Wall St. looking east from Nassau St., c. 1911 - click image to enlarge
U.S. Equity Market Cheat Sheet (October 24, 2011)
The domestic stock market as measured by the S&P 500 Index was higher this week by 1.12 percent. Eight sectors increased and two decreased. The best-performing sector for the week was financials which increased 3.92 percent. Other top-three sectors were energy and utilities. Technology was the worst performer, down 2.15 percent. Other bottom-three performers were materials and telecommunication services.
Within the financials sector the best-performing stock was State Street Corp., up 14.40 percent. Other top-five performers were Travelers Co., Morgan Stanley, ACE Ltd. and AON Corp.
The financial sector has been the best performer over the past month as investors appear to be looking past a potential financial crisis in Europe. The U.S. Global domestic equity funds have been significantly underweight financials and this has hampered performance in recent weeks. We believe government policy is a precursor to change and until there is true clarity on what steps governments will take to resolve the current situation in Europe, we will follow our models and largely stay on the sidelines.
At U.S. Global Investors we employ a āGARPā (growth at a reasonable price) approach to investing. At a very basic level, we look for companies growing revenues by at least 10 percent and generating high returns on capital. We use this model to initially select investments and to monitor existing positions to determine whether or not they still conform to the model. So far this earnings season, with one exception, holdings have continued to meet the model based on the new third quarter earnings reports with many posting revenue gains well in excess of 10 percent. The one exception was a health care stock which was subsequently sold.
Strengths
- The consumer electronics group was the best-performing group for the week, gaining 15 percent on strength in its single member, Harman International Industries Inc. The firm reported quarterly earnings which handily exceeded the analystsā consensus estimate.
- The oil & gas storage & transportation group outperformed, up 14 percent on strength in member El Paso Corp. The pipeline company rose approximately 25 percent after Kinder Morgan agreed to buy El Paso in a cash and stock deal valued at $21.1 billion.
- The homebuilding group gained 9 percent. On Wednesday the Commerce Department announced that U.S. housing starts in September increased 15 percent from August levels to 658,000 starts at an annual rate, above the consensus expectation of 590,000 starts. This was the highest annual rate since April 2010.
Weaknesses
- The casinos & gaming group was the worst-performer, down 7 percent on weakness in member Wynn Resorts Ltd. The firm reported quarterly revenue and earnings below the consensus estimate. Strength in the firmās Asian operations was offset by weakness in its Las Vegas operations where net casino revenue was down 8.3 percent year-over-year.
- The computer hardware group underperformed, falling 6 percent, led down by the groupās largest member, Apple. The firm reported quarterly revenue and earnings below the consensus estimates. The shortfall was due largely to consumers postponing purchases of the iPhone in September in anticipation of a new model expected to be introduced in October. ExxonMobile has now regained its position as the largest company by market capitalization with Appleās fall this week.
- The gold group gave up 6 percent, led down by its single member, Newmont Mining Corp. The price of gold declined for the week.
Opportunities
- There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.
- We are right in the midst of earnings season and many bellwether companies are reporting next week including Caterpillar, Dupont and ExxonMobil.
Threats
- A mid-cycle slowdown in the domestic economy would be negative for stocks.
- An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.
