I can give you five reasons to expect a fourth-quarter rally this year.
The market has rallied in mid-August to early October, during what is usually a weak period, to give stocks momentum in November and December.
Money is flowing out of real estate and bonds and into stocks.
Short interest climbed to multiyear highs on both the New York Stock Exchange and the Nasdaq in September, so there's plenty of pessimistic money to send prices higher when it turns optimistic.
We're starting to see rotation out of the stocks in the Dow Jones Industrial Average Index, which led the market upward in September, and into the more speculative Nasdaq stocks that typically lead a fourth-quarter advance. On Oct. 4, for example, the Dow Industrials climbed 1.05%, but the Nasdaq Composite rose 2.1%.
Thanks to an end of tax-selling in October, the stock market almost always goes up in November and December -- 16 out of the past 18 years, in fact.
You can increase your portfolio's exposure to a fourth-quarter rally by increasing the beta of the stocks in your portfolio.
Beta measures how well an individual stock is likely to match the ups and downs of the market as a whole. Stocks with a beta of 1 are as volatile as the market as a whole. Stocks with betas above 1 move faster than the market as a whole.
If the stock market as a whole is headed up, you'd certainly like to raise the beta of the stocks in your portfolio to capture that general advance of the market. No laggards wanted here.
But getting the big trends right and tuning your portfolio to the ups and downs of those big trends is only part of the investor's task and only part of what makes up a portfolio's return. The other part is called "alpha" in current financial theory. You and I probably call it stock-picking.
Alpha is the part of your return above what you'd get from just tracking the market or a specific index. Delivering alpha is what money managers get paid for. You can, after all, capture the market's return by buying an index fund such as the
Vanguard 500 Index Fund
and pay a minuscule 0.18% in fees.
It's tough to deliver alpha consistently. In fact, some academic studies say it's impossible to beat the market over the long term and generate any alpha at all.
And the effort to produce market-beating returns can get a portfolio in deep trouble. The $6 billion lost by a hedge fund run by Amaranth Advisors in September on a leveraged bet that natural-gas prices would climb -- they fell instead -- is just the latest and most spectacular example of piling up risk in an attempt to produce market-beating returns.
The chase for alpha doesn't have to end like that, I believe. Good stock-picking can give you a shot at outperforming the market. At the same time it can limit your potential for losses if the big trends -- and the market as a whole -- go against you.
How? By picking stocks that not only are positioned to take advantage of the big, marketwide trends but also have their own internal catalysts. These catalysts -- a new product rollout, increasing profit margins, gains in market share and the like -- can keep a stock ahead in a rising or falling market.
The easiest way for me to explain exactly what I mean is to pick five stocks with the right stuff for the fourth-quarter rally: betas above the market beta of 1 and potentially high alphas, thanks to internal catalysts that will deliver higher-than-expected earnings. I've listed them in alphabetical order.
Solid progress on key
account and growing order backlog set to pass $2 billion milestone in December.
In the long term,
is a play on the increasing complexity of customer management in the telecommunications business. The more accounts telecom companies link together, the more services they add, the more pricing plans and billing options they offer, the more they need the customer-management software systems Amdocs provides.
In the short run, however, two positive developments should push the stock higher in a year-end rally. First, Amdocs is making solid progress on building out the infrastructure for the big and very complicated Sprint account. Success at Sprint will give Amdocs increased ability to sell systems to other customers. Second, Amdocs's order backlog continues to build, and it is likely to pass $2 billion by the end of December. That would demonstrate to investors that business momentum continues to build at Amdocs.
American Eagle Outfitters
Strong mall traffic for fall and holiday shopping seasons plus launch of new store concept MARTIN+OSA.
Mall traffic started strong in the September back-to-school period, in itself good news. Plus, a strong September usually leads to a strong holiday season for retailers.
The news was especially good for
American Eagle Outfitters
( AEOS), which sold residual seasonal merchandise without resorting to deep markdowns. That's a sign that the company's improved markdown technology works. That should continue to drive operating margins, which are already ahead of those of most of its teen-apparel retail peers, up another 0.9 percentage point in fiscal 2007, according to Standard & Poor's.
The company has also finally rolled out its new MARTIN+OSA store concept with a single store in the Tyson's Corner mall in Virginia. Three more openings are scheduled for 2006. The revenue from four stores won't amount to much, I admit, but adding a second concept and a new market segment (25- to 40-year-olds) to the company's existing business answers the question of where future growth will come from.
Market-share gains in a hot market -- plus a seasonal peak.
Some slump, eh? Sales growth of personal navigation devices -- handheld devices that use the global positioning system of satellites to calculate users' location and then deliver maps and real-time travel directions -- slowed to 209% in August 2006 from 215% in July.
picked up personal navigation market share -- 63% in August, according to Morgan Stanley, up from 58% in July -- so the company saw its unit growth climb by 276% year to year in August.
The company, with five of the six most popular personal navigation products in the U.S., looks particularly well-positioned to rack up big market-share gains in both the U.S. and Europe. The company's upside isn't limited to personal navigation devices, either: Garmin has new aviation and marine devices due to launch in 2007.
J.B. Hunt Transport Services
Peak holiday shipping season.
The economy is certainly slowing, but all the signs point to a solid holiday
season. In the week ended Sept. 23, intermodal container traffic -- containers that travel by truck and then rail and then often truck again -- was up 10.3% from the same week in 2005, according to BB&T Capital Markets.
That's good news for
J.B. Hunt Transport Services
. The company owns a huge container fleet -- more than 28,000 units -- with new containers ready to go into service in time for the holiday peak. In the second quarter of 2006, intermodal was the fastest growing segment of the company's business, with revenue climbing 14%.
Going forward, though, the fastest growth is likely to come from the dedicated segment, where J.B. Hunt gets a premium price for taking over a customer's most complex logistical problems. Management says this segment could account for 40% of overall revenue in the future.
But it's actually the results from the company's third leg, its truckload shipping business, that excite me most in the short run. The company managed to get a 5% second-quarter increase in revenue from this segment. That was a very tough time for trucking companies in general, thanks to soaring fuel prices and a shortage of drivers, which pushed up compensation and left rigs at some companies idle. A company that can keep revenue growing through the tough times is likely to be able to do better than competitors when the peak arrives.
Market-share gains, fourth-quarter seasonal peak, customer upgrades to prepare for
new operating system.
Nothing like a distracted competitor to help a company pick up market share.
( ATYT) and
typically play leapfrog, with one company and then the other launching a new graphics processor to temporarily gain an edge in the market.
This fall that edge looked like it was due to go to Nvidia anyway with the launch of the GeForce 7900GS graphics processor. But the pending acquisition of ATI by
Advanced Micro Devices
looks like it will give Nvidia a stay at the top that's longer than usual.
Nvidia's fall refresh product will beat ATI's to market by a month, and its G80 product will hit the market in early to mid-November. ATI's response, the R600, won't ship until early 2007. The pickup in market share couldn't come at a better time, since the holiday shopping season sees the biggest demand for the kind of high-end PC gaming gear that Nvidia powers. The momentum won't stop with the fourth quarter either. Vista, Microsoft's new operating system due to hit the consumer market in 2007, expands demand for graphics processing in the average PC.
At the time of publication, Jubak did not own or control any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
Jim Jubak is senior markets editor for MSN Money. He is a former senior financial editor at Worth magazine and editor of Venture magazine. Jubak was a Bagehot Business Journalism Fellow at Columbia University and has written two books: "The Worth Guide to Electronic Investing" and "In the Image of the Brain: Breaking the Barrier Between the Human Mind and Intelligent Machines." As an investor, he says he believes the conventional wisdom is always wrong -- but that he will nonetheless go with the herd if he believes there's a profit to be made. He lives in New York. While Jubak cannot provide personalized investment advice or recommendations, he appreciates your feedback;
to send him an email.