Warning: This is the Only Kind of Stock You Should Buy Right Now…
The volatility index, a measure of risk and fear in the market, recently spiked to its highest point this year as stocks sold off in the face of the European debt crisis. The yield on U.S. Treasuries, considered a risk-free asset, has dropped to its lowest level ever as investors rush out of other investments, looking for any kind of safe haven.
Unless you have been living under a rock lately, this is not breaking news. If you are like many investors, then you’ve probably watched your portfolio shrink as even classic safe-haven investments like gold and consumer staples make new lows. You also probably watch the financial news daily for an investment that will provide safety of capital, even at the risk of low returns not meeting your financial goals.
Let me be clear: This is my favorite market!
#-ad_banner-#Since March, the market has had one thing on its mind: Europe. It doesn’t matter that housing in the United States has found its bottom or that most economic indicators point to comforting-but-not-stellar gross domestic product (GDP) growth of around 2% this year. It doesn’t matter that, while slowing marginally, China is still expected to beat 8% GDP growth and has more than $3 trillion in reserves with which to stimulate its economy.
This is my favorite market because even with further pain out of Europe, only 14% of exports from the United States go to the eurozone. Retail sales have increased by more than a 6% annualized pace in each month of the first quarter, while consumption has increased each of the last four quarters.
Right now, however, Mr. Market does not seem to care about economic realities or corporate fundamentals.
While weakening demand from European customers should rightfully be driving down revenue expectations at some companies, there are still others that see most or all of their revenue from the United States, where economic growth is still happening. Companies in the S&P 500 earn, on average, 47% of their revenue internationally and 14% from Europe. When the markets return to trading on fundamentals and domestic economics instead of European headline risks, these two stocks could pop…
1. Limited Brands (NYSE: LTD) booked 93% of its $9.6 billion in revenue in 2011 from domestic business. The retailer operates Victoria’s Secret and Bed, Bath & Beyond, two brands that define their segments and have strong customer loyalty. For context, revenue in 2011 was just 5% less than that of Abercrombie & Fitch (NYSE: ANF), Coach (NYSE: COH) and Guess (NYSE: GES) combined sales of $10.1 billion.
With the price of cotton off last year’s high by more than 40%, margins could improve during the next few quarters. Additionally, the steep drop in energy prices should act to support consumer spending. Earnings per share of $2.63 for fiscal 2012 were 28.3% higher on sales that grew 7.3% to $10.4 billion from the year prior. But despite strong fundamentals, investors have sent the stock down more than 17% in the last four weeks alone.
2. Life Time Fitness (NYSE: LTM) operates 105 multi-use sports and athletic facilities in 26 major markets in the United States. While I am not betting that the trend of growing waistlines will reverse anytime soon, consumers are conscientious about their health, and the fitness industry should see consistent growth.
Revenue at Life Time Fitness has grown by 11.5% annually over the last five years to $990 million in 2011. Fiscal year 2012 earnings were up 14.7% to $2.26 per share.
CEO Bahram Akradi to make a huge bet on the stock on April 24, buying more than $750,000 at $44.07 per share. Even at the lowered forecast, the current fiscal year earnings are expected to come in 19.5% above last year’s.are down 10.5% year-to-date and off more than 20% from highs in March. The stock was punished after its first-quarter earnings disappointed investors that had grown accustomed to blowout results. The drop in price prompted
Risks to Consider: I am not saying there might not be more pain to come. The situation in Europe is far from resolved, and if any more negative news comes out, then the market will likely take its usual myopic view and cause another wave of selling. Further disorder from across the pond will hurt exports and may cause employers to rethink hiring plans. Even given the short-term pain, the U.S. economy should grow and eventually markets will start trading on company-specific fundamentals like revenue and earnings growth. When it does, stocks with red, white and blue revenue, so to speak, are set for a big rebound.
Action to Take–> A long position in stocks with higher betas and percentages of revenue from the United States., like the two above, could outperform when the market goes back to trading on fundamentals. Advanced investors could hedge further short-term risk with a short position in globally-diversified funds or companies that will continue to be pressured by weak demand in other developed markets.