Boston, MA 05/21/2014 (wallstreetpr) – As investors enter the historically weakest six-month period of the trading year amidst concerns of further scaling-back of Fed stimulus, a trend toward a rotation into large-cap stock from small-caps can be witnessed by the widening spread between the S&P and Russell 2000 in 2014.
But overall, the trend has been up for stocks and down for fixed income for the past five years, which therefore implies to us that the Russell is undervalued against the S&P during what we believe to be merely another correction phase within the long-term secular bull market in stocks for 2014-5.
Stocks Favored Versus Bonds for Foreseeable Future
Moreover, in a low interest rate environment, projected S&P earnings growth for 2014 and 2015 remains robust at between 7% and 8%. Contrast that with a 10-year Treasury which trades at a measly 2.5%, and the choice between stock and fixed income becomes more clear to money managers.
Historically, investors will most likely choose a projected real rate of return over a negative rate, especially when the trend in stocks is still up. And as long as the Consumer Price Index (CPI) doesn’t runaway to the upside, investors will most likely add to their stock holdings to escape near-zero money market rates.
Though the dividend rate for the S&P hovers at an historically low 2%, the environment for stocks still remains positive due to an widespread strategy among company CFOs of forgoing dividends, on balance, in favor of stock buyback programs as a means of applying downward pressure on Price Earnings (PE) ratios through higher earnings per share.
Increased stock valuations and market capitalization have been the result of siphoning the supply of stock.
Fed Policy Likely to Reverse, Lifting Stock Valuations Further
With Fed monetary policy heavily impacting equities prices, the Fed’s so-called “tapering” weighs on investors in 2014. And concerns about the stall speed threat to the U.S. economy, which began in the first quarter will equally weigh on the Federal Open Market Committee (FOMC) for the remainder of 2014.
2014 has not been good for the US economy. Sluggish GDP and low employment participation rates leaving the Fed no choice but to stop tapering its bond purchases (and reverse policy) and to allow the US dollar to fall relative to the S&P in coming years.
Under a condition of Fed liquidity injections, stock have soared since 2009. And we have no compelling reason to believe that further Fed liquidity won’t bolster stocks once again.
In that environment, financial services stocks should benefit from increased capital flows and fees charged.
Two stocks have hit our radar for a trade during the remainder of 2014 and 2015.
WisdomTree Investments, Inc. (NASDAQ:WETF)
More than 10% of WETF’s market cap was traded on May 16, an astounding level of volume of more than $130 million traded hands.
After breaking down below its 200-day Exponential Moving Average (EMA) in mid-March, the stock may have reached its bull market cycle lows.
Though the company has been hit with net redemption to its foreign Exchange Traded Funds (ETF), especially the Japanese yen and equities ETFs, the market appears to have overly discounted the effect of lower fees derived from the capital outflow from these funds.
A price rebound on massive volume against a backdrop of declining major averages indicates to us a strong enough convergence to issue a macro trade alert on WETF for the remainder of 2014 and possibly beyond.
Insiders and Institutions hold a meaningful percentage of the company’s outstanding shares.
Banc of California Inc (NASDAQ:BANC)
Shares of Banc of California (BANC) may have bottomed in 2014, following a successful capital raise issued at near-market prices on May 16.
The bank said it generated gross proceeds of ~$50.4 million from the sale of common stock and ~60.0 million from the sale of tangible equity units, for a total of more than $110 million.
Like WETF, this 2014 alert was triggered because of the stock’s exceptionally strong volume and higher closing price in mid-May 2014, from the downtrend which began in the summer of 2013.
In the case of BANC, investors saw the near-market price capital raise on May 16 as a vote of confidence in the bank among institution investors. The worst of 2014 may be in for WETF, with the stock reaching at one point of more than a 20% price divergence from its 200-day EMA.
BANC trades at a low Forward PE when compared to its peers. In addition, BANC trades at a significant discount to Enterprise Value (EV) Book Value (BV) when compared to its peers.
Insiders and Institutions hold significant stakes of Banc of California’s outstanding shares.
