Western CO stocks outperform in November

The Scout Partners Index of Western Colorado Stocks rose sharply in November, +2.3% versus +1.7% for the widely followed S&P 500 index. The 25 stock index focuses on large companies whose operations have a significant impact in Western Colorado. It includes major Mesa County employers such as Wal-Mart, Halliburton, Kroger (City Markets), Startek, CRH (United Companies), and the Union Pacific Railroad.

For the month of November, the strongest performer in the index was Williams Companies (WMB), which surged 13.6%. The Tulsa, Oklahoma-based energy company benefited from rising natural gas prices as colder temperatures, especially in the northeast, boosted investor interest in the sector. In November, Williams also announced the sale of its remaining interest in Williams Four Corners LLC to Williams Partners L.P. (WPZ), which had purchased a 25% interest in Four Corners from Williams Companies earlier in the year.

"The entire energy sector sold off during the summer," said Doug May, President of Scout Partners. "but the sector is enjoying tremendous profit growth and normal profit taking in the sector was exaggerated by the fiasco of Amaranth Advisors’ hedge fund blowing itself up. Once the Amaranth assets were lifted off the market, the entire sector started moving up again and Williams, with rising natural gas prices moving up, found a lot of investor interest."

Qwest Communications (Q) was the index laggard, falling 10.9% during the month of November. May noted that “even if you forget, for a moment, that Qwest’s customer base is canceling its land-based service in favor of VoIP alternatives that are much cheaper, in mid-November it was announced that the new regime at Qwest has decided to cash in $36 million of windfall option gains and, later in the month, that Phil Anschutz is parting with nearly 80 million shares, all of which tends to make investors a tad nervous.”

Scout Partners equal weighted Index of Western Colorado Stocks is comprised of 25 stocks that hope to reflect, to some degree, business conditions in Western Colorado. Reflecting the local economy, the index has a large (over 30%) concentration in the energy sector, which tends to drive index performance. The next largest sector concentration is in industrial stocks, which comprise over 20% of the portfolio.

In the month of November, the index’s concentration in energy stocks boosted index returns, while specific stock selection in the energy, industrial, and telecommunications sectors were the largest drags on portfolio performance. More specifically, Local energy stocks rose 6.7% during the month, while the national energy sector rose 8.0%. Local industrial sector stocks fell 0.5%, while S&P 500 industrial sector stocks rose 2.1% during the month. Qwest fell 10.9% while the S&P 500 telecommunications also fell, but only 0.5%.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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Time to Wrap It Up

What sort of finishing touch will the market put on this year’s present? Stocks go into the final month with double-digit returns. Will it be a pretty bow, with a final performance surge taking returns close to 20% for the year? Or will it be a lump of coal in the stocking?

The stock and bond markets are expecting different things for this Yuletide season. The 10-year Treasury bond, which climbed as high as 5.25% in late-June, has since fallen to below 4.5% on concerns that we’ll be talking less about inflation in 2007, and more about the need for an economic recovery. Stocks, on the other hand, have bought into a “soft landing” story that acknowledges the weakness in several economic indicators, but anticipate the Federal Reserve rising to the occasion to cut interest rates and “save” the economic recovery with heroic 9th inning (or is it 6th inning?) moves to reduce interest rates. Bonds are anticipating a lump of coal. Stocks are forecasting a pretty bow. Markets are sending mixed signals and our ETF model is responding accordingly.

In October, the model added long bonds to the portfolio, and those bonds have generally kept pace with the market’s advance since then. Adding bonds is typically a “defensive” move, which makes a lot of sense if we’re about to head into a recession, which should hurt stocks. On the other hand, in December the model replaced defensive “consumer staples” stocks with more aggressive technology stocks, reflecting strength in a sector which hasn’t moved much since 2003, despite impressive growth in earnings power and recent strength in the software and communications equipment sectors.

Market momentum favors stocks in the short run. Year-end and first-quarter money flows also tend to favor stocks. Storm clouds on the economic horizon continue to grow, however. The portfolio is positioned to make money in stocks, while the opportunity lasts. We at Scout Partners offer you our best wishes for a happy holiday season and a prosperous New Year.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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