Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Market Sector

Businesses are grouped in a market sector, which denotes that they all provide a similar good or service. Grouping businesses together allows investors an easier opportunity to research and investigate each company amongst its peers. An investor can then compare earnings ratios, price-to-book ratios, and other metrics all within one defined sector of the economy. It’s difficult to compare businesses in separate industries, as they would have unique growth prospects. A mature industry such as that of railroad companies can’t expand at the same rate as Internet companies and therefore the fundamental metrics are not the same and can’t be compared at face value.

Dow Jones Transports Leading the Market?

By for Profit Confidential

economic indicatorThis market is definitely looking tired after such a strong run since mid-October.

The performance of transportation stocks has been noticeable this year. The Dow Jones Transportation Average has actually outperformed the NASDAQ Composite year-to-date. In my mind, when there’s leadership from this group, it’s a compelling, traditional bull market indicator. Countless component companies are pushing record highs.

Equally as impressive is the performance of the Russell 2000 index, which has pretty much mimicked the NASDAQ Composite over the last two years.

A divergence became apparent in the beginning of July, as the Dow Jones Industrial Average began underperforming the other indices. It’s as if investors upped their risk tolerance, willing to bet on more risky equity assets as they felt more comfortable being bullish on a stock market that’s already gone up.

Over the last 12 months, the Dow Jones Transportation Average has been the leading index (excluding biotechnology stocks, which aren’t comparable). While outperforming the Russell 2000 by a slim margin and the Dow Jones Industrial quite significantly, I think the Dow Jones Transportation Average remains the leading index going into 2014 and a great indicator for the broader market.

Among the railroad stocks that are included in the Dow Jones Transportation Average, Union Pacific Corporation (UNP) bounced back nicely higher over the last five weeks after experiencing a lasting price consolidation the past six months. It will be interesting to see if the stock can hold above its all-time record-high of $165.18. Doing so will be meaningful.

CSX Corporation (CSX) is also a component of the Dow Jones Transportation Average, and it, too, seems to have broken … Read More

What Traders Love So Much About This Sector

By for Profit Confidential

Traders Love So Much About This SectorWhen we looked at Biogen Idec Inc. (BIIB) in late April, the biotechnology company was trading around $218.00 a share. Now, it’s trading between $230.00 and $240.00 or so and is still a big momentum bet.

The company recently raised its forecast as its multiple sclerosis (MS) drug, known as “TECFIDERA,” is now the leading MS therapy drug in the U.S. The drug is approved for use in the U.S., Canada, and Australia, and the company is working on approval from the European Medicines Agency (EMA).

The right drug company can defy prevailing stock market sentiment and make a lot of money for shareholders. While biotechnology stocks typically trade on their own material developments, they are often super high-risk and very volatile investments. They are perfect for risk-capital traders and momentum players.

Biogen Idec’s total revenues in its third quarter of 2013 grew 32% to $1.8 billion, with earnings growing 22% to $488 million. The company’s growth rate is slowing, but this could change significantly if more markets for its MS treatment open.

Another biotechnology stock that’s experienced major momentum in its operations and on the stock market is Alexion Pharmaceuticals, Inc. (ALXN). The stock has tripled over the last three years, and earnings estimates continue to rise for this year.

The company’s main drug offering is “Soliris,” which is a treatment for a debilitating blood disorder known as paroxysmal nocturnal hemoglobinuria.

Third-quarter net product sales grew 36% to $400 million. Non-GAAP earnings grew 39% to $168 million.

The company recently increased its 2013 revenue guidance, and the stock reaccelerated from a recent consolidation. (See “Why Momentum Traders Love These … Read More

Japan Not Home-Free Despite Strong GDP

By for Profit Confidential

Japan Not Home-Free Despite Strong GDPIn these pages, I recently discussed the amazing returns in the benchmark Nikkei 225 index in Japan and how the country is following America’s example, printing money to fuel the economy.

The fact is that Japan is finally beginning to see some results from Prime Minister Shinzo Abe’s aggressive strategy to inject $2.4 trillion into the Japanese economy over the next decade.

Maybe this time it’s for real. Previous attempts to drive Japan’s economy out of its economic tailspin have failed. Of course, it will take some time, and success will depend on the continued weakness of the yen and a pickup in the global economy, especially with the country’s key trading partners in China.

If the first quarter was any indication, the despair in Japan may be finally coming to an end after decades of disappointment; but again, it’s only one quarter.

Japan saw its gross domestic product (GDP) surge 0.9% in the first quarter or an annualized rate of 3.5%, according to data from Japan’s Cabinet Office. (Source: “Japan GDP Rises 0.9% On Quarter In Q1,” RTTNews, May 15, 2103.)

What’s also interesting is the rise in private consumption in Japan, which contributed to 2.3% of the 3.5% GDP growth. The upward move in consumer spending is critical, as a large part of the economic renewal in Japan will be dependent on consumer spending as is the case in the United States. According to Trading Economics, consumer spending accounted for about 60% of GDP in Japan, so it’s essential.

While it’s still way too early to see if Japan is on the path to growth, the country’s first-quarter … Read More

It’s the Final Out: RIM Better Hit a Home Run

By for Profit Confidential

RIM Better Hit a Home RunResearch In Motion Limited (NASDAQ/RIMM; TSX/RIM) appears to be rising from the ashes, as investors dive back into the stock of the once-fabled maker of the “BlackBerry.” For Research In Motion (RIM), it has been quite the journey after the investment community, including myself, thought the end was near for this former Wall Street star.

Since the emergence of Apple Inc. (NASDAQ/AAPL), the BlackBerry and RIM’s “Playbook” tablet have proved to be horrible failures, based on my stock analysis.

But something strange is happening in the equities market, as RIM has surged 168% since trading at $6.43 on September 21, 2012; Apple, on the other hand, has declined 29% in the same period, according to my technical analysis.

My stock analysis shows an opening gap on the RIM stock chart on January 22 on a bullish moving average convergence/divergence (MACD) as indicated by the circles; while this is bullish, be wary of the stock’s overbought condition.

RIMM Research in Motion ltd, Nasdaq stock market chart

Chart courtesy of www.StockCharts.com

The smartphone and tablet markets continue to be extremely competitive, and I expect this competition will heat up further, based on my stock analysis.

My stock analysis suggests that Apple dominates the tablet market, but there is strong competition from Google Inc.’s (NASDAQ/GOOG) “Nexus” tablet and Samsung Electronics Co. Ltd.’s “Galaxy” series. (Read “Why Apple Needs to Refocus Its Energy.”)

Some believers are also surfacing as RIM gets ready to launch new its new line of devices, powered by its “BlackBerry 10” (BB10) operating system, on January 30. Based on what I have seen that has leaked out on the Internet, the new BlackBerry has the familiar rectangular shape and … Read More

Will Housing Stocks Crash?

By for Profit Confidential

Housing Stocks CrashOne of the most often talked about parts of the economy is the real estate market sector. Because real estate is such a large and important part of the economy, naturally, many eyes are focused on whether or not this market sector can and will rebound from its deep decline.

While we have certainly seen a strong bounce off the bottom, there are still many concerns for the future of both the real estate market sector and housing stocks, specifically. Investors in housing stocks are definitely ahead of the curve, as many housing stocks have increased substantially. With gains in excess of 100%, the question on many people’s minds is: will the real estate market sector continue its upward trajectory or are housing stocks teetering on the edge of a massive decline?

I think recent comments by the CEO of D.R. Horton, Inc. (NYSE/DHI), Donald Tomnitz, can illuminate a lot. Tomnitz stated in a conference call that he was quite concerned that the lack of jobs might lead to lower home sales next year. D.R. Horton is, by volume, the largest homebuilder in America. One of the most sobering moments was when Tomnitz stated, “I also see the fact that there are potential layoffs in a number of industries, especially the defense industry.” (Source: “D.R. Horton Falls as CEO Cautions on Job Growth Next Year,” Bloomberg, November 12, 2012.)

The question isn’t the current level of the real estate market sector. For the fourth quarter, which ended September 30, 2012, D.R. Horton reported net income of $100 million, a massive increase of 180% from the prior year’s quarter. Revenue for … Read More

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