Taking Stock of the Stock Market

With the major indexes down so this year, it seems a good time to talk about the stock market. I’ve mentioned previously, that I do expect there to be a major stock market decline this year. My predictions doing pretty good so far, but it’s still early in the game.

The question in raised then, where is a good place to put your money. I’ve long been a fan of Barrick, but today it’s trading in the $35 range which I consider an absolute screaming by for this stock. How much of a buy you ask? Well, let’s just say that my brother (who’s profited from my stock advice in prior years) and I are taking investing in some call options on the stock. To best explain why, let’s look at a chart of Barrick versus the price of gold.

See how the share price of Barrick gold has been sharply declining despite the continued strength in the price of gold? Barring some bad news or an announcement by the company that they are going to miss their earnings, the current price of Barrick just doesn’t make any sense, which is the time where I really start to look at options. Barrick is going to announce their fourth quarter earnings on February 18th. The company should be reporting a huge profit for that quarter given that gold spent almost the entire quarter above $1100 (Barrick based its earning’s expectations on a gold price of $950) and given that it took a charge against its third quarter earnings to unhedge itself from prior gold contracts. That means that Barrick has maximum exposure to the rising gold price, and that means that Barrick is one of the few companies that’s going to continue to make money in this rough economy. The purchase of call options contracts that expire in the month of March should give plenty of time for the stock to bounce back up and make a handsome profit.

Kevin, my most loyal reader, spend me an article back in December from Fortune magazine that weighed in on the “10 Best Stocks for 2010.” Of course, I don’t believe that anyone can expect to make money taking advice from Fortune magazine’s stock picks for the upcoming year, but it’s always good for a laugh to see what they recommend. Note that the Fortune article bases its PEs on estimated 2010 earnings, while this article will use trailing PE:

• Mastercard- the company has a PE ratio of 23, which is too high for the stock to be considered a value pick. Fortune picks Mastercard because they figure that the economy will recover and therefore there will be more credit/debit card transactions of which will translate to more fees for Mastercard. Since I feel we’re just at the beginning of a long, slow decline, I’m rejecting any stock picks which hinge on an economic recovery as this one does.
• Amedisys- which is currently trading at a PE of 12 or so is a company which provides hospice and in-home nursing care for the aged. Seems a good value pick in a growing industry, so I can’t really poke too much fun at this pick.
• Qualcomm- A PE of 40, ick! The write up on the company sounds great, but I’m never one for buying tech stocks at high PEs in a down economy. That’s why I’ve always shied away from Apple despite loving their products.
• Petrohawk Energy- This company lost money last year, to the tune of -$6 a share. The Fortune write up says that it has a lot of natural gas discovered and that its low production costs should be able to show a company profit, despite the possibility of a declining market for natural gas. I don’t see any reason to get excited about this stock, when there are gold mining companies around that are seeing the value of their holding appreciate with the price of gold. Just saying, as long as we’re talking about taking stuff from the ground and selling it, why go with a natural gas company that didn’t earn any money last year?
• Baxter Pharmaceuticals- Well the old adage is that pharmaceutical stocks are great to buy in a down economy and right now Baxter is trading at a PE of 16. Sounds good, but I also see that the FDA just ordered a recall of their hemodialysis system, which certainly doesn’t sound good. Of course, this whole industry’s revenue is deeply related to how the government doles out its Medicare payments, and so these earnings are subject to change without notice in the face of health-care reform. But, if you were a gambler at heart, I could see some price appreciation.
• Quanta Service- Is a company that is set to help the US with upgrading it’s power grid. Sounds like a good plan, and on that’s environmentally friendly, but the current PE of 22 seems a little high to me. For me to get involved in this stock, I’d be looking to pick it up if the price drops significantly.
• Salesforce.com- Oh hell no! This stock pick is absolutely horrible, and whoever picked it should be shot. The stocks current PE is 110, and it’s a software provider that’s competing with the likes of Oracle on the exact same business model of licensing CRM software on a per-user basis through the internet. No, no, no!
• American Tower- Another hell no. The stock is trading at a PE of 63 and is a provider of cell phone towers to carriers. Sounds like a good business to be in, but I don’t see that business growing exponentially in the next five years like I would need to see to justify that PE. Niet!
• Renhe- Is an interesting pick. A company that provides air-raid shelters to the Chinese government trading at a PE 13.5. Unfortunately, the stock is newly listed, has a bizarre ticker (1387.hk?) and no related news. It seems like I’d be putting my money at the mercy of the Chinese government. Say, aren’t those guys, ahm, Communist?
• Vornado Realty Trust- Oh good God. We’re staring into the maw of one of the greatest real estate collapses in history and Fortune wants you to put your money in a REIT that barely turned a profit last year (it’s PE is 1100). With picks like this, I feel so much better about the boring old gold mining companies I follow.