Stock market 'leaders' are really losersMarch 28, 2013: 1:47 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
The proverbial "they" say that the cream rises to the top. Well, "they" clearly haven't looked at the stock market this year.
Stocks are about to wrap up a stellar first quarter. The Dow has hit several new all-time highs this month, while the S&P 500 finally joined suit Thursday and topped its October 2007 peak.
But the companies that have led the rally are not necessarily strong and healthy. Instead, investors have been rewarding many of last year's dogs on the hopes that things won't be as bad as in 2012. It's a rally led by garbage that only Oscar the Grouch could love. Call it the Tom Petty market. Even the losers get lucky sometimes.
Hewlett-Packard (HPQ) is the best performing stock in the Dow this year by a mile. Its 66% gain ranks it as the third best in the S&P 500, too. HP has been pummeled for the past few years because of seismic shifts in the technology industry that the company missed -- primarily mobile. HP also has struggled to reinvent itself as a scaled-down IBM (IBM) that focuses more on software and services. (Ahem, Autonomy!)
CEO Meg Whitman has stressed that the turnaround will take years, but PC sales are unlikely to rebound in dramatic fashion. Considering that analysts expect earnings and sales to fall this year, and revenue should dip again in 2014, why should the stock be up this much? At least nemesis Dell (DELL), which also missed the mobile boat, has a tangible reason for surging 40% this year: CEO Michael Dell is trying to take the company private.
The tech sector has several 2012 duds that have suddenly become 2013 darlings -- despite many risks. BlackBerry (BBRY) is up 25% even though the jury is still out on its new phones.
Memory chip maker Micron Technology (MU) is another stock whose gains make you scratch your head. It's up 57% this year after a flat year in 2012 and a more than 20% drop in 2011. Investors seem excited that DRAM prices may have finally bottomed, but this is a company that still has big ties to the woeful PC business -- and it's also continuing to lose money.
Looking for other losers that have gone from zero to hero in 2013? Retail is the place to be. Best Buy (BBY) is up 87% on hopes that new CEO Hubert Joly can reverse the company's lagging fortunes. But like HP, Best Buy is not going to suddenly improve overnight. There's a reason Best Buy lost nearly half its value last year: It faces brutal price competition online from Amazon (AMZN) and in the "brick and mortar" world from Wal-Mart (WMT). That hasn't changed.
Sure, Joly might succeed. But righting a sinking retail ship is not easy. Just ask JCPenney (JCP) CEO Ron Johnson or any executives who used to work for the now-defunct Borders or Circuit City.
Shares of struggling grocery store chain SuperValu (SVU), which fell nearly 70% in 2012, have more than doubled this year. It's the best performing stock in the S&P 600 Midcap Index. But the company has consistently missed Wall Street's consensus earnings forecasts, and sales are expected to decline this year.
The only reason for optimism? SuperValu was able to sell 5 underperforming chains to private equity firm Cerberus for $3.3 billion. SuperValu is also cutting 1,100 jobs. Hip hip hooray! SuperValu isn't the only grocer that's getting Wall Street attention: Rival supermarket chain Safeway (SWY) is beating the market too. Shares are up nearly 45% following a 14% drop last year ... even though sales growth is expected to be sluggish.
The one notable exception to the loser rule? Netflix (NFLX). Shares have more than doubled, making it the best performer in the S&P 500. Netflix's stock actually rose 34% last year, too, although it's been a volatile stock.
The good news for Netflix is that the stock does seem to be gaining ground due to improving fundamentals. It has momentum again, thanks to subscriber gains and growing hopes that it can lure even more new customers with its own content, such as the Kevin Spacey show "House of Cards" and the resurrected "Arrested Development."
Fears that Netflix is spending too aggressively on international expansion and new content deals are less of an issue as well. Wall Street's consensus earnings estimates for this year and 2014 have risen dramatically over the past few months.
The problem is valuation. Does Netflix really deserve to trade at nearly 140 times earnings estimates for 2013? It's also a heavily shorted stock. But of all the market leaders this year, it at least has the most going for it in terms of revenue and earnings potential.
But here's the thing. With the market rallying as hard as it has on hopes that the U.S. economy is slowly improving, aren't there better places to put your money?
Apple (AAPL) seems criminally oversold given its market leadership position, its $137 billion in cash and a valuation of just 10 times 2013 earnings forecasts. Oracle (ORCL), UnitedHealth (UNH), Coach (COH) and General Motors (GM) have all underperformed this year even though they have solid growth potential, little debt and trade at reasonable price-to-earnings ratios.
Now is not the time to chase winners in speculative stocks where the easy money has already been made. It's time to look for quality companies that have not run up as much. They should be the future market leaders.
With the market closed tomorrow, there will be no Best of StockTwits feature. So I'm handing out my Reader Comment of the Week one day early. At one point while obsessively watching the S&P 500 this week and waiting for it to top the record, I noted that the vigil reminded me of the scene in "Three Amigos" when Steve Martin is chained to a wall. That prompted this amusing response from fellow Fourth Estater and all-around good guy Aaron Task from Yahoo! Finance.
Well played. But Aaron, you told me I have a plethora. And I just would like to know if you know what a plethora is.
Have a great weekend, everyone. Dear little buttercup, won't you stay awhile?