A Year-End Rally
The market has been relatively flat this week on low trading volume and I expect that light volume to continue as some portfolio managers window dress their portfolios with the recent strong performers.
However, the market has still been able to enjoy the year-end rally, which has helped our GameChangers stocks drift higher. I’m especially pleased to see the big turnaround DigitalGlobe (DGI) made this month, bouncing over 30% off its December lows. As you may recall, I wanted to give the stock a little more time for its story to play out, as I felt there was a good chance we’d see a year-end bounce in the shares—which is exactly what happened.
With the news flow for our GameChangers names relatively light in this holiday week, I wanted to use today’s Weekly Update to talk about the one fear that’s reemerged in an otherwise bullish environment as 2014 comes to a close.
Greece: The Next Market Mover?
On Monday, December 29, the Greek parliament failed to elect a president, forcing a snap election to be held January 25, which could end up creating a political crisis in Greece.
If the Syriza party is elected, they may seek to write off the country’s 320 billion euros of debt, which is very high in relation to total GDP of 200 billion euros, and leave the Eurozone. Even if this did happen, it’s important to note that Greece is less than 2% of Europe’s GDP, so any impact of Greece leaving the Eurozone on the economy of all of Europe and corporate earnings would be minimal.
However, the bigger question is whether it would lead the complete breaking up of the Eurozone, as other peripheral nations like Italy and Spain could leave in order to have the greater economic flexibility that having their own currency could give those nations. But right now, I do not see this as a serious threat—although it will still be something I keep a close eye on.
The big difference between now and 2011 is that thanks to the support of the European Central Bank (ECB), Italian and Spanish 10-year bonds are at record lows—at less than 2%. This very low interest rate was brought about by ECB President Mario Draghi’s promise to do whatever it takes to keep the Eurozone together. I think that it would be hard for any political party in Spain or Italy to call for leaving the Eurozone as long as these countries benefit from such low rates which keeps their debt manageable.
I also think the Street realizes that the situation is different from 2011, which is why the market reaction has been muted. So while news from Greece may move the market as January 25 nears, I don’t expect it to be a major market driver.
Looking Ahead
While I do not believe the issues in Greece will have a lasting impact, I think we’ll still be faced with continued volatility. This past year had increased volatility as compared to 2012 and 2013, with more brief corrections, especially in the second half of the year. I think this up and down market will continue into 2015, although I still expect next year to be a positive one for stocks.
Here in GameChangers, stock selection will be of even more critical importance with stocks at elevated levels. However, I continue to believe that innovative companies that can continue to meet their earnings estimates and demonstrate they still have above average earnings growth potential will reap the rewards and climb higher. In addition, interest rates are likely to remain low, even with the Federal Reserve tightening, as U.S. rates remain high in comparison to the levels we see in Japan and Europe. I expect this to help keep gains in longer-term rates in check.
With the increased volatility, I think our strategy of focusing on stocks with solid fundamentals and being quick to lock in profits or cut losses will serve us well. Our current Buy List is very fresh, with all 12 having been initially recommended in 2014. We’ve been moving quickly, pocketing our profits in Sprouts Farmers Market (SFM), Maximus (MMS) and Five Below (FIVE) in the fourth quarter of this year, with an average gain just under 17%. In addition, we’ve only had one loss in the quarter, which came from Shutterstock (SSTK). Although even with this loss, the stock had made a dramatic turnaround beforehand, falling 13% before rebounding and allowing us to exit the position at an easily manageable -2%. I expect this performance to continue into the New Year as we continue to invest in solid companies.
We’ll talk in greater detail about my outlook for 2015 in next week’s Monthly Issue. I’ll share the factors I’m watching and review all of our GameChangers names, including where I see each heading next.
I wish you a very happy and safe New Year, which I expect to be a profitable one for us. And don’t forget, the market will be closed January 1, on New Year’s Day!
Sincerely,
Hilary Kramer
Editor, GameChangers
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