Local stocks rise while broad market falls

The Scout Partners Index of Western Colorado stocks rose +1.72% while the broad market fell -3.25% in February (total return including dividends). 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 Market), Exxon Mobil, StarTek, CRH (United Companies), and the Union Pacific Railroad.

Natural gas prices rose and many local energy companies were up 10% or more during a month where the broad market indices continued their 2008 declines. B.J. Services (BJS) rose +19.4% in February, but close behind were Arch Coal (ACI), +16.4%, Halliburton (HAL), +15.7%, Encana (ECA), +15.1%, Williams (WMB), +12.7%, and Bill Barrett Resources (BBG), +11.2%. Doug May, President of May-Investments, a Grand Junction-based registered investment advisor, noted that, "natural gas prices have reached their highest prices in 26 months but investor sentiment about the sector remains pretty cautious,” May said. "Gas inventory levels remain under control and the lower drilling rig activity we've had over the last year suggests that inventories will decline from here." Concern about a possible recession is overshadowing the positive industry fundamentals, however, so valuations in the sector remain depressed.

Mesa Air Group (MESA) was the worst performer in the index, falling -31.1% in February. The stock closed the month at $2.42 and has fallen 68% in the last 12 months. Mesa was as high as $12.87 as recently as 2006, recently re-signed several senior executives to long-term contracts to reward them for their service to the struggling carrier.

"High energy prices have hurt Mesa," May observed, "and the company reported a $2.8 million loss mid-month on lower revenues and higher legal expenses. Including losses earned at its Air Midwest subsidiary, the company managed to lose $4.2 million." Mesa Air Group has announced that it is selling the money-losing Air Midwest subsidiary. "Mesa said that it is planning to boost its cash reserves by financing its spare parts inventory," May noticed, "which makes investors feel good until they realize that it's sort of like an alcoholic taking out a home equity loan to put money back into the family bank account, nor does it make me feel better about climbing onto one of their planes which might be needing one of those spare parts to stay right-side up."

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. Local stocks are up +6.9%% over the past 12 months while the overall market has returned -3.6% over the same time period.

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

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