Flat stock market challenges experts

The bull market is getting long in the tooth.

U.S. major indexes now have gone three years without a 10 percent correction, and no one knows that any better than the four local stock experts in the 13th annual Hono­lulu Star-Advertiser investment contest.

With winners harder to come by in a slowing market, only one of the four local experts eked out a gain in the third quarter.

Dwight Melton, co-founder of the Hawaii Stocks and Options Group and the two-time defending champion, saw his hypothetical $20,000 portfolio rise just 1.3 percent in the July-September quarter. Still, it was good enough to lift him from third place into the lead with a year-to-date gain of 22.5 percent and a total portfolio of $24,493.16.

"The S&P has now gone about three years without a correction of at least 10 percent, an unusually long period that’s caused unease among investors who are convinced that a decline must be coming," he said. "Such a correction could bring more buyers into the market, because there are few attractive alternatives to stocks these days."

Barry Hyman, vice president, private client group, for the Maui branch of FIM Group Ltd., remained in second with a 16.3 percent year-to-date gain even as his portfolio dropped 4.5 percent in the quarter to $23,266.70.

Norm Caris, managing director for Los Angeles-based investment bank B. Riley & Co. and a Kauai resident, saw his portfolio tumble 20.1 percent in the quarter to shave his 25.9 percent midyear gain to a mere 0.6 percent. The big loss dropped him into third place at $20,110.89.

Richard Dole, chief executive officer of Hon­­olulu-based investment bank Dole Capital LLC, fell into the red for the year as his portfolio fell 6.9 percent in the quarter to leave him with a 3.9 percent year-to-date loss and a total portfolio of $19,225.05.

Melton, who has won the investment contest five times in 12 years, said he doesn’t see any bargains now but that some sectors could gain more than others depending on capital spending.

"Capital spending is finally emerging as a big positive story in this country," he said. "Companies move to replace aging infrastructure, lower utilization rates hovering around 80 percent and boost productivity. Industrials, technology and financials will all benefit from that kind of spending."

Melton, who in recent years has eschewed individual stocks for this contest in favor of index investing, had the two best performers of any of the local experts last quarter. The ProShares UltraPro QQQ, which corresponds to 300 percent of the Nasdaq 100 index fund’s daily performance, jumped 15.7 percent while the Direxion Healthcare Bull 3X fund rose 15.3 percent. Those gains helped offset a 26.3 percent drop from his worst performer, the Direxion Energy Bull 3X fund. The 3X funds reflect results that are 300 percent of the price performance of the primary index fund for the sector.

Despite his penchant for index investing, Melton made an exception for the fourth quarter by adding GoPro Inc. to his portfolio. GoPro, which allows adventurers to stap tiny video cameras onto their bodies to re­cord their exploits, has seen its shares more than triple since its June 26 initial public offering.

Melton said the U.S. stock market has entered into a corrective phase despite the major indexes escaping 10 percent pullbacks.

"But the underlying bull market remains in place," he added. "Last year the benchmark S&P 500 rose about 30 percent; so far this year the index was up about 8 percent (through the third quarter)."

The Dow Jones industrial average, the most widely followed index, had a total return of 4.6 percent through the first three quarters while the Standard & Poor’s 500 index was up 8.3 percent and the Nasdaq composite index was up 8.6 percent. For the July-September period, the Dow was up just 1.9 percent, the S&P 500 was ahead 1.1 percent and the Nasdaq gained 2.2 percent.

Hyman points out, though, that not all indexes have escaped a correction, which marks a 10 percent decline from a recent peak.

"U.S. stocks, as measured by the Russell 2000, corrected more than 10 percent from its closing peak in March to its recent closing bottom," Hyman said. "In the global markets the MSCI EAFE small-cap index and the MSCI Emerging Markets indexes were both down more than 11 percent. But the large-cap U.S. indexes have neither made much headway nor had an official correction this year. In my mind the main factors supporting the large-cap U.S. indexes are the relative strength of the U.S. economy, the perceived safety net investors think the Fed has spread out and recently the dramatic strength of the U.S. dollar. The factors holding them back include a slow global economy, a massive buildup of debt and pretty hefty broad stock price valuations."

Hyman, who routinely readjusts his portfolio each quarter, has added two stocks for the fourth quarter: Teradata Corp. and Janus Capital.

"Teradata is an investment in the expanding corporate demand for data analysis," Hyman said. "The market has pressured the stock based on perceived competitive threats that I believe are unwarranted. Earnings growth decelerated due to an increase in selling, general and administrative expenses intended to stimulate sales."

Hyman said with bond king Bill Gross leaving PIMCO for Janus Capital that Janus Capital’s stock "is still undervalued despite the pop in its price on that announcement at the end of the quarter."

Caris’ portfolio, which had the best return among the experts at midyear with a 25.9 percent gain, saw that record tarnished in the third quarter due to a gold meltdown among two of his picks. The Direxion Gold Miners Bull 3X fund sank 50.5 percent, and NovaGold Resources dropped 28 percent. In addition, another one of his holdings, Ford, fell 13.6 percent. Deckers Outdoor, which designs and markets footwear and accessories, was the only winner with a 12.6 percent increase.

He sold Direxion Gold Miners Bull 3X and Deckers Outdoor after the quarter ended and bought Kratos Defense & Security, a maker of drones and cybersecurity software, and Vince Holding Corp.

Caris said Kratos "makes sense for this environment where ISIS is out of control."

And he calls Vince "one of the best-run companies I have witnessed in my many years in the business."

"The company has new lines of purses and men’s shoes that are well priced, of high quality and that are likely to help the company gain market share," he said.

Dole, who has maintained his same picks all year, saw all his selections lose ground in the quarter with Brazilian-based Vale SA, an iron ore producer, taking the biggest hit with a 16.8 percent decline.

He called the stock market an auction with its trends based on investor perceptions.

"Just because there hasn’t been a correction doesn’t mean that there isn’t one coming," he said. "Noah waited a long time before the rains came. Interest rates were supposed to go up this year, but they haven’t. The defense sector was supposed to suffer with the sequester, but instead these stock have soared. Concept stocks (companies with rapidly increasing earnings from a low base, such as Facebook and Twitter) have been in vogue, and will probably remain so unless they face disappointment. They need to deliver."

Dole said he doubts the Federal Reserve will raise interest rates at a time when foreign markets are soft and the dollar is strong.

"If they did, the dollar would further increase against a basket of foreign currencies and choke off exports from the U.S., including Hawaii tourism," said Dole, noting that the Hawaii tourist industry is an export industry because it brings in dollars.