CI Outlook - Archives

JUNE 2014

May began like April, weak and foreboding.  Yet once again, regardless of the bleak economic news, the market recovered.  Even though first quarter GDP was revised sharply lower and Janet Yellen confirmed the continuing necessity of Fed stimulus, the market still closed the month at new all-time highs.  As exciting as that sounds the Dow Jones is still up only one percent for the year.  We think that reflects two important points.  First, the market is still digesting last year’s gains.  A process that should end soon.  Second, the exceptionally slow winter quarter left investors without confidence in predictions of economic strength later in the year.  The psychological state of the market is “prove it”.  With that type of attitude many large traders have withdrawn from the markets and are waiting for a high volume breakout, either up or down, before committing funds.  That leaves us with an early case of summer doldrums but some opportunities for bottom up stock picking.

 In a perceived slow growth economy the best preforming stocks should be those with superior growth prospects.  And in a slow market many times they can be bought at a reasonable price.  Growth at a reasonable price or GARP investing is a style that lends itself to small and mid-size stock discoveries.  One such company is Sprouts Farmers Markets (SFM).  Recently we bought the stock after an earnings miss by it and Whole Foods.  That news dropped SFM from $50 to $26 per share.  We think the selloff was overdone and that SFM has a bright future.  The concept is appealing.  The company uses low prices on high quality produce to lure in shoppers.  According to reports written by analysts at UBS and Wells Fargo, SFM sells a comparable basket of goods approximately 17% below the cost at major grocers such as Kroger and Safeway.  The savings are even higher when compared with Whole Foods and other “healthy” grocers.  This winning concept has allowed SFM to thrive by growing market share at their current 175 stores.  More importantly Sprouts expects to grow the chain to 1200 stores.  If they are successful analysts think SFM will grow earnings at a 25% compounded rate.  We like those prospects and have added the stock to portfolios where appropriate.

Although we expect a slow summer we are not waiting for the market to break out.  We have been investing long enough to know the mood can change suddenly and without warning.  We are using this quiet time to research for other potential exceptional investments and will add them to your portfolio if they are appropriate to your investment goals.

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