I am bullish on the near-term outlook for stocks. The economy? Well . . . not so much. Frankly, the excitement and commentary from economists and major stock market participants regarding recent data have me scratching my head. If the Republican party in 2012 had spun and controlled its message the way the economic picture is being sold, Mitt Romney would be in office today. I am concerned that if this exuberance ends up being the primary driver of stocks in the near term, we could come down hard in the first half of 2014.
Here is why.
It is no secret that consumers are the greatest contributors to the economy. When consumers are buying goods or paying for services, that usually means a healthy economy and employment environment. A key component of this consumption growth is often dependent upon the biggest purchase of them all: a home. The rippling effects of home-buying on the economy sound a little like certain sections of the Bible. Just as this one begat that one, and that one begat another one, home-buying spurs the purchase of many other goods and services and generates tax revenue.
Since the commencement of the economic and credit crisis in 2008, the housing and mortgage sectors have been abysmal, with few exceptions.
In fact, even where there has been growth, such as the average home sales price bounces of late, it hasn’t exactly been that meaningful. Lo and behold, recent data cited a 25% jump in new home sales for the month of October, implying tremendous demand and growth in housing.
The sad truth is that the sale of newly constructed homes is just a fraction of overall home sales and that the total number of new homes sold is on pace to be one-third of the peak reached a few years ago and just over half of the average number of new homes sold annually for the past 40 years.
Does that 25% growth number look great on the surface? Of course. Should we cheer? Not at all. And there’s even more recent data that appears to be positive -- but really is not.
Yesterday, the U.S. Commerce Department released revised GDP figures for the third quarter of this year. The new figures indicate GDP growth of 3.6% versus the 3.2% rise predicted by economists, which on the surface appears to be a positive indicator. Unfortunately, when you peel back the onion on the numbers, you start to cry.
Export growth was reduced to 3.7% from 4.5% while import growth rose to 2.7% from the previously estimated 1.9% figure. This means that we exported a lot less than initially ascertained and imported a great deal more. Plus, this picture is actually worse when compared with recent years because the U.S. is importing fewer and fewer barrels of oil as we lessen our dependence on foreign suppliers. In addition, the growth itself is misleading since corporations reported a huge rise in inventories for the quarter, indicating that they ramped up big time to account for the expectation of a big rise in consumption in the fourth quarter of this year and early next year.
All of this news isn’t good but it doesn’t necessarily mean that stocks will be torpedoed anytime soon. As long as EPS estimates for 2014 stay largely the same and valuations are attractive, even incremental GDP growth above 2% for next year would keep the stock market’s gravy train rolling. If not, we will remind you to “Sell in May and Go Away.”
In this day and age, one would think that companies would recognize that their names and perhaps even their stock symbols carry a lot of weight with customers and investors. A cool moniker can go a long way toward a company becoming a familiar household name, and it can mask some problems. (See: Xerox- NYSE – XRX and Kleenex.) On the flip side, a bad name or stock symbol can mask all of the good things a given company has to offer. For example, FAB Universal, whose stock has been halted for about 10 days due to alleged improprieties, has the stock symbol FU on the NYSE. Talk about a bad choice…
One example of a great company and a very attractive stock with a boring name is Hybrid Coating Technologies, Inc. (OTCQB – HCTI - $0.36.) The name may not be so striking, but the business model is very clever.
Hybrid Coating produces its proprietary Green Polyurethane™, the first polyurethane-based coatings and paint that eliminates the use of toxic isocyanates from the entire production process. Isocyanates, used in the formulation of all polyurethane materials including coatings, adhesives, sealants and foam, are dangerous chemicals now considered potential human carcinogens. The handling of isocyanates, while formulating and applying polyurethane, can cause severe respiratory problems. Prolonged exposure can cause asthma and even death.
The early part of December can be one of the most nerve-wracking and conflicting times of the year for investors. There are a multitude of reasons why this seasonality occurs with some regularity, even though investment pros seem to forget it each year. The good news is that if you can be patient and know what to look for, some real bargains will be had in the coming weeks.
Re-Balancing and Window Dressing
This is the time of year when investors decide what to sell and what to hold onto. While retail investors may only begin to contemplate addressing this process now, investment professionals and institutions are in the hot-and-heavy period of rebalancing portfolios by sector or asset class and selling off names that may have already neared the conclusion of their run. Moreover, mutual fund managers will jettison stocks they do not want to be listed in their year-end portfolio reports while they are happy to add names that they believe will work in 2014 and are popular today. These conflicts and changes cause a stymying effect or a neutral effect, making the market direction hard to gauge.
Small-cap and microcap success stories usually have similar characteristics and we believe that Fresh Healthy Vending International Inc. (OTCQB – VEND - $2.12) will emerge as one of these success stories.
Company successes have obvious traits such as operating in a large addressable market and having an identifiable differentiator or a fragmented market with no 800-pound gorillas. If you are lucky, you can hit a stock at the right time if you establish a position in the early stage of a major shift in trends that leverage the early-mover advantage in its industry segment. Every once in a while these stocks sell off for a spell after reaching a peak, only to run right back up again.
That is exactly what we believe will occur with Fresh Healthy Vending.