Searching for Santa

It’s hard to believe it’s our last issue of 2014 already and that 2015 is right around the corner! It’s certainly been an interesting ride in the market this year, but it’s also been a profitable one for us here in Inner Circle.

Of the 21 stocks we sold this year, 19 (91%) were moneymakers for us, and our average return was a solid 15%. I’m proud of the profits we’ve been able to lock in, and they are a testament to staying disciplined with our strategy – buying quality, catalyst-driven names on weakness and protecting gains that could be vulnerable to market fluctuations..

And speaking of market fluctuations, things have certainly gotten a bit more volatile this month, so it’s important that we keep our approach in mind as we wrap up the final weeks of 2014. I know the volatility is unnerving, but it has also restored some balance to what was starting to look like a complacent and slightly overbought market. The broad market is now 3% below the record levels set earlier this month, even though it may feel like more than that, and is still tracking a few points above the long-term norm.

Oil remains the biggest culprit behind the weakness, and we could see further downside as well as renewed worries about foreign markets. Today, investors got a little jittery ahead of tomorrow’s Federal Reserve meeting as everyone waits to see what the Fed will say about interest rates.

Stock prices have come a long way but hopes for earnings growth in the current quarter have gone in the opposite direction, leaving the S&P 500 in particular looking a little rich on a pure earnings basis. Until we get confirmation next month that expectations are geared too low, it will be hard for the bulls to get much leverage – and of course, if too many early earnings reports miss the mark, the bears will gain the upper hand.

In the meantime, the remaining days of 2014 are likely to be lower volume, though institutional managers will be busy harvesting their now richly-priced winners and rotating into any area of the market that still offers relative value – like our stocks. That could set us up for a rally ahead, even if Santa fails to show up on Wall Street this month. While there are no guarantees, the bright side is that Inner Circle investors don’t need to believe in Santa Claus to see profits. Why is that? Let’s take a closer look at our Buy List to find out.

State of the Buy List: What to Buy Now

As large cap stocks have come under pressure, so has our Buy List, and several of our positions are currently trading in deeply oversold territory. I know the dips are never easy to stomach, but the good news is that we’ve been here before and came out on top.

We were in a very similar position this time last year, when we had already harvested our winners for the year and were left with a lot of red ink as market volatility increased. But as we were invested in solid companies that had strong upside potential, our patience was rewarded as the names came roaring back for us in the first three months of 2014. In fact, those stocks were some of our bigger winners this year!

Our current stocks are positioned for a similar bounce ahead on any market strength, which makes now a great time to be getting started for those of you who are new to Inner Circle. I continue to like all of our stocks, and see the current weakness as a buying opportunity to scoop up these quality names at even more attractive prices. Declining share prices also give us an opportunity to lock in even higher effective dividend yields, which gives us some added cushioning should we see further downside. We have some nice payers on the Buy List. Carlyle Group (CG) and Telefonica Brasil (VIV) are each in oversold territory, so they could be setting up for a bounce to go along with nice dividend payouts of around 4% in the coming months. Both are good buys at current prices. 

Another name that stands out to me as a good place for new money right now is Virgin America (VA). This stock should start making some buzz on the Street once its cooling-off period (that kept its all-star IPO underwriters silent so far) starts to thaw later this month. I love this stock for its relatively high profile and instant sector footprint, and likewise many institutional investors are eager to make room in their portfolios once the big banks give them the green light. Once that happens, the float here is so narrow (13 million shares to support a $1 billion enterprise) that the price action will likely move extremely fast as funds chase the blocks they need. Be sure to get in before the rally and buy VA below $35.50.

Barrick Gold (ABX) is one of our newest stocks, and while it’s gotten off to a rocky start for us thanks to the recent volatility, the chart looks close to a bottom at current prices. I recommended the gold producer as it appeared to be transitioning into a full-fledged recovery, and with that upside still ahead, the shares look even more attractive right now. Buy ABX under 13.

And finally, I would also call out Team Health Holdings (TMH) as a very attractive buy for new money. It stands to benefit from a rebound in the healthcare sector, and I like that this name traditionally holds up very well in volatility, making it an attractive option for investors seeking safety amid the bumps. That could give the stock some nice support as we wrap up the year and makes it a good buy below $57.

The key right now is not to panic over the day-to-day moves, as difficult as they can be. Our patience has been rewarded in the past, and I remain confident that it will be again.

I watch all of our stocks every day, and at the same time, I’m also on the lookout for new opportunities. Period of heightened volatility often produce some of the best buying opportunities, and the market’s negative reaction to risk has led me to today’s new recommendation. I believe this name will also provide us with some added protection from the downside, especially considering its exposure to the economic upside of low oil prices, as well as its substantial income stream. Let’s take a look at it now.

Stock of the Month: SIX

Six Flags Entertainment (SIX) may sound like the last thing you want more of right now – a rollercoaster ride – but its position as a real estate investment trust (REIT) requires the company to distribute most of the profits from its network of 18 amusement parks to shareholders. The stock has regained some momentum over the last few months, but these shares are still so deeply depressed that this quarterly profit distribution now translates into an attractive annualized 5% yield – with the next installment coming in February 2015.

With that math on the table, the risk of owning this stock simply revolves around the company’s ability to keep bringing crowds to its parks. Plus, management’s current guidance of 10% revenue growth over the next few years is a bit on the conservative side, as Six Flag’s shift from a pay-per-day model to a monthly membership model should encourage repeat customers while boosting overall revenue at the same time.

And the current macro environment should provide a boost as well. As gas prices have plunged 20% in the last 12 months, many families should be encouraged to take longer road trips and spend a little more on the destination-type fun rather than simply feeding the fuel tank.

Wall Street currently expects SIX to double its earnings numbers by 2016, which will not only support the dividend but also free up cash to actually increase the amount of money flowing to shareholders. Remember, this is all organic growth as the existing parks move toward the monthly model, so the company won’t be expanding its debt load in order to acquire and develop a lot of new property.

These shares move on a seasonal cycle, which shouldn’t surprise any investor that’s familiar with the amusement park calendar. February through June is the typical rally season for SIX, as it is the early busy season for its Sun Belt properties. The time to buy these shares is now upon us, so I recommend you buy SIX below $42.50 and get ready to pocket that spectacular dividend and ride the stock higher.

Exciting Updates to Our Model Portfolio Ahead

As we head into the final weeks of 2014, trading may stay choppy, but should get lighter in volume as Wall Street tends to shut down for the holidays.

As a result, it’s important to focus on positioning ourselves for the year ahead. A big part of our success in 2015 will come from our Model Portfolio, which I’ve been hard at work on. As you may have seen, I sent you a brand-new report last week all about the improvements we’re making to the Model Portfolio and how I’ve incorporated some of your recent feedback to make it even easier to incorporate all of my advice into one streamlined Buy List.

I have high expectations for this exclusive portfolio in 2015, and I can’t wait for us to get started with it. We’ll kick off the first full week of the new year with our next issue, and at that time, I’ll share all of the details – how it will work, what our recommended allocations will be to start the year, our hand-picked holdings, and more. I’ll even introduce some new tools to help you make the most of the Model Portfolio.

That issue will be ready for you on January 6, and the very next day, we’ll hold our own Inner Circle meeting to kick off the new year. I’ll host a live chat online to share my outlook for the year, talk through the new and improved Model Portfolio, and as always, answer as many of your questions as I can. I can’t think of a better way to start the year, and I do hope you’ll be able to join us.

I’ll be in touch with all of the details soon. I really think 2015 is going to be our best year yet, and I’m excited to get it off to a great start. Until then, I wish you all a very happy and safe holiday!

Sincerely,

Hilary Kramer
Editor, Inner Circle

P.S. Effective January 1, 2015, you will need a personalized user name and password to log in to all of the Kramer sites. To create your own now, please click here.