To be sure, at downside and upside inflection points, stocks are anything but efficient. As my father says, “The stock market is fear, hope and greed only loosely connected to the business cycle.” Yet, to be a successful investor, one must also be able change their views for the changing causal relationships. Sticking with the Cisco example, over the past few years Cisco has made a huge strategic mistake by moving into the data center business. Before that Cisco was known for its prowess in the switching and router business. When a customer wanted servers, Cisco used Hewlett Packard (HPQ/$36.96/Outperform), or some other manufacturer. Not so anymore. Cisco went on an acquisition binge and now competes with many of its previous customers and in the process has alienated them. Accordingly, some of them have gone into Cisco’s business. Hewlett Packard is a perfect example. HPQ bought 3Com and now competes head-to-head with Cisco’s switching/router products. Meanwhile, Juniper (JNPR/$37.05/Market Perform) is also taking market share from Cisco. As Vitaliy concludes, “Draw a straight line through its chart and you see it’s either going to zero or at least will continue to go nowhere.”
Speaking to “timing” the market, I too don’t believe anyone can “time” the stock market on a daily, weekly, or even a monthly basis. I do, however, believe that if you have the patience and discipline to wait until the odds of success are tipped decidedly in your favor, that when you do put trading capital at risk, if you are wrong you will be wrong quickly, with a de minimis loss of capital (read: take your losses quickly). Patience is the key. Take last year, I only made six trades last year and most of those were to hedge the downside into the April – June swoon. More recently, we have been exercising patience since the SPX broke below its 50-day moving average and traveled into the 1316 – 1320 support zone. That level thus became important, suggesting that if it is violated we would raise some more cash. That said, the SPX subsequently recaptured its 50-DMA, which I said was a step in the right direction in my verbal strategy comments late last week. The scene would become even brighter if the 1340 level can be bettered this week. If so, it would bolster the view that stocks could rally above 1400 into quarter’s end as professional money is forced to chase ‘em.
Last week one of our investment stocks was in the news as NII Holdings (NIHD/$43.42/Strong Buy) hosted an Analyst Day in Peru. The company reiterated its plan to launch 3G in Chile by year-end 2011, and in Mexico and Brazil by 1H12. The company also reiterated its commercial launch of Push to Talk over 3G in Peru by the end of this summer. The company said that its plan over the next five years is to grow the subscriber base by more than 2.5x and to grow revenues and EBITDA by 2x (would imply CAGR of 15%). Growth is focused on its core business and push to talk on 3G. From 2012-2014 the company is targeting net adds CAGR of 25%, subscriber CAGR of 25%, revenue CAGR of 15%, and EBITDA CAGR of 20% with margin expansion during this time frame. Our analyst believes NIHD is currently trading at a low EBITDA multiple (5.0x 2011E EBITDA) relative to its expected five-year growth trajectory.
The call for this week: I am writing this Monday night without the benefit of seeing Tuesday morning’s pre-opening futures because I will be on a plane for the West Coast. Still, I am optimistic given last week’s backdrop. While it is clear economic statistics have softened, we believe this is largely attributable to Japan (Fukushima), the European debt debacle, the Middle East, and our continuing weird weather. That optimism is reinforced by another all-time high in corporate profits (before tax and adjusted for inventory valuation adjustment and capital allowance adjustment), which is good for capex and employment. Moreover, low interest rates, a cheap U.S. dollar, strong emerging market growth, a mini-tech boom (LinkedIn), and the fact that President Obama and Fed Head Bernanke are determined to see a stronger economy all suggest the economic expansion has probably become self-sustaining. And, maybe that is what the stock market reflected last week as the defensive sectors (Consumer Staples, Healthcare, Utilities, etc.), which have been outperforming over the past month or so, weakened, while Energy (+2.04%) and Materials (+2.07%) rallied. That rotation allowed the SPX to recapture its 50-DMA (@1329.31). Now if the SPX can trade decisively above 1340, our case for a move to 1400+ should gain traction.
Copyright © Jeffrey Saut, Chief Investment Strategist, Raymond James
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