Doom and Gloom?
Everywhere we turn, the news has been gloomy. From the threat of a global recession to the struggling job market, and don’t forget the Eurozone crisis. Yet looking at the major averages year to date, the markets do not seem to be panicking. In fact many of the averages are having quite the good year. Though the rallies have been dull with very low volume, we are still close to multi-year highs on the Dow, Nasdaq, and S&P 500.
Let’s take a look at some key economic and market activity from this past week:
Jobs, Jobs – Where Art Thou Jobs?
The closely watched nonfarm payrolls rose from June’s 64,000 to 163,000 in July at least temporarily alleviating recession concerns. However these lackluster results still leave QE3 on the table. The Fed has keyed in on the unemployment rate, which is ticking back up again and stands at 8.3%. Another concern here is that the most recent ISM survey suggests the labor market will continue to be weak. This means the August labor reports will carry additional weight as the Fed becomes more critical of any further weakness.
The Relief at the Pump was Short-lived
Gasoline prices are rising rapidly again. After bottoming at $3.35, the price of a gallon of regular gasoline has increased for five- straight weeks, including a nearly 14-cent rise to $3.64 last week. As the consumer is now spending more and more on gas, this leaves less in the budget for more discretionary items. It is estimated the average consumer is spending 10% of his budget on fuel costs.
Higher oil and natural gas prices have benefited the energy sector. While investor’s have increased their appetite for risk buying up technology and more cyclical stocks. Defensive stocks have not kept pace with the overall market. Since June 28th the S&P 500 is up 5.5% and here are the winning and losing sectors:
The Consumer Credit Illusion
It appears as if consumer credit is improving. However a closer look at the numbers shows us that the strength is only an illusion:
• Consumer credit slowed from 7.8% in May to 3.0% in June
• Revolving credit fell 5.1%
• Non-revolving credit rose 7.2%
Solid gains in non-revolving credit (where we see the strength) are mainly a result of an increase in federal government loans (the majority of these are student loans). Take away student loans and non-revolving credit is still near the bottom. Consumers are still cautious and as a whole are not participating in the economic recovery.
Overseas Weakness Impacting Manufacturing
Because of weakness overseas, wholesale inventories fell 0.2% in June, while sales tumbled 1.4%, the largest drop since March 2009 (falling oil prices contributed to half of the decline). The inventories-to-sales ratio, which measures how many months it would take for businesses to liquidate all stockpiles, rose from 1.18 to 1.20, the highest since December 2009.
What about Europe?
There weren’t major headlines out of Europe this week other than the ECB (European Central Bank) signaling it was “focusing on the short end of the yield curve”. This most likely means the ECB will eventually come in and buy shorter-term debt. Short-term Spanish bond yields inched lower this week, but Spain is still a very volatile situation and needs to be monitored closely.
The ECB may lend a helping hand through bond purchases but it seems they want weaker countries to utilize its rescue funds and agree to stricter conditions.
China Worries Ease
Many have been concerned about China’s growth challenges because of its impact on the global economy. This red-hot economy was showing signs of cooling off but this week the Reserve Bank of Australia kept its key rate at 3.50%, saying, “China’s growth has moderated to a more sustainable pace, but does not appear to be slowing further.” If China can sustain their current growth path, this will aid U.S. equities and commodities.
IDEA OF THE WEEK: MAKE MONEY ON DEBT RECOVERY SERVICES
Most successful investors figure out ways to spot opportunity before the masses have time to figure it out. They often get in early and reap large benefits along the way. For the “contrarian” investor who seeks out investment ideas that others don’t know about or are unwilling to take a chance on, a little research can go a long way.
Right now, many investors are banking on a slow economic recovery. It is the message being fed to the masses. So the mantra goes, “be defensive and buy dividend paying stocks in ‘recession-resistant’ companies”. In other words, buy utilizes, telecom, health care, and consumer staples – the more defensive sectors.
Well in doing a little bit of research, I discovered something quite different. In fact, it’s an idea the average investor has likely never heard of. This idea could possibly deliver much better returns.
In a tough economy, consumers are having a tough time paying their bills. As a result credit card debt, bankruptcies, defaults, and foreclosures are at or near all-time highs. This can cripple the bottom line for financial service companies in the lending business.
Yet there is a hero in these tough times. This company is able to leverage 20 years of servicing and 60 years of debt collection experience to provide services and technologies to help financial companies recover assets and enhance customer relationships.
Better yet, this company has limited capital requirements, no debt and a low cost operating model. If the economy remains sluggish or gets worse, more companies will need help collecting debts. That’s where Altisource (NASDAQ: ASPS) comes in. They provide services to some of the most respected organizations in their industries, including one of the nation’s largest sub-prime servicers, government agencies and many lenders, servicers, investors, mortgage bankers, credit unions, financial services companies and hedge funds across the country.
I think the best is yet to come! It provides services and technologies that span the mortgage lifecycle from origination through REO asset management, in addition to asset recovery and customer relationship management. As it relates to default management, Altisource helps with valuation of foreclosed properties, property preservation and Inspection, title search services, foreclosure trustee services, default processing services, as well as deed-in-lieu and short sales.
Altisource now trades at $78 along with 40-50% revenue growth and doubling their earnings. As asset recovery of defaulted mortgages will be a hot area to be in for the next several years, Altisource should be more profitable in this type of environment.
Three reasons I like Altisource:
1. Given its ability to do well in all economic conditions, I really love Altisource’s diverse business model with debt collection, asset management, and technology solutions.
2. Real estate recovery is a booming business. Altisource is a key niche player helping companies with a variety of real estate services along with superior solutions.
3. It has a strong management team with notable and well respected industry veterans who have published numerous articles and research papers, presented at a wide variety of industry conferences and been cited as experts in both trade and consumer publications.
Risks to Consider: Altisource is not cheap. It currently has a P/E ratio of 20.3 versus 11.3 for the industry and 14.6 for the S&P 500. Additionally they are quite volatile. Because they are a small cap stock (market cap of $1.8 billion), they need to see sharper peaks and valleys than the overall market. Additionally, because revenue growth has been so robust, expectations can get ahead of themselves. If growth slows, Altisource could see a price correction.
Action to Take –> Buy Altisource Portfolio Services (NASDAQ: ASPS) up to $85 a share. As the economy continues to be sluggish, Altisource’s profitability should soar. I expect this stock to top $100 by yearend with the economic recovery currently stuck in the mud.
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