Small Cap Network Blog

Though the new year technically started on Friday, squeezing a trading day in after a holiday and before a weekend doesn’t quite help us out if we were looking for early clues about sector leadership. As fas as I’m concerned, today’s the first real day of trading in 2009. So, the clues from today’s activity mean a whole lot more to me.

In any case, if there are any clues we should take at face value from today’s small cap leaders, then here’s the list you’ve been waiting for…. the best-of-the best industries from the world of small cap stocks.

Some of these arenas I’m not surprised to see get a good start right out of the gate. Others I’m not so sure about. Take a look for yourself, but keep reading for my follow-up thoughts.

        Name                                  %Chg: 1 day      %Chg: 4 wk      3-Mon Pct Chg

1. Oil & Gas Drilling                           8.19%             27.19%              -28.12%
2. Automobiles Industry                    6.31%             17.75%              -10.97%
3. Marine Industry                            5.99%             26.38%              -12.33%
4. Oil & Gas Explore & Prod               5.61%             26.39%              -24.20%
5. Homebuilding                               5.36%             -1.64%              -23.23%
6. Diversified Financial Srvcs Ind        4.30%             5.23%                -1.14%
7. Energy Equip & Service Industry    4.61%             24.41%              -16.50%
8. Energy Sector                              4.45%             24.59%              -16.37%
9. Oil, Gas & Consumable Fuels Ind    4.20%             24.84%              -16.99%
10. Oil & Gas Equip & Svcs                  4.00%             23.92%              -13.93%
11. Computer Hardware                      3.57%             12.15%              -15.42%
12. Cstr&Frm Mchnry & Hvy Tks          3.52%             17.43%               0.26%

Energy doesn’t shock me one bit. I predicted a modest recovery in oil prices with my predictions for the new year, which would pull the energy sector’s stocks along for the ride. I trust that strength, even if I still expect a lot of back-and-forth.

Automobiles doesn’t entirely shock me either. The ‘worst is over’ mentality prevails thanks to a government bailout. Fundamentally speaking though, the worst is not yet over. However, America’s love of turn-around stories may be enough to prop those stocks up for a while. A trade? Maybe. An investment? Not yet.

Homebuilding? Same as automobiles…..America loves a turn-around story more than they love results. I do think housing is at or near a bottom. It may take much longer for investors to see that we just don’t need as many houses or homebuilders as we currently have.

Financial stocks really are poised for a better 2009, though it’s still apt to be hit and miss from one stock to the next. I trust the early strength though.
As for computer hardware, I don’t see much longevity to today’s strength at all. Homebuilders and auto-makers can ride the euphoria train for a while. Hardware makers, on the other hand, have too much inventory, and not enough customers. Even if the economy turns considerably better, slightly-more-advanced technology is low on the list of priorities right now.

Farm machinery and trucks? Yeah, I can see that trend lasting a while. I predicted agricultural stocks would remain hot in 2009, which means ag equipment could as well.

Anyway, it’s just one day - not to be etched in stone. I just thought it was kind of interesting to see which small cap industries jumped on the first day of real trading. As I said on Friday though, January is an erratic month, full of ups and downs. The list above could change dramatically when I do my “monthly small cap leaders” list at the end of January.

If you’ve got any special insight about individual small cap companies that are driving the results above, please chime in below.

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Though the market was in the red yesterday - again - not every industry was giving up ground…. particularly among small caps. The S&P Small Cap Distributor Index was up nicely (4.7%) on Monday, as it has been for the last four weeks. Were it just Monday we were seeing this strength, I might dismiss it as a mere curiosity. But to see this oddball group perform that consistently in this environment? I think it’s worth a closer look, just to see of there’s something worth adding to our portfolio.

First of all, a ‘distributor’ in this sense is a technology and electronics distributor… mostly. The actual definition is a little blurry, but the group includes the likes of Tech Data (TECD), Ingram-Micro (IM), ScanSource (SCSC), and GTSI Corp. (GTSI). (Be sure not to confuse these stocks with food and beverage distributors.)

However, it’s specifically the small caps in this group that have been on a month-long tear.

As for Monday’s pop from the small cap distributors, it’s attributable to two - and only two - names….Peerless Systems (PRLS), and Pomeroy IT Solutions (PMRY). They were up 3.7% and 2.4%, respectively. Impressive numbers, though the fact that they’re both priced under $5.00 means a small gain goes a long way in percentage terms. Still…

Both are ‘of interest’. I’d lump these two smaller names into a more speculative category, while based on the intermediate-term strength, I’d be willing to take a look at a couple of the larger names mentioned above as a less-speculative possibility.

It’s not just the chart I’m digging though. The underlying results for these companies are compelling too. I don’t have time to get all the way into the rationale, so I’ll summarize it with a “now and later” look at their price multiples (a.k.a. P/E ratios). You’ll find that data in the nearby table.

My first thought was that the ‘N/A’ was a nice way of saying nobody expected profitability from that respective company. As it turns out though, ‘NA’ actually meant ‘not available’ in this particular instance. These companies are small enough - and boring enough - to avoid analyst coverage. However, I know for a fact that GTSI and Pomeroy were both profitable last quarter, though they had not been profitable at some point earlier in the year (i.e. they’re not imploding).
Now, do I believe even the adjusted projected-P/Es? I don’t distrust the genuineness of the guess, though I don’t take it to heart either. I think there’s still an overly-optimistic bias from these companies as well as from the few analysts following these companies.

At the same time though, I do firmly feel that at least a couple of these names will be surprising leaders in 2009. I believe the worst of any recession has already been priced in, and I suspect we’re at the beginning of an economic upswing. As the global economy starts to improve, I think many of the individual company results will be no worse than meeting expectations, and possibly exceeding them.

What I like best, however, is that nobody else is even interested in these names….analysts, or investors. It’s still hit-and-miss within the group, but I like the overall group quite a bit because the bulk of the outside world hasn’t meddled with them yet.

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This certainly isn’t the kind of thing the media is going to cover - particularly when the Blagojevich debacle is just getting juicy - so I’ll bring it to your attention …. coal stocks are starting to smolder again. Could it be an omen of a fully-stoked fire? Methinks it could be, which is why I want to put the industry back on your radar. (I put it on your radar back in September, but never got a chance until now to follow up.)

Just so you know, coal stocks are well up this week-to-date. That’s not a big deal, as a lot of groups are up this week. However, there are two key points of interest about the Dow Jones Coal Index (DJUSCL) to make. First, it is THE leading group for the week so far, and second, these stocks may be waaaayyyyy undervalued. They took more than their fair share of drubbing since June, so I have to wonder if a recovery is going to be particularly strong. I think it will be - it has been so far anyway.

Take a look at the chart of the Dow Jones Coal Index… for the first time in months we’re seeing higher highs and higher lows. It looks a little like the gain over the last few days may be pushing the chart’s limits, so I expect a small pullback from here. As long as we don’t make a lower low though, I think this is something that’s more than a little interesting. In fact, as long as the 20-day line (blue) holds up as support, I’ll likely buy on a dip. Why there? That line has been a big factor - bearish and bullish - for months now.

I also wanted to throw in a chart of Arch Coal (ACI). This is an idea we were kicking around a few days ago as a possible ‘official’ site trade. We opted for the ProShare Ultra 500 ETF (SSO) instead, as we felt better about a market call than a sector call. However, we may add ACI to our official pick list soon - if this chart does what I think it’s going to do. Keep this one on your back pocket, along with the Market Vectors Coal ETF (KOL) [not shown]. Either have a lot of potential.

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Want to know what’s been the hottest industry group so far in November? It’s the mid-cap internet and catalog retailers. The average stock in this cluster is up 17.4% month-to-date, according to my Reuters information. That’s only fourth among about 300 industry and market cap groups, most of which are still in the hole for the month. The reason? I think the obvious one is the right one … online and out-of-store shopping - as an investment - tends to get a little more attention when more consumers start doing it themselves as a consumer choice. It’s a ridiculous reason, as online and catalog shopping is still at the mercy of a recession, but that hasn’t prevented these names from blasting off.

And what should we expect this year in terms of online sales trends? Nielsen says their polled consumers are planning to spend about 41% of their holiday shopping budget online, compared to 39% for last year. As for the number of people who said they’d spend the majority of this year’s shopping budget online, that number increased from 32% to 36%.

All well and good, but what about the raw numbers? Are consumers going to spend less or more - total - online? Well, it depends. Nielsen also said these improving web-shopping trends point to a slightly higher online sales total than we saw in 2007, even though in-store retail sales are expected to be lower.

Unfortunately, there are two sets of data that are not available that I’d still like to see.

The first set is, how much of this year’s online shopping is going to be done with traditional retailers who have stores anyway? Of the three sites that are expected to see the biggest increase in web-shopping (Amazon, Wal-Mart and Barnes & Noble), two of them are also prolific storefront retailers; only Amazon is purely virtual.

The second set of data I’m curious about is how much paper catalog retail shopping is going to be transacted this year? I know most paper catalogs are relics, and all of them are eventually going to follow in the footsteps of the now-defunct J. Peterman. However, they’re still a factor… at least when it comes to that 17.4% month-to-date gain I mentioned above.

Anyway, some of the stocks in the group include the big players like Amazon (AMZN), eBay (EBAY), and IAC/Interactive (IACI). The ‘mid caps’ are the likes of Overstock.com (OSTK), Systemax (SYX), and GSI Commerce (GSIC).

I still don’t think owning these companies based any recent online-shopping trend, data, or season is a sound reason to own any of them. In my experience, if it’s “too obvious” then there’s no real value to the premise. However, if enough other people think it is a good reason to own ‘em, it may well make for a good short-term trade.

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Back on October 27th we made a handful of industry picks that we expected to do well even if the overall stock market stayed weak. Since then - with one exception - those picks have indeed done better than the market (the S&P 500). On the other hand, it’s a dubious honor … they all still lost ground - they just lost a lot less ground than the market.

Still, to see that kind of relative performance still suggests the strategy has merit. It’s just that the market was hit so hard, so quickly, that not much of anything could come up for air.

Here’s the overall performance of our picks for November-to-data, along with the S&P 500. Airlines were the only stocks in our list that underperformed.

All those picks are still valid too. Why? The recession isn’t over, and perhaps the bear market isn’t over either. These are all groups that fare better in the kind of environment. Even the airlines can do well in a recession, as long as oil stays cheap.

That said, here are the best of the best for the last month. Frankly, I don’t trust them all. The market got a bullish Obama nudge, but it’ll take more than that to keep stocks headed north. However, momentum is momentum. Maybe some of these groups are making gains now knowing that the economic storm isn’t over yet. I know water’s on there twice … I’m sure there’s overlap, but those two indices aren’t quite the same.

As I mentioned with our last look at this data, spotting sector rotation is a journey - not a destination. This is an ongoing exercise, as there’s always a group falling in and out of favor. I’ll keep you in tune as much as I can.

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Yesterday I opened this can of worms, vowing to open it a little further today when we got more data. Well, we did indeed get more data about last month’s and last quarter’s retail sales. October’s retail sales fell by 2.8%… the biggest plunge ever. What had been the biggest drop-off ever was the 2.65% dip in November of 2001. Nordstrom (JWN), JC Penney (JCP), Abercrombie (ANF), and Kohl’s (KSS) all reported numbers that were well under last year’s comparable results, though they at least met or exceeded the lowered expectation. Here’s the basic breakdown…

                               Actual EPS      Estimated EPS   Same Quarter Year Ago EPS
Nordstrom                  $0.33              $0.31                        $0.68
JC Penney                  $0.55              $0.54                        $1.17
Abercrombie                $0.72              $0.71                        $1.29
Kohl’s                         $0.52              $0.51                        $0.61

Clearly nobody’s doing great, though two names stick out - Kohl’s, and Wal-Mart (which was specifically mentioned in yesterday’s look).

Based on these results, I think we can take the hint that the consumer is feeling real pain right now, which translates into pain for these companies. That’s tough part about being in a discretionary business … even when things get challenging, the “I want it” mentality can drive sales. Now though, these stores are dealing with “I just don’t have the money” problem - a different beast altogether.

The reason Kohl’s and Wal-Mart have been able to survive - and dare I say thrive - is simply that they’re more able to meet basic needs at a reasonable cost. TJX Companies (TJX) deserves an honorable mention as well on that front. For the retailers that sell goods on the upper end of the price scale though, it’s ugly. The numbers don’t lie.

There are a few more retailers to report next week; I’ll keep examining the data as long is it’s relevant.

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Not that three retailers’ results mean everything, but in looking at who did well and who didn’t, I have to wonder if the consumer is just playing dead, or is actually dead. Most spenders say they’re cutting back, but never actually do so. This time around they may be putting they’re money where their mouth…. or I guess not putting their money where their mouth is, as the case may be.

There are a handful of retailers who report later today and tomorrow (like Kohl’s, Nordstrom, Abercrombie and Penneys), so I’ll update this list later on. I want to go ahead and plant the seeds now though - check out how retailers have fared, which is almost entirely a function of top line sales…

                         Actual Quart. EPS        Estimated Quart. EPS       Comp. Quart. 1 Year Ago
Macy’s (M)                 $(0.08)                        $(0.19)                                $0.08
Wal-Mart (WMT)         $0.80                          $0.76                                  $0.70
TJX Cos. (TJX)            $0.54                           $0.55                                  $0.54

Not that Macy’s (M) is uber-high-end, but let’s face it - it’s not a discounter like Wal-Mart (WMT) or TJ Maxx (TJX). I just find it interesting that the brand-name department stores and specialty stores were specifically doing well through the early part of this year, while discount chains were turning in mediocre performance. Then a few weeks ago, all those roles got reversed.

An obvious consequence of a recession? I wouldn’t say so. It seems logical, but in reality consumer spending on high-end goods (the ‘wants’ instead of the ‘needs’) rarely actually tapers off… even if money is tight. So, the ‘value over luxury’ theme is largely a myth - or was a myth. Now it seems to be a reality.

Like I said, a few more stores will be reporting over the next day or so, and might re-paint this picture slightly. It’ll be interesting though… and probably not in a good way.

If the data above is a trend and not just a snapshot, then Wal-Mart is really jerking us around. They actually lowered their Q4 outlook even though Q3 profits were up 10%, and sales were up 7.5%. For most retailers and apparel makers, sales were down significantly last quarter. Liz Claiborne’s (LIZ) sales were lower by 16% last quarter, and Best Buy’s (BBY) revenue fell by 7.6% in October.

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We’re now entering the thick of earnings season again, and obviously things are going to be a little nastier than they were a year ago, or even three months ago. However, the question is whether or not earnings will be better or worse than expected. (Meeting a low expectation can still be a good thing for a stock.) And, the same applies to the overall market….if companies aggregately beat the average expectation, it could be good for the whole market.

With that in mind, here’s some key earnings data for the S&P 500, which is currently priced at 930.99. (By the way, I’ve got forecasted sector P/E’s below…which is actually the whole point of this entry.)

The consensus estimate for forward-looking 52-week operating earnings for the S&P 500 is now $90.65 (P/E = 10.27), which is down from $102 (P/E = 12.1, at the time) a couple of months ago. And, trailing operating earnings are reported to be $61.27 (P/E = 15.2), which is down from $91 this time a year ago (P/E = 16.7, at the time).

I had to read the numbers a couple of times to figure out what I was missing, ’cause they just don’t jive. Then I came to this conclusion - the estimates jive….they’re just still too optimistic.

Basically what Standard and Poor’s is saying is that stocks are undervalued compared to where they were two months ago, AND they’re going to be about 33% more profitable over the next twelve months than they were over the last twelve months. In short, they’re predicting a full recovery back to 2006’s earnings levels (when times were pretty good).

My question is this - what’s going to happen over the next year that will cause earnings to improve from $61.27 to $91.00? I’m not saying it can’t happen…I’m just saying “show me why and how”. After all, they were wrong two months ago about where we’d be now. Why should we trust ‘em about where we’ll be 12 months from now? (That’s a rhetorical question, of course.)

That said, I want to clarify my stance….I’m optimistic too, but only because I know stocks don’t always trade at that they’re worth. I think 2009’s valuations won’t be as attractive as guessed by our friends at S&P because stocks will be priced at what the market thinks they’ll be worth in 2010. That’s why I’m planning on ‘paying up’ a little in 2009 for decent equities…they’ll be moving higher in advance of earnings results. I won’t be worried about doing so either, at least not until I start to see P/E’s (trialing) reach above 17/18-ish.

That’s not exactly what I came here to talk about though. I actually came here to talk about sector valuations, and making meaningful valuation comparisons within a sector. You know - apples to apples.

See, I’ve got a feeling in 2009 we’re going to start seeing some serious sector divergence, which we didn’t see much of in 2008 - all sectors stunk. I’ve got some opinions on which sectors will be hot and cold, but I want to lay this groundwork first because it will be a large part of my selection strategy.

The nearby table lays out Standard & Poor’s forecasted P/E’s for all the major sectors (as of November 4th). My strategy is a simple peer comparison. Basically, if I’m looking for undervalued stocks, the forecasted P/E (or even the trailing P/E) has to be as cheap or cheaper than the respective sector.

Now, do I trust the Standard & Poor’s forecast? The whole point of the rant above was to illustrate how even S&P can be too optimistic for the overall market, so I have no reason to think they’d suddenly be realistic when it comes to sector earnings forecasts. However, as long as they’re consistently overly-optimistic, we can still make useful comparisons.

In short, on a forward-looking (2009) basis it looks like Standard & Poor’s thinks stocks are trading at about 2/3 their historical values. That’s pretty exciting, though perhaps a little too enthusiastic. Still, even if companies fall short of the expectation - and I think they will - I still see some significant value in technology, energy, telecom, and general industries. I have to like financial stocks too, but that’s not really based on valuations….that’s just based on them being so beaten up.

This is just the beginning of creating a sector outlook. Stay tuned as I rationalize my way though a complete sector forecast for 2009, though sector rotation is a journey and not a destination.

Happy election day everybody. I trust you’ve already voted, or at least made arrangements to. They weren’t kidding about record turnouts causing long waits, so plan accordingly if you still need to cast your ballot. Please vote though... you never know when one vote makes a difference. That’s not what I came hear to talk about though.

Remember back on October 27th when I suggested a few specific industries were ideal picks for a tough environment? The argument was that certain sectors would benefit more than others as we enter the heart of a recession (which I now believe we’re in). Those picks were utilities, mid cap airlines, mid cap reinsurance, mid cap general merchandise stores, small cap personal products, and small cap pharmaceuticals.

In a nutshell, those groups - though for various reasons - all met my four-pronged selection criteria. Those four criteria were fundamentals, technicals, the market environment, and the state of the economy. Those are the four main influences on any stock’s price.

Well, here’s how things have taken shape since the 27th…

That’s pretty impressive for only seven trading days, though it’s interesting that these groups have slightly underperformed the averages.

I don’t say it’s ’surprising’ simply because the recent revival of bullishness has attracted investors to high-growth or totally-deflated arenas like construction, energy, consumer finance, casinos, chemicals, autos, and telecom. I like all of those too, but I think the ’shiny’ will wear off on those groups pretty soon. When it does, I look for the groups I first mentioned to fall back into favor again.

So why is my preference still more for safety and value, and less for aggressive growth? I think the bear market is over, but I think the recession is just beginning. All stocks will benefit, but not all companies will benefit. (And yes, there’s a difference.)

By that, I just mean results will eventually have to support valuations, and I don’t think casinos, auto-makers, construction companies and the like are quite ready to do that well yet. Eventually - like mid-2009 - yeah, maybe. But now? No, I don’t see it. I’ll still take on proven performers for the time being.

That’s not to say you won’t find some good ‘trades‘ in the meantime. Have you seen some of the hottest industries that have led the rally thus far? Here are the best of the best since the 27th….

I wonder if the automobile industry’s stocks are really going to pull out of their funk. Auto sales stats don’t suggest they will, but the stocks are acting like things can’t get any worse for the industry. I see a lot of basic materials names on the top 30 list…steel mostly. Notice how real estate and energy stocks are appearing multiple times as well.

If history repeats itself, one or two of those groups will hold its place as a leader throughout this new bull trend. With that in mind…

I don’t know if I explicitly said this before or not, but if not, here goes….this sector/industry rotation strategy works, but requires constant updating. Sometimes these sector leaders hold their place for days, sometimes for weeks, and sometimes for months. You never know which is which though, so to make the most of the information you have to be willing to ride the trends that persist, and take profits on the ones that are fading.

It seems like a lot of work, but it’s not - these trends usually flow with your natural ‘finds’ anyway. However, paying attention to small details like this can really improve your overall results.

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The rumors of coal’s death have been greatly exaggerated. That applies in every sense - the commodity’s price, the underlying stocks, and even coal’s place within the global energy machine. Coal’s not going anywhere, and like oil once was, coal could actually be a brilliant long-term idea.

Admittedly, part of the reason I’m now interested enough to bring it up is our recent profile of China Energy Recovery (CGYV). By prepping our coverage of the company, I learned quite a bit about how coal is used for energy creation by prepping our coverage of the company. Along the way though, it also became clear we don’t have a lot of choice in the matter - we need coal if we’re going to meet our growing energy demands. The fact that China Energy Recovery makes using coal cleaner and cheaper is just icing on the cake.

Anyway, given that so many coal stocks were so rewarding in the early part of 2008 - and so destructive in the latter part of 2008 - I think there’s enough of a reason to start looking at the commodity and the trading opportunities it presents. (Or, maybe I’m just tired of talking about oil.)

Here’s a chart of the spot prices for Appalachian coal, which is generally the standard for the coal commodity market. There are other types of coal, but they’re of lesser quality/heat yield. Any of the charts would work, as they all tend to move in unison. The Appalachian coal price seems to be the focal point though.

What’s interesting is how the underlying stocks in the coal industry trade in tandem with coal prices, much like oil stocks do with oil prices. The cool part about coal, however, is that it’s not exactly synchronized with oil. Sometimes, it’s totally disconnected from oil.

I just wanted to officially launch our newest addition to the laboratory/research arena. I’ll be adding forecasts and additional thoughts soon, because I really think coal’s going to become the next oil in the foreseeable future. That’s not to say alternative energies won’t eventually take over, but that’s decades down the road. Coal’s going to have to fill the gap.

Any thoughts? Leave ‘em below. Let me know what’s on your mind when it comes to our newest topic.

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I promise it’s not a vendetta; I just truly believe in my heart that newspapers are in their twilight years. The web has killed ‘em, and made them lousy investments.

I said so on June 6th, and then again on July 24th as a follow-up to a ‘Tech-Ticker’ interview with a former NY Times editor.

Well, we’ve seen yet another layer of evidence of the same notion - this one from MorningStar.com. Same story… shrinking ad revenues have forced newspapers to scale back on staff and coverage. In turn, circulation has suffered. In turn, ad revenue shrinks even more.

The reason I bring it up is just because there’s a pretty good data table that puts some data behind the theory. You can check it out here.

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While the rest of the market was floundering last week, the paper mills found a way of putting up a nice gain. The Dow Jones Paper Index (DJUSPP) rallied 3.36% last week, mostly thanks to a strong Friday. Nevertheless, those results easily trounced the broad market’s loss of about 3.0%. Sometimes a move of that magnitude is nothing more than sheer chance. Other times it’s an omen. Either way, the results are good enough to merit finding out exactly what’s going on … there may be more of the same on the way.

Back in April – following a wave of rumored and actual selloffs and acquisitions – I started to fear the worst for all these stocks. Rising input and commodity prices were making it tough for the smaller operations to remain competitive with the big boys like International Paper (IP) and Packaging Corporation of America (PKG). I suspected the end result would be more unions and acquisitions, with the intent of survival in this price-competitive arena. And, we did see some acquisitions in the aftermath.

The market has a way of dishing out surprises though.

For its investors, the great part about International Paper’s domination of most of the paper and containerboard market is the company’s ability to offset low margins with higher volume. Smaller outfits can’t achieve the same economy of scale, yet are largely selling their product at a price established by IP. It stinks for the smaller paper companies and their shareholders, as margins can be a big problem unless International Paper decided to raise prices.

Well, as it turns out, the reason for this past week’s strength in paper stocks can be pinpointed to one catalyst – International Paper did indeed decide margins were important again. As of Oct. 1st, IP is pushing the price on 42-pound containerboard to a $670 per ton…a record-setting level. (L2)

Translation: Other paper companies can raise their prices - and therefore margins – as well.

And it’s a decision that couldn’t have come soon enough. The average net margins for the industry are a pathetic 3.3%.

The only question mark was whether or not the new prices would ’stick’; the theory was that IP would hit a headwind with the price increase. Based on what we saw immediately after the IP announcement though, I don’t think for a moment International Paper is going to back down…they don’t need to. RockTenn (RKT) announced a similar price increase two days later, and rumors of price increases from other companies are starting to surface as well. It looks like the industry is going to play along with IP’s new pricing structure, since it’s a standard all these companies benefit from.

Bottom line? If you’ve been waiting on better days for paper stocks, I think they’re here. As always, some choices are better than others, but at least the epidemic won’t be industry-wide any longer.

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I don’t know if any of you guys noticed this, but last week (and pretty much today) telecom stocks led the race. They’re up 2.5% today, and higher by 3.5% going back to the beginning of last week. That’s second-best (of nine sectors) for both time periods.

I’m not quite sure what to make of it. I don’t disbelieve it, but of all the groups I would have expected to make a run, I don’t think I would have put telecom on the list. Nevertheless, that’s what we’re seeing. If there’s a chance of a breakout, then I’ll keep tabs on it.

I’m specifically looking at the Dow Jones Telecom Index (DJUSTL), but most of the telecom indices look the same. Despite my skepticism, in retrospect I really do like the shape of the chart. Take a look at the gentle turn-around…a ‘U’ shape, which is the kind of reversal that has a little longevity. Even more interesting is that the recent bottom was also a low from the middle of 2006.

Applying Fibonacci retracement levels, there’s a logical profit objective for the Dow Jones Telecom Index at 158, and then another one at 173.

By the way, telecom was one of my bullish bias picks from August 25th - proof that a watchlist helps keep track of opportunities. Had I actually been watching my watchlist the way I should have/wanted to, I would have caught this strong performance several days ago. Nevertheless, I think this trend is still taking shape.

I also mentioned on the 25th that I’d dig deeper into the sector and find the leading industries, and then find the leading stocks in those industries. I haven’t forgotten - I just haven’t had time yet. I’ll get to it this week, so be sure to stay tuned to the blog. If you’re only interested in the sector, then the Telecom HOLDRs (TTH) are the way to go.

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I hate to get on my soapbox say I told you so, but have you seen the small cap metal and glass container stocks today? The Standard & Poor’s Small Cap Metal & Glass Container Index is up nearly 5% for the day so far. In fact, it’s the second best performing index out of about 300 industry/capitalization indices. It’s worth noting, however, that it’s just the small caps that are doing well in this group today.

I only bring up to reemphasize the point I made yesterday afternoon… these stocks were looking unusually strong, and there had to be a reason. For those who took the hint, you’re already well up in just a few hours.

In other words, the strategy works.

Now I’m not going to be naive enough to think that one day means a lot, because it doesn’t. That’s one heck of a coincidence though.

In light of the success so far, yes, I think I will continue to ferret out these niche industries, and even continue breaking them down into capitalization groups.

Either way, of the company’s I mentioned yesterday, Northern Technologies International (NTIC) and Myers Industries, Inc (MYE) are the major contributors to today’s big gains. Northern is up nearly 7%, while Myers is ahead by nearly 5%. There are a lot of these names that I didn’t mention also producing big numbers today though, so don’t limit your search to just a few ideas I pointed out.

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I think I may have stirred up a hornet’s nest with the whole ‘hot industry’ thing. I did it on a whim Friday, and followed up with some specific picks on Monday. As a result, we’ve now got several requests for us to keep digging - to pinpoint the exact stocks responsible for the industry’s strength. Here’s one of the requests from a reader….

Dear Sir,

In the newsletter you mentioned that food distributors were one of the groups you were looking at.  Will you be breaking that down to specific companies within that sector in a future newsletter?

I have been looking at Military Resale Group ( a food distributor ) for possible purchase, however I am unable to find much current information concerning the restructuring they have been undergoing. I believe there could be a lot of upside potential in this stock if the restructuring plan is successfully completed. They had mentioned a retail division in one of the press releases in the past, could you inquire about that and the overall progress of the restructuring plan.

Any information would be greatly appreciated.
 
Thank You

Thanks for the question. First of all, let me say to you and all the other readers….I’m really pleased that you’re thinking along these lines now. I’m convinced half of my success as a trader is directly the result of spotting the right sector at the right time, and then digging up the best stock in the group. The media - and most financial professionals - try it the other way around. But, that really doesn’t work the right way often enough.

Now, to answer your question….

I don’t know. I’d like to be able to highlight these trends and drill down into all of them. The thing is, time is an issue (for everyone, really). My plan was to dig deeper into the four groups I mentioned if I could find the time. I’ll try, but I can’t guarantee anything.

That said, I’ll make you a promise….if you help me, I’ll help you. If you vow to read the newsletter and blog on a regular basis - and contribute via the blog when you have something to add - then yes, I’ll break down all these trends into individual stocks. If there’s only a passive or mild interest in me doing this though, I really can’t afford to devote time to it.

Let’s try it for a few days and see what kind of feedback we get.

As far as Military Resale Group is concerned, your guess is better than mine. I’m not prepared to answer anything about it, but give me a few days and I’ll see what I can find.

In the meantime, I do have a curious observation about one of Monday’s rare bright spots. Small cap metal and glass container stocks were up pretty nicely….nearly 1%. I’m not always surprised to see a materials industry rally when the rest of the market sinks. However, Monday was a bloodbath, affecting every corner of the market - except small cap metal and glass container names.

Were it just one day, I might dismiss it. However, this group has had one wild-but-firm rally over the last month….following one wild plunge the month before that. With all that shakin’ going on, I think we at least owe it to ourselves to see if there’s a stock or two we need to look at.

Well, you can thank me later - I’ve narrowed the list down for you. If you get a moment you might want to do some due diligence on Pactiv (PTV), Northern Technologies International (NTIC), Myers Industries, Inc (MYE), Intertape Polymer Group (ITP), Crown Holdings, Inc. (CCK), Greif, Inc. (GEF), and Bway Holding Company (BWY). Here’s a quick fundamental snapshot; be sure to keep reading below for charts of each.

Now just so you know, I didn’t pick those stocks based on their fundamentals. I picked them based on their charts; it just so happens that the fundamentals are pretty good. (Kinda funny how that happens sometimes.)

And speaking of, here are those charts. What do you think?

If any of you have any thoughts or knowledge about any of these stocks, please let us know. The contact form is below.

In the meantime, a significant number of these stocks were heading higher on Monday despite the broad market’s big losses. That ain’t a coincidence, and I can’t chalk it up to a volatile dollar and the threat of inflation. Metal and glass containers…who woulda’ thunk it?

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It’s official - I’m a giant nerd. Anybody who would go to the trouble of ferreting out the market’s hottest and coldest industries is ‘overdoing’ it. Anybody who would then break those industries out by large, small, and mid caps is officially waaaayyyy over-analyzing things. My insanity is your gain.

Anyway, with a little extra time on my hands this morning, I’ve broken down the market’s best and worst small cap performers, by industry. Why bother? Primarily because birds of a feather flock together - these small cap industry indices are doing what they’re doing because the underlying stocks are either (1) rallying well, or (2) falling apart. Either way, there may be something trade-worthy in there.

And to answer the next question, yes, there is a significant difference between the small cap version of these industry indices and their large and mid cap brethren. That was surprising to me, but also encouraging that the lemming mentality hasn’t yet infected every style, cap, and industry.

Anyway, here are the numbers…the best 2-week performers in yellow, and the worst 2-week performers in pink.

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Well, while we’re waiting for oil to rally in the shadow of the Georgia/Russia conflict (which may not happen), and while we’re trying to figure out if the dollar’s going to take a break or not, I figure I have the time to share a quick look at some interesting sector trends. In nutshell, the groups that are leading hint that the market is thinking optimistically

.Compare last week’s winners to last week’s losers. That’s going to be the ‘two week’ column, which only includes all of last week plus this week so far.

No surprises to see materials and energy at the bottom of the list. After all, the dollar is stronger, which puts inflation under attack.

However, look at the top of the list….consumer discretionary and technology stocks? It doesn’t exactly scream that the average consumer (or even investor) is thinking timidly right now. If you roll the time frame out to one month, the relative performance doesn’t change.

Maybe it’s just me, but I find it interesting the market is looking first for stocks that tend to get a good jump out of the gate of a new economic expansion cycle. Perhaps the bear is on his death bed.

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This has little to do with anything we normally talk about, but I have to wonder if the utility sector is offering up a handful of short-term bounce trades. The Dow Jones Utility Average is lower by nearly 10% over the last four weeks, but Duke (DUK), CMS Energy (CMS), and NiSource (NI) all reported earnings today….and all were better than expected. Those same stocks are also leading the utility sector’s rally so far.

What’s interesting is how the sudden reversal occurred at what has ended up being a big support level for the Dow Jones Utility Average. Check out the line at 460. That was last August’s low. It was also near the low from March of this year as well as March of last year. (Might there be a seasonal trend in there? Hmmm.)

There is a problem with the idea though. Take an even closer look at the chart, and I think you may find a troubling head and shoulders pattern on the verge of being complete…..on the verge of starting the usual meltdown. If 460 breaks down, look out below. Valuations have nothing to do with the matter - this is a technical/momentum issue.

I for one expect the upside move to pan out, which puts me in the minority. Of course, I’m not jumping on until I see the utility index make its way back above 469. That’s my re-assurance.

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I know I’m not necessarily your supreme authority on every single matter (hard to believe, isn’t it?), so I don’t take too much offense if you didn’t blindly agree with my June 6th assessment that printed newspapers were a wilting business…and investing in one could be bad for your financial health. If you didn’t believe me and my pessimistic outlook on newspapers, would you believe if it someone from the newspaper industry said it?

That’s basically what we heard yesterday from the former editor of the New York Post. His discussion came shortly after the New York Times (NYT) announced yet another disappointing quarter. Ad revenue is down, and so is circulation…for the whole industry.
I’m not going to rehash the article/interview, but if you’re interested, just click here to be taken to “tech ticker’s” interview with former New York Post editor Tom Colarusso.

The recommendation for printed newspapers? Don’t fight the web - embrace it.

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I thought we’d never make any headway with my June 25th bullish call on small cap biotech. Biotech in general has been going strong for the whole month, but it seemed like large caps (such as our Amgen pick from July 1st) had no intention of yielding to smaller stocks. Today though, the S&P Small Cap Biotech Index is up about 5%. For the month-to-date (which ends today), the small caps are leading the industry with a 23.2% rise.

So what’s next? I think more of the same….and not just based on today’s outperformance. (One day does not make a trend.) No, now that the small cap biotechs have taken the lead, I think they’ll stay out in front for a while simply because they have the most ground to make up.

Take a look at the results table below. If you look at 3-month results, small cap biotech is still well behind large and mid caps. Being a ‘rotation’ guy, I typically assume leaders and laggards are apt to change. So…

In that light, I mentioned way back in June that I was on the hunt for some small cap biotech names. Not that this is an exhaustive list, but here are some that caught my eye and kept my attention:

• GTX Inc. (GTXI)
• Genomic Health (GHDX)
• Martek Biosciences (MATK)

I doubt I’ll follow up with any of these stocks, unless one of them specifically becomes a trading idea. That doesn’t mean you can’t do something with them though. If you have any thoughts or other stocks, feel free to add ‘em below.

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