Joel Klein of Klein Asset Management gives Kate Stalter his view on growth names that are currently outperforming the indices. He also shares why a few widely held big caps may see slower upside performance ahead, and which consumer-facing industry is showing unusual strength.
Kate Stalter: We are talking today with Joel Klein of Klein Asset Management in Lemont, Illinois, and thank you Joel for joining us today.
Joel Klein: Oh, my pleasure. It’s nice to be with you.
Kate Stalter: Give us your take on the current market. What should individual investors be looking at, given some of the recent market developments?
Joel Klein: From the top down, we’re in the third year of a bull market. Most bull markets tend to last about three years. This often leads to quick, short rallies that begin and end abruptly, much like 2007, which is a good precedent for what we anticipate for the rest of 2011.
During the year 2007, there were three quick rallies, and then the bear market began in October of that year. Currently we’ve been in two corrections this year, and the last one ended on June 21, when the Nasdaq rose 2.1% on a pickup in volume. Since then, the markets have surged.
Some pundits might argue that the markets are overbought in the short term, but the trend is still higher currently. There’s also a sense here that many institutional and individual investors find themselves under-invested, and they could be willing to buy even on the slightest pullback.
So the short-term and long-term trends are both higher, but we could be late in the cycle.
Kate Stalter: Given all that, Joel, what are some of the global regions or sectors or sub-industries that you view as showing some particular strength right now, and why?
Joel Klein: It’s interesting. In recent years we’ve seen a lot of the emerging markets leading, and we don’t see that as much right now.
The current leading group is the beverage group of stocks, led by, I’d say, Green Mountain Coffee Roasters (GMCR), Starbucks (SBUX), Sodastream (SODA), and Femsa (FMX), which is a Mexican company.
Green Mountain is arguably the strongest stock in the whole market. The story is very interesting. Starbucks and Dunkin’ Donuts are going to be selling coffee machines in their restaurants and selling the branded K-Cups of their coffees.
While the company’s been growing earnings at 100% per year in recent years, this new development could lead to an acceleration in earnings—maybe 200% or greater—in coming years. So it also positions Green Mountain as a toll-bridge business model, where other coffee makers will have to use the Keurig K-Cup brands if they don’t want to lose market share. This is much better than just being another competitor.
We also look at retail. It looks very strong right now, led by Lululemon Athletica (LULU), Chipotle (CMG), and Fossil (FOSL).
We’re also looking at the financial sector, especially a niche—that’s the credit-card companies, MasterCard (MA), Visa (V), Discover (DFS), and American Express (AXP). This group is surging after federal regulators approved an increase in fees a few weeks ago.
Kate Stalter: Those are some of the stocks showing leadership. How about some examples of some of the opposite? Maybe some sectors or regions that you believe are out of favor and individuals should avoid right now?
Joel Klein: It’s interesting. In the last decade, the most powerful stocks have been what we call consumer-technology stocks, like Google (GOOG), Apple (AAPL), Research In Motion (RIMM), and Baidu (BIDU).
Most recently it’s been Apple, Baidu, and Priceline (PCLN). They’ve become very obvious after several-hundred-percent moves in every case.
We would avoid those at this point. We think they’re crowded, obvious trades. We’re not saying they can’t go higher, but they’re probably not going to move like they did early on.
In the case of Apple, even though the fundamentals remain very robust, the stock has only managed to match the performance of the overall market since last September’s rally in 2010.
Kate Stalter: These are some great names, Joel. How about any other individual stocks that you believe folks maybe should take a look at. Anything that is showing some emerging strength at this time?
Joel Klein: Sure. Our bias in this area is, we look for stocks that have growing fundamentals, which is earnings per share typically.
It could also be market share, but we’re also looking for stocks that trade a lot of dollar volume, which means institutions are active in these stocks. So usually, maybe $100 million traded per day on average, something like that.
We look at a stock like Intuitive Surgical (ISRG), Franklin Resources (BEN), and Netflix (NFLX). Those look very good.
We’re also still watching stocks like Baidu and Priceline, because there’s a chance they could return—maybe later this year—as leaders, but we’re kind of cautious on that short term.
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