The Market Is in a Risk-on Kind of Mood

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Posted: Jun 07, 2016 12:01 AM
The Market Is in a Risk-on Kind of Mood

You would not know it by looking at the indexes each day. You would not know it by watching the nightly news headlines. You probably would not even know it by watching the financial channels.

But, this has quietly transitioned into a “risk-on” market, ever since those FOMC minutes were released a few weeks ago. In those minutes we learned that the FED had turned hawkish once again.

A hawkish fed seems like a very unlikely reason for the market to flip to a risk-on mood once again, but I gave my observations as to why in an article that I wrote for Marketwatch this past week. It just seems that the market was ready for the inevitable rate hikes this time around.

Those hawkish minutes by the FED created big changes in the market. It halted the falling dollar. It halted rising precious metals prices. It brought the meteoric-like move in the emerging markets to a screeching halt.

It also caused the chips to come back on the table in a risk-on type of way. Why didn’t you hear about it on the nightly news? Because you had to dig deep into the individual stocks that make up the broad indexes.

The S&P 500 was absolutely flat last week, but Broadcom (AVGO) broke out to new all-time highs:

You may not have noticed the huge breakout last Friday unless you owned the stock. I do. In fact it is one of my top five positons at Gunderson Capital Management, and it has been for quite some time. I have mentioned Broadcom, the stock formerly known as Avago many times on my daily national radio show.

I featured the stock once again, back in February of this year. I also wrote an article about last year.

Broadcom is not exactly a defensive, consumer staple. Instead it epitomizes a risk-on type of stock.

Data from Best Stocks Now App

Headquartered in Singapore, Broadcom is now a $63 billion market cap company. Their earnings report last Friday knocked the cover off of the ball. Quarter over quarter, sales grew by an astonishing 26%, while earnings were up a blistering 119%. This type of growth is not easy to find in a large-cap stock.

Yet the shares continue to trade at a steep discount to their expected growth rate! That is right, the forward PE ratio of Broadcom is currently just 13.02. Meanwhile the expected five-year annualized growth of the company is expected to run at a 17.8% clip.

This makes for a very reasonable PEG ratio of just 0.73. Furthermore, it I take next year’s EPS estimate of $12.77 per share and grow them by an annualized 17.8% over the next five years, I come up with a five-year target price of $275 per share.

The stock closed last Friday at $162.56. It seems to me that there is still plenty of upside potential in the stock.

Once again, here are what those numbers look like.

Data from Best Stocks Now App

While I like value, I also like performance. I am a hybrid investor. I like value combined with performance. Value by itself leads to too many value traps. Meanwhile, performance by itself leads to too many over-priced momentum stocks. I like to combine the two. So, let’s check on the performance of Broadcom.

As you can see the performance of Broadcom has clobbered the returns of the market over the last one, three, and five years. There are obviously no guarantees going forward, but this is a very impressive track record.

I only have a handful of “A” rated stock in my database right now and Broadcom is one of them. In fact, it was my number one rated stock overall (out of a field of 4,122 stocks and funds) the day before they reported earnings. Furthermore, it has been one of my highest rated stocks for over two years.

Data from Best Stocks Now App

It is an excellent example of a stock that in my opinion currently possesses both value and performance.

There were many other technology related stocks that also broke out last week. You probably did not hear about this on the nightly news either. One would have to look at hundreds of stocks on a daily basis to spot such action. That is what I do. You cannot know the market, if you do not know the stocks that make it up.

Did anyone notice the breakout in TCEHY this past week? This is another one that I currently have a position in.

Amazon continues to break out. I own it also. It is currently my largest position.

Other individualstocks that are currently breaking out to new highs would include healthcare stocks like United Healthcare (UNH), Aetna (AET), Humana (HUM), and Wellcare Healthplans (WCG).

I currently own United Healthcare in my Premier Growth Portfolio.

United Healthcare is also a good example of that rare combination of value+performance.

It is currently ranked #50 in my Best Stocks Now database.

Many higher risk retail stocks are also breaking out. Stocks like Big Lots (BIG), Burlington Coat (BURL), Dollar General (DG), and Dollar Tree (DLTR) are all excellent examples of this.

I do not own any shares of Big Lots (BIG), but that is an impressive breakout!

Maybe I need to stop by my local Big Lots today to spruce my wardrobe!

I do own Dollar Tree (DLTR) however. It is also one of my biggest holdings. I discovered Dollar Tree many years ago when I was putting my Best Stocks Now database together. I also wrote about it in my book by the same name. It is still one of the best stocks in the market.

It too continues to break out.

 It is also one of only a handful of “A” rated stocks in currently my database.

Real Estate investment trusts like Crown Castle (CCI), Coresite Realty (COR), Dupont Fabros (DFT), and Digital Realty (DLR) also broke out last week. Most of these also come from the more “risk-on” side of the market ledger.

I wrote about Coresite Realty (COR) recently. If you don’t know about it, you may want to look into it. I currently own it in my Growth & Income portfolio. It too is breaking out once again.

Coresite has also put up some very impressive performance numbers over the years.

Finally, many gold stocks broke out last Friday, but I am not as wild about them as I used to be. I will explain why after we look at a few charts.

Bellweather, Barrick Gold broke out.

Agnico Eagle also broke out.

The breakout in gold stocks was due to the huge drop in the U.S. dollar last Friday.

The huge drop in the dollar was caused by the horrible jobs report on that day. The U.S. economy only created 38,000 jobs during May. This is the worst number in over five years. As of now it looks like this was a one-off, and it does not appear that a recession is anywhere near on the horizon. The seven year plus bull market is still intact for now.

Nevertheless, the jobs report set off a sell-off in the dollar and a rally in the bond market. The thinking now is that the FED will not hike rates in June. But it is still inevitable that a rate hike is coming much sooner than later. This will cause the dollar to rise and gold to start falling once again.

So for now a risk-on mood has returned to the market. While you may not see it on the surface of the market, it does exist if you dive down a little bit deeper into it. I do not know how long it will last, but earnings are expected to continue to start growing once again in the second half of this year. That could keep it going for quite a while.

My work on S&P valuation currently suggests about 10% upside potential over the next 12-18 months.

As long as the market remains in this “risk-on” mood, you have to make hay while the sun shines.