s analysts have it backwards. Instead of touting the party line for their clients‚Äîmutual‚Äîfunds, the Morningstar analysts should be pointing out that if mutual funds’ portfolio managers had been doing their jobs, they would have sold close to last year’s highs, and they would have money to invest now.

If mutual funds had preserved their customers’ capital instead of watching it slide away, the customers would not be cashing in on what’s left in their mutual fund accounts.

Morningstar warns that individual investors are lousy market timers because they tend to sell at the bottom and buy at the top of market cycles.

Yes, that’s probably true. But professional money managers know how to time the markets as do individuals who work at investing. The problem is that the mutual funds don’t allow their portfolio managers to actively manage money. They make them sit and watch the markets run away from them.

It’s more important to the mutual funds to keep investors’ money fully invested so that the funds can collect fees on the invested capital than to make money and preserve capital, which is what investors thought the funds would do.

To me, the mutual fund industry is a scandal waiting to happen.

Fully invested speculators getting killed by their mutual funds; those in cash preserving capital

A few weeks ago Fidelity sent a fancy brochure that warned against pulling out of its managed stock mutual funds and going to cash and cash equivalents.

I threw the brochure away.

Like almost all mutual fund companies, Fidelity seems to me to be more concerned about maintaining its fee income than about preserving investors’ capital in a bear market. That income is based on the assets that are invested in mutual funds. A typical fee may be 0.75% of assets. Thus, if you have $10,000 in a fund, you pay an annual fee of $75 regardless of whether the fund returns a profit or a loss on the year. If the fund makes a $1,000, or 10% profit for the year, the $75 fee is equal to 7.5% of the profit. So instead of earning, say, 4.2% interest on your money when it’s in cash, you pay Fidelity or another fund company 0.75% of your invested funds to hold your money and lose money for you.

The current financial crisis first hit the market back in late February 2007. At that time, Fidelity Capital Appreciation Fund was trading at $26.81. We’d owned the fund for several years and had a nice profit on the investment. We sold FDCAX because the market outlook was grim. Wednesday, FDCAX’s net asset value was $15.80 per share, or some 41% below the price on March 2,  2007. We also sold a couple of our other funds and have been in cash ever since, despite some rallies late last year that took FDCAX as high as $29.70.

These charts show how poorly several famous Fidelity funds have performed. Click on a chart to see weekly and point and figure charts. This is not meant to pick on Fidelity. All mutual funds are pretty much in the same boat and I think that they are not serving their investors well.

The question is, shouldn’t FDCAX’s money manager have gone to cash or 40% to 50% cash? Why are investors paying for active management of a fund that isn’t being managed? A fund can’t go to 88% cash and limit its loses for the year to date to less than 4% because it needs those management fees. And if multi-billion funds moved in an out of markets the way market timers can and do, it would roil the markets.

But individual investors, or, more accurately, speculators, can go to cash quickly. Many are on the sidelines today, waiting for the market to bottom out. They still have capital to invest, a peace of mind and the optimism that the markets will come back.

Whether individuals should pull out of the market at this point is questionable. We’re probably with in 10% or 20% of the bottom, but there is no guarantee that we’ll bound the 10%, 20% or 30% that many fee-conscious portfolio managers are predicting on TV and on their blogs. Each person has to decide for himself or herself.

I’m sitting with seven stocks that are down and other positions that are up.

But they’re small holdings. I think I can work my way out of my losing positions by selling call options against them over the next couple of years. Mutual funds generally don’t sell covered calls or hedge their positions in the options markets. Not everybody wants to put in the time or effort to do that.

One thing we won’t do is pay mutual fund companies or financial advisers, for that matter, to manage our money. They have too many conflicts of interest and constraints on their flexibility. While they certainly have good years, they also have some terrible years like 2008 when they incur huge losses.

With real, active management, those funds could and should protect their investors against such losses when markets turn bearish. Could they time the markets? Of course they could, and people who are in the markets the way professional portfolio managers are do it all of the time.

Janus (JNS) misses earnings forecast as mutual fund fees drop; clients withdraw $1.1 billion

Mutual fund companies are seeing their fee revenues shrink as the values of the equities they hold plunge and bearish customers withdraw funds. Because mutual fund portfolio managers stay virtually fully invested so that they will earn management fees, the only way investors in mutual funds can go to cash when they think the market is bearish is to take their funds out of mutual funds.

Often, fund investors just switch their money to money market funds from stock or bond funds, but uncertainty about the safety of money market funds has caused a lot of investors to withdraw their money from fund companies and put it in U.S. Treasury Bills or other federal government bond issues.

This is what is hurting Denver-based Janus Capital (JNS) , which operates mutual funds. Janus missed analysts’ expectations that it would earn 24 cents a share in the third quarter, when it earned 16 cents on continuing operations, down from 29 cents in the same quarter a year ago. The Janus news release is here.

Janus suffered a $1.1 billion long-term net outflow of investors’ money in the third quarter. “Average assets under management during the third quarter decreased 8.7% to $182.7 billion
compared with $200.1 billion during the second quarter 2008,” Janus announced. It said that as of September 30, “Total assets under management were $160.5 billion compared with $191.8 billion at June 30, 2008. The decrease in firmwide assets during the third quarter reflects $26.2 billion of net market
depreciation / fund performance, long-term net outflows of $1.1 billion, and money market net
outflows of $4.0 billion.”

Janus is cutting its workforce by 9%. This will save $40 million to $45 million. It is cutting general and administrative expenses by “approximately $25 million to $30 million” and will incur an estimated severance charge of approximately $7 million in the fourth quarter.

After buying $72 million of its own stock during the third quarter, Janus has suspended stock repurchases to preserve liquidity. It is only one of hundreds of companies that have wasted shareholders’ money buying back shares in an effort to boost executives’ bonuses.

If a company doesn’t know when to take its investors’ to cash to preserve capital and foolishly buys its own stock while it’s in a sharp decline, how can investors trust it to manage their money? It just doesn’t make sense.

JNS is trading at $9.75, down 5.71% on the day and down from its 52-week high of $37.08. Its dividend yield is 0.41%. Charts are here.

UPDATE: The day after I published this piece, Barron’s published FBR Capital Market’s explanation of why it has downgraded the stock, lowering its target price to $7 from $16.

I don’t own JNS.

For educational purposes only. Investigate before you speculate.

Mairs and Power Growth Fund (MPGFX) looks like a sell

Mairs and Power Growth Fund’s (MPGFX) total returns have declined in the last week, month, year to date (YTD) and last 12 months. During the last three years, it’s average return has been 4.16% a year, and its expected annual return over the next three years is a rather poor 15.83%, according to Morningstar.com.

Based on Mairs’ past performance, Morningstar gives the mutual fund four out of a possible five stars. But it seems to be losing its touch and probably should be sold.

In the last week, Mairs’ total returns are down 0.51%; in the last month, down 0.95%; YTD, down 4.02%; and in the last 12 months, down 4.7%.

The fund owns 42 stocks that were worth $2.1 billion on June 30.  Of those 42 stocks, 16 have positive weekly and point and figure charts. Their daily charts are here and here. Their point and figure charts are here and here.

Total returns on these 16 stocks were up 0.66% in the last week, up 2.66% in the last month and up 0.32% YTD. But total returns on these stocks in the last 12 months were down a modest 3.06%. In the last three years, total returns on these stocks were up an average of 2.32% a year.

The expected annual total returns on these 16 stocks is an average of 14.82% annually.  The 16 stocks’ average PEG ratio (PE/projected growth rate) is 1.41, and they yield an average of 2.73%. Their return on assets is only 5.22%, and their average return on equity is 16.15%.

The average three-year earnings per share growth rate on the 16 stocks is only 6.87%. The stocks are selling for an average of 9.99 times cash flow per share and for 1.34 times sales.

Yet, these stocks are selling for 87% of Morningstar’s estimated fair value for the 16 stocks, which is pretty high in this bear market. Only one of the 16 stocks has a 5-star rating from Morningstar. Five have four star ratings. The total portfolio has eight five-star stocks, nine four-star stocks and 14 three-star stocks.

Mairs is famous because it seldom trades its stocks. Its annual turnover rate is only about 1%. And it charges low fees, only 0.7% of total assets. But, of course, when a fund loses money over 12 months, its fees are more than 100% of earned profits, since there are none.

What is amazing is the number of stocks Mairs owns that are down more than 14% to 90% in the last 12 months, including 12 down more than 20%. Mairs has owned most of those stocks the entire 12 months. A little more active money management could increase the fund’s performance tremendously.

Mairs and Power specializes in investing in companies that are based around its St. Paul, MN, headquarters, but it owns several companies based in other parts of the country.

Of the 16 stocks, I have positions in STJ, TCB and WFC. And we own this fund.

For educational purposes only. Investigate before you speculate.