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Zacks #1 Stocks on the Move 04/23/2014

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Zacks Premium Weekly Market Analysis

In this weekly piece, Sheraz Mian, the Director of Research, analyzes the forces driving the stock market and provides his outlook for the market. The focus each week remains on the market's underlying fundamentals, ranging from the direction of the economy and interest rates to corporate earnings and valuation. The combination of this market road map with proven track record and discipline of the Zacks Rank gives the Zacks Premium subscribers the tools for successful investing.

Weekly Market Analysis: March 03, 2014

Sheraz Mian

Is Ukraine Really Such a Big Deal?

By Sheraz Mian

We had a shaky start to the new month, thanks to developments in Ukraine. The Russian move has added a big geopolitical risk factor into the equation, which has unsettled the global markets. But how big of a deal is it? Will the Ukraine issue kill this bull rally?

I am no Ukraine or Russia expert, but I strongly feel that the world will soon move past Russia's Crimean move. I believe the markets appreciate the distinction between Crimea and Ukraine proper. As long as the issue doesn't escalate into Ukraine proper, it will become a nonissue for the markets.

Crimea has been part of Russia for a very long time and became part of Ukraine only in the 1950s after the former Soviet leader Khrushchev 'gifted' it to the then fellow republic. The region is home to Russia's Black Sea fleet, and its main port is on lease to Russia. Putin apparently suspected that the newly-installed Ukrainian government will cancel the Russian Navy's lease, further complicating the relationship.


What Can the U.S. and Europe Do?

With an armed intervention out of the question, there is not much beyond symbolic measures that the U.S. and Europe can do to counter Russia. Diplomatic isolation and even some sanctions could potentially be imposed on the country.

But the U.S. doesn't have as deep an economic relationship with Russia as Europe does. The extent to which Europe, particularly Germany, will follow the U.S.'s lead in economically punishing Russia will determine the full bite of any sanctions.

That said, the Russian economy was weak to begin with and even modest sanctions will hurt its outlook. The country's GDP was up only +1.3% in 2013 and was expected to do no better than +2% this year and next before this crisis got underway.

Where the U.S. and Europe can be most effective is in propping up and helping the new Ukrainian government. Strong financial and moral backing for Ukraine, aimed at setting up inclusive democratic institutions that address the concerns of eastern Ukraine's substantial Russian population, will go a long way towards stabilizing the country.


Will Russia Stop at Crimea Only?

Putin's image of a power hungry leader who likes to punish the former Soviet satellite states for showing autonomy may not be off the mark. Russia is a powerful country, particularly relative to Ukraine, and some Russian hawks may be tempted to replicate the Crimean adventure in eastern Ukraine as well. Instead of using regular Russian troops, they could instigate a rebellion in the eastern half of the country and effectively divide Ukraine along East-West lines. They have followed similar policies in other former Soviet republics like Moldova and Georgia.

But such a division of the Ukrainian state will be hard fought and will hardly be a replay of what happened in Crimea. Even if Russia is able to carve out such a buffer in eastern Ukraine, the associated turmoil will be highly disruptive to Russian natural gas exports to Western Europe that transit through Ukraine.

About a third of Western Europe's natural gas comes from Russia, primarily through pipelines that run through Ukraine. Europe is a steady source of energy revenue for Russia. It is not in Russia's interest to undermine such a steady source of revenue. That's why futures prices for the U.K.'s North Sea natural gas for delivery in Germany spiked today in response to this uncertainty.

Crimea was a military matter for Russia, but conflict in Ukraine will be a big blow to its economy, not to mention long-term energy relationship with Germany and the rest of Europe.


Putting It All Together

The market was down big today, but the sell-off was measured and not 'panicky'. The prospect of conflict and disruptions to Europe's energy supplies are no doubt unsettling for investors. We saw that play out in global markets today and will likely remain a headwind in the next few days as well. But I don't think the issue will have much staying power, particularly if the conflict doesn't move past Ukraine's eastern borders. Nothing can be said with certainty, but I would expect the market to start stabilizing and reflecting fundamentals sooner rather than later.


Focus List Update

We made 6 changes to the Focus List today, adding and deleting three stocks each.

We deleted Cincinnati Financial (CINF - Analyst Report), Starwood Hotels (HOT - Analyst Report) and Calgon Carbon (CCC - Analyst Report), as all of these stocks had fallen to a Zacks Rank #4 (Sell). Starwood was a long-held position in the portfolio since February 2012, and was up +46.6% in that time period. Calgon Carbon entered the Focus List in July 2013 and had gained +12.2% since then, while CINF was down -2% since entering in September 2013.

Replacing these three, we have added Juniper Network (JNPR - Analyst Report), Wynn Resorts (WYNN - Analyst Report) and Tesla Motors (TSLA - Analyst Report) – all having a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy).

Best Regards,

Sheraz Mian

Director of Research

Visit http://www.zacks.com/ for more profitable investment commentary and recommendations.

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