What the Market Wants: Market Fueled by Flow of Funds to Equity Markets

Eleven of the past twelve market days have seen the market move higher . . . generally to new all-time highs. The S&P 500 closed today at 1695.53, yet another new high.

Could the upward run continue? Yes, it could and likely will for at least three reasons. 1) Funds continue to flow from money market and longer-term fixed income funds into the equity market; 2) valuations have not exceeded reasonable variations from the norm—a tad high here and there but with bargains remaining; 3) the gains have not been powerful, large up days on large volume indicating a blow-off top.

Where is the market looking for opportunities?

Clearly, it’s not looking at large-caps, which are being shunned to some degree due to global-slowing risks. McDonald’s (MCD) today was a perfect example, missing earnings and revenue on slower non-domestic business. Approximately 70% of MCD’s revenues come from non-domestic sources. The market is wary of this problem. Note the black stripe on the cap/style table, below, which aptly demonstrates that Large-Cap Growth has NOT been favored for an entire year.

(Click here for the rest of the market stats.)

Accordingly, the market is favoring small-caps and, over the past month in particular, small-cap value plays. Mid-caps without serious over dependence on global business are also welcome. Sustainable dividend payers are favored by the money leaving the fixed income markets. Overvalued companies are shunned.

Earnings will continue to dominate the news the next two weeks. Last week’s poor showings from Intel (INTC), Google (GOOG), eBay (EBAY) and, worst of all, Microsoft (MSFT) have put a pox on the Technology sector; but don’t throw the baby out with the bath water. Smaller, well-positioned large-caps such as Xilinx (XLNX) can still do well.

But don’t overpay! There are numerous companies in a good position to seize market share in Technology, Healthcare, and even Industrials where excellent GARP opportunities remain.

This week’s economic releases will be sparse. Existing home sales were a bit disappointing today, but PMI Manufacturing and new home sales will give new data on Wednesday; jobless claims and durable goods on Thursday; and consumer sentiment on Friday. It is fairly unlikely that any of these will be head-turners but altogether, these minor headlines can have a cumulative effect.

4 Stock Ideas for this Market

Here are our stock picks for this market—two small-caps and two mid-caps, all reasonably valued with good growth expectations.

Fortress Investment Group LLC (FIG) – Financials Sector – Mid-cap
FIG is a publicly owned investment manager that uses a wide variety of investment vehicles. The firm employs a fundamental analysis with bottom-up approach to create its investment portfolio. Its earnings growth projections are exceptional, with +137.50% for the current quarter, +142.90% for next quarter, and +77.50% for the year—and a forward P/E of 10.34. Website: http://www.fortress.com Price (close) on 7-22-13: $7.97

ION Geophysical Corporation (IO) – Technology Sector – Small-cap
Headquartered in Houston, Texas, ION provides planning and seismic processing services, software, and acquisition equipment to the energy industry worldwide. The company has excellent projected earnings growth for next quarter (+27.30%), this year (+16.20%), next year (+37.20%), and an average of +18% per year over next 5 years. All this for a forward P/E of 10.52. Website: http://www.iongeo.com Price (close) on 7-22-13: $6.21

Triangle Petroleum Corporation (TPLM) – Basic Materials Sector – Small-cap
TPLM engages in the acquisition, exploration, development, and production of unconventional shale oil and natural gas resources in the Bakken Shale and Three Forks formations in the Williston Basin of North Dakota and Montana. The company’s extraordinarily high projected earnings—+312.9% this year, +65.2% next year, and a steady +35.0% per year over the next 5 years—can be had a very cheap forward P/E of 7.02. Website: http://www.trianglepetroleum.com Price (close) on 7-22-13: $7.65

United Therapeutics Corporation (UTHR) – Healthcare Sector — Mid-cap
UTHR focuses on the development and commercialization of products to address the unmet medical needs of patients with chronic and life-threatening conditions worldwide. Its lead product is Remodulin. UTHR was a stock idea in our April 15 letter and has made two appearances in our Earnings Busters Portfolio (and was profitable both times). This year’s earnings projections are modest (+3.7%), but UTHR is expected to grow its earnings by 40% per year over the next 5 years, with a forward P/E of 9.96. Website: http://www.unither.com Price (close) on 7-22-13: $71.22

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems
Leaders in Investment Research

http://www.sabrientsystems.com

Full disclosure: The author does not hold positions in any of the stocks mentioned in this article.

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.