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| This dip could be an opportunity to get a good price on PotashCorp, which has a strong fundamental story for 2011 and beyond. |
It looks like President Obama said the magic words in his State of the Union address as the market charged higher Wednesday morning. However, the Dow has now pulled back below the 12,000 level after poking through. The President’s opening remarks pointed to a roaring stock market as evidence of a recovery, making it clear that he will do everything in his power to see that continue.
Market Willing to Win Ugly
Sometimes when your high flying offense isn’t clicking, you have to be willing to get it done ugly. We have noted over the last week that the action has been extremely sloppy, which is often a sign of an imminent correction. To this point, however, the market remains resilient as ever. And who can really be surprised? While the first half of 2010 brought some indecision in the markets, the end of the year saw improving economic data, policy decisions designed to boost asset prices and stoke inflation, and a massive shift of capital from bonds to equities.
Markets do correct at some stage, and it is prudent to get cautious when you see warning signs, but at this point it has not paid to get short. Continue to look to buy the dips in strong fundamental stocks and sectors. Some momentum darlings like cloud stocks are having a tough time as investors look for lower risk opportunities. The cloud debacle illustrates the point that, even as a technical swing trader, you cannot simply ignore valuations.
Microsoft Breaking Out
We touted Microsoft Corporation (MSFT) this morning as a good long-term value play that looked set to break out of a month long technical base, and the stock is breaking out nicely this morning. The flight away from small-cap growth into mega-cap stocks bodes well for MSFT, which is an attractive play on several different levels. The company has become an attractive value play while providing some growth upside due to its exposure to cloud computing and desire to innovate once again. The company now also pays a dividend of 2.5%, only 0.1% below the 10-year treasury note yield.
Ags and Cloud: In Which Sector Should You Buy the Dip?
Both the cloud computing sector and agricultural sector were slammed last week on news. This week we have been watching each group closely to see whether or not they are buying opportunities. After watching the technical action and taking into account valuations, it feels like one will be a stud and the other a dud in 2011.
In cloud, weak outlook from F5 Networks, Inc. (FFIV) triggered a sell-off in the entire group. Instead of being an immediate buying opportunity like we saw back in October, the cloud stocks have continued to be weak. VMWare, Inc. (VMW) was the next to report earnings, and despite beating across the board the stock sold off hard again. While the group has gotten a bit of a lift today, it remains an area of concern. Riverbed Technology, Inc. (RVBD) is next up on Thursday after the close, and based on precedent even a small beat could trigger another drop. Imagine what a miss would do. These stocks remain extremely highly valued on extremely fragile footing, with RVBD, for example, carrying a trailing P/E of ~230 and forward P/E of 43. Momentum traders are starting to fall out of love after harsh corrections.
The agricultural group, which sold off following news that Cargill planned to sell its 64% stake in The Mosaic Company (MOS), is a different story. As we have noted previously, fertilizer stocks have a strong fundamental story as population growth and the rise in affluence put more people higher up on the food chain. It takes more corn to feed a cow to then eat his meat than it does to feed corn to people. At the same time, the amount arable land is shrinking, making potash fertilizer crucial for farming. The ferts feel like they have found a bottom and are heading back toward highs, with Potash/Corp. of Saskatchewan (POT), which controls 20% of the world’s potash supply, our favorite in the group. We feel better about buying the dip in the ag group.
Casinos Winning Hand
The casinos are another group we watch closely, but have been somewhat off the radar over the past couple weeks. Today, they are starting to perk back up again. The true leader of the group, Wynn Resorts Limited (WYNN) has held up best in the upper end of its range, and today is heading back toward highs. Las Vegas Sand Corp (LVS) is a close second in the group, and at its current level is the more attractive risk reward trade as it has based considerably off the highs. A floor seems to be in at $44 and change, and the pattern is tightening. We expect to see LVS back to the $50 level in the coming weeks.
*DISCLOSURE: John Darsie is long LVS, POT, MSFT, MOS, RVBD, FFIV. Scott Redler is long LVS, MGM, MSFT, GRMN, GLD; Short SPY.
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