A public opinion poll is no substitute for thought. -- Warren Buffett
The quote above happens to be one of the most basic and fundamental messages anyone can appreciate, not necessarily just from an investment perspective, but in everyday life. That said, in the stock market it is even more fitting, for a multitude of reasons - not the least of which is the fact that there is often an inherent herd mentality that drives equities in either direction. And it should not come as a surprise that Mr. Buffett is the same person that states one should be fearful while others or greedy and greedy while others or fearful.
Throughout the entire first quarter of 2012 the discussion on the market has had a focus on what is at the core of investor decision making - or more specifically what exactly is the driver of sentiment? The answer to that question is quite easy, and it is the same answer that gives off the feeling that we get each time we open our wallets. It is the confidence to spend while also knowing that income is not too far away. We have come to know all too well of the effect that a lack of such confidence can have on the stock market - the terms "recession" and "depression" exist for this reason. Basically, a lack of confidence of self-reliance or you can even use the word "assurance" is a dangerous place to be.
By being too afraid of our personal economic condition, we often unknowingly make matters worse than they might have been otherwise. This is whether or not our circumstances (as dire as they may be) are real or merely perceived. For this reason, I have been and will continue to be a firm believer that investors should be careful in how they translate consumer confidence numbers into investment actions. One thing in particular that has always had an effect on consumer confidence is gas or time spent at the pump. The average price at my favorite fuel station has risen from $3.19 as of January 1 to $3.90 as of this past weekend - up 22 percent in one quarter.
Investors have become very familiar with the fact that when consumers spend more at the pump, it takes away from other forms of discretionary spending as household budgets are forced to adjust. Gasoline prices are already at a national average of $3.82 per gallon. This has been the highest level ever to start the year. Also, analysts say the average price could again flirt with $4 per gallon by the spring. So considering the fact that the gas prices have now already increased by 22 percent, at this rate, it is now trending for a price of $4.76 by July 1. The question is how will this translate to my spending and investment decisions? Here are a few stocks that I think will be moving in either direction due to this anticipated event.
Schlumberger (SLB)
One of the first names that I will be looking at closely this quarter is Schlumberger. It is yet one of those oil and energy titans I just have not been able to figure out. But it is not because I haven't been trying. The company started the year at $68.36 it then surged as high as $80 and now it is trading right back to where it started. So the question is, where is it heading next? My suspicion when considering the value of its peers and the fact that there is nothing fundamentally wrong with the company to the extent that it could not sustain its recent $80 value is that it is heading back to $80. This makes Schlumberger an excellent buy at current levels.
For investors looking for some assurances, they only need to look at the execution plan that the company has laid out. Basically, the company can tell you exactly where it will be five years from now assuming that everything is executed as planned. These steps include growing market share in various oil service lines, growing earnings per share faster than revenue, establishing the highest margins in the business in North America and continuing its strong share buyback and dividend policy. Schlumberger is optimistic about future growth in oil and gas spending and seeing as oil and gas are set to rise this year, it is well positioned to capitalize early on its plans. The company has beaten Wall Street expectations over the last several quarters, and can be another great play on future demand for oil and gas in 2012.
Sirius XM (SIRI)
I've recently closed out my $2.35 short position in Sirius XM last week for a decent profit. It's not as much as I would have liked, but it certainly was a good enough trade to compensate for "the run" that I was told that I've missed. I would have loved to have held my short for a bit longer, but quite frankly there has been just too much new information and developments recently that I have not had sufficient time to digest - although I do have my suspicions which I plan to share soon. The stock is now back at the $2.30 range and it is right where the pros want it to be while still toying with the emotions of retail investors. It would not surprise me one bit to see the stock approach the $2.35 level again - at which point I plan to re-short it back down to $2.20 - hence wash, rinse, repeat.
From a consumer confidence standpoint, it is hard to have confidence in a stock that requires auto sales and not consider what $4.00 for regular unleaded gas will have on auto sales. To date, remarkably is has not yet had an effect. But the psychology of seeing $4.00 for just 87 octane can't be all that appealing. From that standpoint, the other concern for Sirius XM is with its subscriber projections. The company mentioned during its Q4 full year 2011 report that it expected churn to increase "modestly" this year to 2.1 percent. For this reason, I don't expect it to increase its subscriber guidance not until at least Q3 and investors should in fact expect some challenges for it to meet its 1.3 net additions that it has guided this year. If you own shares of Sirius XM, I would hold at current levels but it is certainly not a buy until more clarity is given either from the company itself or from Liberty Media (LMCA).
Wal-Mart (WMT)
Consumer confidence and Wal-Mart just go together. Consumers flock to the retail giant whenever confidence is lacking because Wal-Mart has established a reputation for having the lowest prices for everyday products. However on the flipside, whenever consumer confidence is high guess where they go? Yes, Wal-Mart because the retail giant has a reputation of having the lowest prices for non-essential items as well such flat-screen TVs and electronic devices - essentially it as the best of both worlds. But I like Wal-Mart for many more reasons, not the least of which is that it is stable, makes a lot of money and offers a very respectable dividend.
In its latest quarter the retail giant reported numbers came in line with analysts' expectations on revenues. However it did miss on the all important earnings per share. On a quarter-over-quarter basis, revenue increased and GAAP earnings per share dropped. Wal-Mart booked revenue of $122.29 billion. The 16 analysts polled by S&P Capital IQ predicted sales of $123.66 billion on the same basis. GAAP reported sales were 5.9% higher than the prior-year quarter's $116.36 billion. For the quarter, gross margin was 24.8%, - 30 basis points lower on sequential basis. Operating margin was 6.8%, a decrease of 10 basis points sequentially while net margin arrive at 4.2%, 100 basis points worse than the prior-year quarter.
Overall, it was a decent quarter, I would say, with all things considered. However, with the news that gas prices are on the rise, I suspect that the company will soon see more foot traffic in its stores to make up for the EPS miss in the following quarter, because any time discretionary spending becomes a concern, it often bodes well for retailers that focus on consumer staples, such as Wal-Mart. The company stands to benefit even more so by being a one-stop-shop of sorts for consumers who want to shop for groceries, get their car serviced and possibly buy some needed hardware or home furnishings. With any potential increase in gas prices, consumers will want to limit their driving and visit Wal-Mart for all of the services it is able to provide in one visit.
Halliburton (HAL)
When looking at Halliburton and its P/E of 10 I continue to marvel at just how undervalued the stock is when compared to Schlumberger, which trades at a multiple of 19 - almost twice that of Halliburton. Clearly the stock is being underappreciated and value investors should certainly make a play at current levels, especially considering the issue of rising gas. But more importantly than that, the company is well positioned to benefit from the rising global demand in energy - something that is always going to be in great demand. That coupled with the fact that the increase in worldwide deepwater drilling as well as the current boom in North American shale does not appear to be slowing.
Aside from the benefits it stands to gain as demand increases for more drilling, the company has also been doing pretty well as it relates to its earnings. From that standpoint, there aren't many companies that have fared better and have proven to be more consistent than Halliburton. It has steadily demonstrated an ability to beat expectations and deliver on its bottom line. It goes without saying that its management will want to continue this trend, and will be doing just about everything under its power to make certain that these types of performances continue. From a valuation standpoint, the stock is trading well below the median analyst target of 50 per share. At $33 this still represents a 50 percent upside for investors willing to take a chance while also willing to be patient.
Exxon Mobil (XOM)
Since being passed my Apple as the world's largest company according to market cap, oil giant Exxon has sort of been the forgotten titan on Wall Street. With a current P/E of 10 it is hard to say that the company is getting the respect that it deserves. As with Halliburton above there is a lot to like with Exxon. Yet the company often gets overlooked for what appears to be routine success. It often gets taken for granted. Investors should keep in mind that Exxon Mobil is still a dominant player even among the big oil companies. It has nearly three times the market cap of even the other oil giants, but it is hardly a lumbering, stumbling giant.
The company is still in the mix of all phases of upstream and downstream operations, and its portfolio of exploration and production projects should make it able to continue to weather these lean times. It has huge reserves and plenty of capital which often is an appealing quality to conservative investors. Not to mention that it has a well earned reputation - something that many of its competitors are working hard to rebuild. At $86 per share investors should expect the stock to approach $120 to $150 over the course of the next 12 - 24 months. Exxon remains a buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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