We’re halfway through 2009 and the markets continue to be very dynamic. After a full fledged rout in the first quarter, equity markets have rebounded sharply in the second quarter posting the best market return since the bullish days of the late 90’s. Despite the strong performance off the March lows, equity markets still appear to have a significant amount of risk. Unemployment numbers continue to be weak, consumer spending is contracting even with upticks in income levels, and governments around the world are piling on excessive debt.
A true dynamic investment program needs to be able to adapt to market changes in order to protect against new risks, and capitalize on evolving opportunities. However, picking four stocks at the beginning of the year is a great exercise in long-term planning and evaluating what broad sustainable trends are in place. This quarter our four stocks have increased sharply from the weak Q1 levels but still leave much to be desired. By contrast, the ZachStocks Growth Model which is continually adjusted to account for risks and opportunities has outperformed the market by quite a large margin this year.
So here are the four positions we chose at the beginning of the year:
1. JA Solar Holdings (JASO)
Solar energy has rebounded in the past few months as stimulus dollars finally hit the market and are beginning to drive demand for solar power and the components necessary to produce that power. JASO has traded higher and currently shows a slight profit for the year. As traditional energy prices increase, the relative competitiveness of alternative energy is boosted. JA Solar has had trouble keeping up with many of its peers as management has issued relatively weak revenue guidance. By comparison, our position in Yingli Green Energy in the same sector has yielded triple digit gains. JASO will likely continue to ride the solar trend higher but it now appears competitors int he sector make for better investments.
2. AECOM Technology Corporation (ACM)
AECOM has rebounded impressively as our second theme for 2009 (infrastructure) finally takes hold. Over the past weekend, the stock was upgraded by Stearne Agee and the price target was increased to $40. It appears that this target could prove conservative over the next 12 months as AECOM is quickly proving its ability to convert its backlog of potential projects in to real-for-sure revenue paying contracts. Througout the recession, ACM has continued to post growth in both revenue and earnings on a quarterly basis. Analysts are targeting $2.04 as expected earnings for 2010 (fiscal year ends Sept 30) but that estimate may be increased due to strong execution. Aecom continues to be a strong component of the ZachStocks Growth Model.
3. TBS International (TBSI)
Shipping stocks have been an incredible disappointment this year. The recessionary environment has cut down on international trade and the corresponding weakness in day rates has caused difficulty even for shipping companies with long-term contracts. Shippers have also had to deal with the frustrating issue of customer defaults. So while long-term contracts may have been in place, once the global crisis hit the customers were unable to keep up with their obligations and the contracts were no longer viable. TBSI is now down more than 20% for the year and we have not held the stock for some time. A rebounding economic climate could push these stocks higher, but currently there appears to be more risk than potential reward in shpping stocks generally and TBSI specifically.
4. China Medical Technologies (CMED)
ChinaMed is relatively flat on the year despite some difficult and proactive decisions made by management. The company decided to divest its tumor therapy division and instead concentrate on its diagnosis business. The strategic move should drive profitability in coming months as the diagnostic business has a recurring revenue stream which is very reliable and has strong margins. The stock continues to sport a single digit multiple despite expected and historical growth trends. It is unclear exactly what catalyst will propel the stock higher, but for the time being valuation is very compelling.
The second half will no doubt bring new issues to ponder, trends to follow, as well as risks and opportunities. Inflation has the potential to eat away at savings and non-performing assets, the current administration appears to be somewhat hostile to free markets, and global economic weakness could spark civil unrest in unexpected places. So continue to be flexible and alert with your trading and make sure you manage risk appropriately.
Below are links to the other participants in this contest (will be updated as more articles become available)
FD: The ZachStocks Growth Model has positions in ACM, YGE and CMED
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