Has the market exhausted itself, or does this bull have further to run? That’s what I asked here last week, and I offered arguments for more upside from two of our contributors. If you missed the issue, you can read the whole article here. Many of our readers wrote back to me with their own opinions. Here are some of them:
“Being a small investor I think the market has ‘had it’ and needs a long rest, bringing us at least a 10% correction. But then again, the little guy is never right.”—Jim Destino
“Still making profits while the sun shines… Keep on shining!”—Jeff Hamilton
“I think the market has a long way to go on the upside. Expect a few down days to relieve the pressure. As long as the earnings come in positive it will run.”—Sy
“My opinion, for what it’s worth, is that so far, the price action is saying that stocks will likely head higher. So I believe investors/traders should be long the market or individual stocks and have a plan to exit if they’re wrong.”—Glenn Corey
“Not that I’m as smart as the pros but I have been investing for over 40 years. I had a 17-year run where I averaged 18%/yr during the ’80s and ’90s. I agree with you! This year feels like a big year but feelings don’t count. What do I do different? I keep my stops closer than usual. I do not target or predict tops. I let the stops do their job. I watch the market every day without fail but am not a day trader. A very long time ago, I bought Skyline at 9 and let my broker talk me into selling at 18. I then watched it climb all the way to 75. I vowed, ‘Never again!’ And I haven’t.”—Don Webb
“I’m holding and riding the wave. Hopefully for all 2013.”—Lenny Figueroa
“I am still riding the wave upward, with trailing stops in place for the more volatile stocks. And selling put options for stocks I already have but would not mind buying more. I have taken a few profits along the way but am still about 80% invested.”—Don A.
Although my readers seem mostly optimistic, I suspect there’s a strong selection bias here. I argued that the bull has further to run, and most of the respondents agreed with me, so I don’t think this sample is representative of most investors.
To give another unscientific sentiment reading: I went to a party at the home of a friend this Saturday, and talked to two casual investors about the stock market. Neither is heavily invested, and both are more worried about downside than excited about potential upside. One told me he had recently taken profits on most of his positions.
Of course, another factor that may be skewing the data is Investment of the Week itself: all the respondents to last week’s piece are readers of my advice here; the two party guests don’t have that advantage!
When I see two or more of our Digest contributors recommend the same stock (that isn’t Apple) around the same time, I always take notice. While we have hundreds of contributors, they have thousands of common stocks to choose from, so a double recommendation doesn’t actually happen as often as you might think.
Nevertheless, we had two double recommendations in the latest Investment Digest. One of the ideas is particularly interesting because, from a growth perspective, the stock’s chart doesn’t deserve a second look. Here it is:
That’s a chart of Apache Corp. (APA) falling 30% over the past 12 months. Lousy performance like that is not usually a catalyst for two different advisors to recommend a stock.
But our two advisors both see the same thing in the stock here: value. That doesn’t just mean it’s cheap: they both think the stock is offering good quality for the price.
In fact, Jason Kelly, Editor of The Kelly Letter, has been watching APA for almost a year, but just pulled the trigger when it hit 75 a couple weeks ago. Here’s why he thinks the stock is a bargain at this level:
“We officially began watching Apache Corp. (APA) in last year’s Note 21 sent April 22 [with] an initial buy price target of $85, a 7% drop from that Friday’s close. When the drop came, I revised our target down to $75 and even placed an active order to buy 400 shares at that price. It never filled. The lowest APA went was $77.46, then rebounded to $94 in September, fell to $74 in November but shot to its recent high of $85 earlier this month before we could place a new order and buy it. From its $85.24 close on February 5, it’s steadily dropped 12% to its current $75.40.
“What’s caused the recent slide to our target price? Its exposure to Egypt, where political instability has interrupted production. Apache pulls about a fifth of its natural gas from Egypt. It also runs a large operation in Argentina, another volatile political backdrop. With natural gas prices remaining in the dumps, Apache reported a disappointing fourth quarter, missing estimates by two cents and achieving the inglorious distinction of delivering a fourth straight quarterly whiff in a row. Natural gas prices averaged $4.14 per thousand cubic feet in Q4, down 1% on the year.
“There was also a brief blowout scare in the shallow-water U.S. Gulf of Mexico, but Apache detected the underground flow and contained it before any gas reached the surface.
“None of this worries me, as it’s roughly the same set of factors that made the stock cheap enough to initially catch our interest. Political instability is part of life in the energy business. ... Operational risks, such as the blowout that Apache nipped in the bud, are not new. The reason Apache is 35% cheaper than its industry group and trading at a 30% discount to the S&P 500 is that these worries are factored in. Investors are assuming more quarters of earnings misses, which betters the chance of upside surprise.
“Also, beyond the headlines the situation is not so grim at Apache. Its operations in Egypt continued without incident through the ups and downs. In Q4, the firm’s production reached 800,000 barrels of oil equivalent per day, up 5% on the year and 4% on the quarter. Output from the Permian and Anadarko basins grew 5% and 10% respectively on the quarter and now comprise a quarter of company production versus a fifth a year ago, shifting more production into stable territory. The firm runs one of the highest levels of operating leverage in the industry, so it won’t take much improvement in demand and prices to see a quick uptick in earnings. Capacity is declining, thus odds are growing for just such an improvement. As far as I can tell, all that really happened is that the market decided to give us a third chance to buy shares of Apache at our target price of $75, and we’ll take it.”—Jason Kelly, The Kelly Letter, 2/24/13
The second recommendation also emphasized Apache’s value for the money. It came from Investment Quality Trends, which is edited by Kelley Wright. Here’s his chart of APA, showing undervalue and overvalue bands calculated using the stock’s historical price and dividend yield.
IQTrends picks stocks based on their belief that, “When all other factors that rate analytical consideration have been digested, the underlying value of dividends, which determines yield, will in the long run also determine price.”
The newsletter’s explanation of its system continues: “The key to value, therefore, lies in yield as reflected by the dividend trend. Individual stock prices fluctuate between repetitive extremes of high dividend yield and low dividend yield. These recurring extremes of yield establish Undervalue and Overvalue price levels. When a dividend is raised, the Undervalue and Overvalue price levels are raised automatically so they will continue to reflect the historically established yield extremes.”
As you can see on the chart above, APA is currently trading right around its undervalue band, which is set at the level where the stock yields 1%. In addition, IQTrends notes that APA earns an S&P Quality Rank of A-, has paid a dividend since 1965 and has raised its dividend by an average of at least 10% over the past 12 years, earning it the newsletter’s designation as a “Select Blue Chip.”
In short, APA is a high-quality stock selling at sale prices: truly a great bargain here.
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Investment of the Week
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