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Small Cap Network Blog

8/11/2009

Mobile Telesystems OJSC (MBT) Rounds Out the Wireless Struggle

Filed under: — SmallCapNetwork Editor @ 8:34 am

We opened a can of worms last week when we pointed out how the S&P 1500 Wireless Index was a bearish freight train despite the fact that some - not all, but some - of these stocks were undeservedly being dumped. Mobile Telesystems OJSC (MBT) didn’t help the cause any today. Russia’s largest wireless service provider saw it’s net income fall 14.6% last quarter, on a 23% decline in revenues.

There’s a slight upside…. the $2.02 billion in sales was better than analyst’s expectations of $1.98 billion. And, the $563 million in income was stronger than analyst expectations of $541 million. There’s a problem though - even that number may be a little misleading. Had it not been for a fortunate currency exchange fluctuation, Mobile Telesystems would have knocked another $198 million off the bottom line for the quarter. In other words, MTS would have earned $365 million instead…. well under the $659 million earned during the second quarter of last year.

A handful of things have become clear….

  1. The problems being experienced by most wireless companies are universal/global
  2. Though Mobile Telesystems is an exception to this trend, revenues are largely dropping because subscribers are being lost
  3. Incomes are up for the wrong reasons…… mostly because of expense cuts, but in MTS’s case because of currency swings

We still contend there are some very solid companies being thrown out with the baby’s bathwater, but at the same time we can’t encourage anyone to step in front of a bus until these little shots of troubling news have eased up.

By the way, we also looked at another wireless company’s earnings this morning - Virgin Mobile USA (VM). It was the same higher income/lower sales act we’ve been hearing from most of these stocks.

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7/21/2009

Walk a Mile in These Shoes - DECK, ICON, WWW, BOOT

Filed under: — SmallCapNetwork Editor @ 9:10 am

Investment opportunities can pop up in unexpected places, but none may be more offbeat than from the small cap stocks in the footwear industry…. such as Deckers Outdoor Corp. (DECK), Iconix Brand Group Inc. (ICON), and Wolverine World Wide Inc. (WWW). Each of those shoe companies - and many of their peers - have fared the recession surprisingly well, leaving many investors wondering why the S&P 600 (small cap) Footwear Index is still down 66% from its October 2007 peak. Here’s a closer look at footwear’s recent past and likely future.

Footwear the First to Fall

Though the recession (thank sto the privilege of back-dating) officially began in December of 2007, it’s not like the market started to fall apart at the same time. Indeed, many industry groups were still hitting new highs in mid-2008. Footwear was not one of them though.

The S&P 1500 footwear index (all caps) began tumbling in early November of 2007, and hasn’t looked back since. All told, the index lost 55% of its value from its peak through its March 2009 trough. The small cap version of the index lost a whopping 82% during the same period. That big dip, however, is part of the opportunity … low stock prices are more affordable than high ones.

‘Undervalued Shoe Stock’ is a Matter of Opinion

Of course, the difference between a ‘cheap’ shoe stock and an ‘undervalued’ one is the company’s future. The more compelling the future, the more attractive the stock is. Fortunately for value seekers, Deckers, Iconix, and Wolverine do indeed have a compelling future… an outlook made very plausible based on the fact that many of these companies remained pretty profitable during a period when profits were rare at best.

Take Iconix for instance…. net margins of more than 30%? Deckers was no slouch over the last twelve months either, clearing more than 10% of its revenue as income. With a forward-looking price multiple of 9.9, DECK is more than a slightly-interesting long-term idea.

The Cinderella story here, however, may be LaCrosse Footwear Inc. (BOOT). To say it’s off the radar would be an understatement, but the company has managed to do something other similarly-sized shoe companies can’t - turn a profit.

Though clearly not every single small cap name in the footwear group is a winner, as a whole, the industry has quietly been holding its own, waiting for an economic rebound. On that note….

Looking Forward - Footwear to Lead the Recovery?

Economic predictions are rarely even worth the paper they’re printed on. And, the estimated earnings for these shoe companies are indeed rooted on the assumption of an economic recovery. So, what if the recovery doesn’t actually happen?

It’s a legitimate concern, but a revisit to 2007 is in order.

In late 2007, when very few prognosticators and even fewer investors actually believed we were headed into the worst recession since World War II, the demise of shoe manufacturer stocks actually correctly predicted what was to come. In that light, the near-100% gain we’ve seen from the S&P 600 Footwear Index since March’s low may be equally indicative of the economy’s improving health.

Strange? A little. Plausible? Sure. Shoe stocks are generally something of an enigma when it comes to long-term trends, so to use them as an economic barometer now isn’t any crazier than, say the Dow Theory (which compares transportation stocks to industrials stocks to determine the market’s true trend).

In the meantime, Iconix and Decker - and Wolverine to a lesser degree - appear to be leading a very stealthy footwear stock charge. Long-term investors who think boring and obscure stocks are beautiful should take note.

–

 

7/5/2009

Semiconductors Set to Lead 2nd Half - ISIL, TXN, CY, CAVM

Filed under: — SmallCapNetwork Editor @ 9:28 pm

Though the second half of 2009 certainly didn’t get started on the right foot, I’ve found a handful of groups I think have emerged as leaders that are strong enough to resist a nasty downtrend. And, if for some reason the market recovers, these groups are sexy enough (i.e. not ’staples’) that they’ll actually benefit from a rising tide.

I detailed my top three industry picks back in the June 30th newsletter. However, one of the areas I didn’t get to highlight then was semiconductor stocks - today’s focal point.

I’ll get to the underlying fundamental reasons why I like the group as a whole. First though, I just want to take a look at a chart of the S&P 1500 Semiconductor Index to show you what I’m so stoked about.

Two things immediately stick out for me.

The first one is minor… the semiconductor industry’s stocks were one of the very few to make gains last week. That kind of relative strength is important.

The second factoid that got my attention is how these stocks still have so much room to recover from last year’s tumble. Unlike so many other groups, there’s some meat left on this bone.

Now frankly, I’m not wild about the shape of the recent chart. It seems like we’re making lower highs, and sorta’ lower lows. If you zoom into a daily chart though, it looks a little more like range-trading. I could also use a little more volume… personal preference.

Translation? I’m basically ok with the chart as long as 155 holds up as support. If not, I’ll have to rethink my timing. Conversely, if 183 breaks as resistance, I’m going all in. In the meantime, I’ll tip-toe in based on the relative strength and the fundamentals for some of my favorite names in the group.

And speaking of….

There are just too many semiconductor names to review them all in one shot, so I’ve done my best to look at as many of the popular ones as I can (all market caps). Hopefully I’ve looked at enough to give you a chance to compare and rank a few against the whole industry.

I’ve highlighted (in yellow) some of the data I found interesting, or some of the value hot-spots. I found Intersil (ISIL) and Texas Instruments (TXN) to be solid values, and it seems as if Cypress (CY) and Cavium (CAVM) are looking at the most earnings growth.

Granted, these are analyst estimates, so take them with a grain of salt. I don’t think they’re off base though.

Just because data is missing doesn’t mean there’s a problem. The blank spots on the grid just mean the data doesn’t exist. Frankly, those holes have me the most curious, as they may be the best opportunities… and we’d never know.

The other upside to this kind of review is recognizing the likely weakness Atmel and AMD seem to be headed into. Both are major industry players, but both look like they’re going to be radioactive for a while.

So once again, it looks like Intersil (ISIL), Texas Instruments (TXN), Cypress (CY) and Cavium (CAVM) are your best places to start digging into your due diligence process. And remember, the charts are just as important as the fundamentals.

One thing about this list… my grouping is for semiconductor manufacturers, which specifically excludes semiconductor equipment stocks. That’s an important distinction, though the two groups tend to move in tandem (I’ll review the semi equipment stocks at another time.)

By the way, if you liked this kind of industry analysis and information, you’ll love our free newsletter (delivered 2 to 3 times per week). Here’s our most recent edition, with more of the same PLUS specific stock picks and trade updates. Don’t miss out again - sign up today. 

6/5/2009

Opinion, Outlook on Small Cap Insurance Brokers - CHSI, EHTH, CRVL, NFP

Filed under: — SmallCapNetwork Editor @ 12:56 pm

As we continue to make our way through the first real shakedown of what I believe is a new bull market, the cream is starting to rise to the surface. In other words, the rising tide isn’t lifting all boats equally. (Two cliches in the first paragraph? Impressive.)

Where are they?

As most of you probably know by now, I’m a big proponent of looking for the leading and lagging industries among the small cap realm (S&P 600 stocks). According to Bill O’Neill, almost half of a stocks’ performance can be attributed to its industry. And, I think a fair amount of it can be attributed to its size as well, meaning there’s a frequent disparity between the large and small caps in a particular group.

I’m also just as interested in the technicals as I am the fundamentals, since stocks don’t always trade at “what they’re worth”.

With that idea in mind, I’m going to use the next several work days to cycle through what I feel are the best and worst groups within the small cap universe. And yes, I’ll also ‘drill down’ into individual stocks.

On with the show.

Today’s chosen small cap industry and opinion? I’m bullish on the insurance brokers.

In short, I have a theory behind last year’s 95% plummet for this group - they were thrown in with the insurance companies, like AIG. However, with just a little digging, it’s not all that hard to figure out that a broker and an underwriter aren’t quite the same thing.

Oh, there’s crossover to be sure. By and large though, brokers don’t take on payout risks - they’re just the middlemen. As for the true small caps in the group, we’re talking about Catalyst Health Solutions, Inc. (CHSI), eHealth, Inc (EHTH), CorVel Corp. (CRVL), and National Financial Partners Corp. (NFP). However, there are a handful of other small caps I think you could reasonable add to the list of compelling ideas.

Anyway, the S&P 600 Insurance Broker chart caught my eye. These stocks are up from than 500% since November’s bottom, yet still have a ton of room to go before even testing prior highs. Tons of upward momentum.

And what about the underlying fundamentals? Not that they’re worth a lot, but they’re at least worth a look. (In some cases, a ‘0′ just means data wasn’t available.)

Interesting, huh?

While I’m relatively unimpressed by analysts and their guesses, it’s not like they’re always wrong or usually off-base. In fact, I think they generally have the right idea, even if they don’t’ see everything. In this case, even being marginally on target bodes well for the brokers - the group as a whole seems undervalued.

I’d still pick and choose carefully within the group. eHealth’s numbers, for instance, don’t look all that attractive. But, it seems you’ll at least have the wind at your back with most of these picks.

The industry opinions are great, but if you want specific trade recommendations, complete with entries and exits, then you want the free Small Cap Network newsletter. See the top of this page to register.

5/28/2009

Small Cap Airline Stocks Hitting a Headwind - SKYW, ALGT, AAWW, HA

Filed under: — SmallCapNetwork Editor @ 6:53 am

Why should the last month be any different for small cap airlines than the last year and half has been?

The S&P Small Cap Airline Index [technically, only SkyWest (SKYW)] is off by more than 14% for the month; it’s also one of the biggest losers for the last six months. Oh, and did I mention this chart is trapped in a bearish trading range, and just recently pulled back from the upper edge of that zone?

Yeah, it’s certainly not looking too good on a technical basis.

I want to like this group. I really do. Many of these companies are actually very well run, and some are even profitable. Plus, with oil still at tolerable prices, I’d like to think these companies (and by extension, their stocks) would finally get some relief. So far though, no dice.

SkyWest is the only airline in the S&P 600, but just for the sake of completeness, I want to broaden my look out to its peers that are part of the Russell 2000. I think they’re all on the same boat, errr….plane.

So what’s the deal? Numbers don’t lie. Take a look at the fundamental snapshot, and you’ll see losses…. lots of ‘em.

Is it the economy? Perhaps, though some airlines managed to squeeze out a profit, so I don’t want to give the whole industry a free pass. No, like I said above, some of these companies are well run…. while some aren’t. Unfortunately, the well-run airlines are being torpedoed by the poorly-run ones. Since they tend to move as a herd, I can’t get excited about any of them until the economy lets up enough to let even the bad ones get on their feet again.

If you absolutely must go fishing though, Allegiant Travel Co. (ALGT), SkyWest, and Atlas Air Group Inc. (AAWW) seem to be bright spots now and looking forward. Unfortunately, only one of those company’s stocks looks technically decent…. Atlas Air Group is managing to fly through the bearish headwind.

Hawaiian Holdings Inc. (HA) is getting some love from the market as well, but there’s not a lot of information or coverage of the company, so it’s hard to say if their worst is behind them. Maybe that’s a good thing though… maybe we don’t want to know.

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Yesterday’s Worst Small Caps Could Get Even Worse - AGP, CHSI, MOH, DEL, UFPI

Filed under: — SmallCapNetwork Editor @ 6:26 am

Not that it was a great day for any sector, size, or industry, but a couple of small cap groups really got whacked on Wednesday. In some cases (too many?) I think the shellacking is a hint of - and part of - a longer-term shellacking that’s best left untouched, unless you’re looking to short some stocks. Here’s yesterday’s bottom of the small cap barrel.

Life & Health Insurance

The S&P Small Cap Life & Health Index rolled over a few weeks ago after a solid March/May rally. I don’t see any particular clue from this chart that the group’s going to find a rebound point anywhere or anytime soon.

As for which stocks these are, we’re talking about AmeriGroup Corp. (AGP), Catalyst Health Solutions Inc. (CHSI), Molina Healthcare Inc, (MOH), and a few others. Pretty much all their charts look the same - overextended through May, and now entering a corrective phase.

Could sheer fundamental performance nip this technical pullback in the bud?

Though you could make a decent case for a couple of exceptions, I don’t see anything big in the way of results that would actually matter… the stocks are plenty cheap as is. The forward-looking P/Es and estimates look even better. Nobody cares though - and that’s the problem. Maybe nobody trusts the estimates. Or, maybe investors are weary of too many consecutive ‘one time charges’. Doesn’t really matter… the stocks are falling despite being cheap.

When it’s all said and done though, I’ve still got insurance stocks on my short list of ultra-values for long term (5 years +) portfolios. I’m just waiting for a bottom.

Forest Products

Owning small cap forestry and wood stocks - which only entails Deltic Timber Corp. (DEL) and Universal Forest Products Inc. (UFPI) - has been brutal this month. The S&P Small Cap Forest Products Index is down 21.4% for the month, and the month isn’t even over yet.

Like the life and health insurance rollover, there’s really not a lot of technical evidence that a rebound is in the cards anytime soon. This was one of those slow, methodical moves that tends to put things into motion for a while.

As far as values are concerned, frankly, I’m surprised either of these stocks managed to rally at all in March. If the analyst estimates are right…. no wait, scratch that. Even if the companies drum up half the earnings analysts think they will over the next twelve months, these stocks will still be stupidly expensive.

Steer clear of Deltic and Universal Forest, unless something amazing happens… which I’m not planning on.

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5/6/2009

U.S. Steel (X), Alcoa (AA), Allegheny Technologies (ATI) - Sector Rotation Part Deux

Filed under: — SmallCapNetwork Editor @ 6:15 pm

I really hope you’ve been closely following our sector rotation theme of late. If you have, not only have you learned a lesson (I think the second most important idea any trader or investor can grasp), but you’ve also made some great money.

I want to stick with the focus on metal and mining stocks for the time being, as they’re a great platform to teach from, and we also have a new action item - profit taking - for those of you who heeded our advice from March 19th.

We went bullish on the metal and mining stocks back on February 14th, when the S&P 500 Metal and Mining Index started to make gains that far exceeded the rest of the market’s. We reiterated the call on March 4th, as the performance of these stocks was improving. Our individual stock picks at the time were Rio Tinto PLC (RTP) and Freeport-McMoRan (FCX). Click on the nearby thumbnail image to see a full-size chart of what we were seeing at the time. And, click here to see why we chose RTP and FCX.

That’s lesson number one…. focus on the best industries and the best stocks first.

Most stocks are only mediocre most of the time. A sector rotation strategy is designed to find the exceptional stock trends.

And, it paid off… we were able to lock in some big gains on March 19th when several of these stocks gapped up at the open. Freeport and many of the other names in the group were up between 20% and 30% by that time. Click on the other nearby thumbnail image to see how things had changed between mid-February and mid-March (and why we took profits).

Enter lesson number two… lock in profits when it makes sense to do so.

Not everybody wanted to bail out of the industry then, which is fine. Most folks did though, as FCX and RTP (along with some other stocks) were just too overbought to leave ‘em hanging in the wind.

But what if the sector/industry trend is still going strong? Well, it was at the time, so it’s not like we wanted to abandon metal and mining stocks altogether. In fact, this is what we specifically said in the profit-taking alert from March 19th:

“…….the previous bottom dwellers in this group like U.S. Steel (X), Alcoa (AA), and Allegheny Technologies (ATI) are probably your better bets for the group’s next bullish wave….. intra-industry rotation forces are telling me we need to look for other ideas in the group to tap into once these stocks dip a bit and start another upside move.”

Did you get that? X, AA, and ATI were the weakest of the industry’s stocks before, but given the way stocks work in the real world, those names were apt to be the groups next big winners.

Take a look at the metal and mining stocks’ performance since we made that statement on March 19th. [This is a percentage-change chart, as we want to compare relative performance.]

Three of the top five performers after we updated our industry call were the same stocks that had been dragging the bottom prior to the update. That’s the third lesson.

Lesson number three… there’s rotation even within a sector. Just like sectors turn hot and cold, so too do the stocks in a sector.

Well, guess what it’s time to do? It’s time to employ lesson number two - take profits when it makes sense to do so.

If you took our advice from March 19th and bought U.S. Steel (X), Alcoa (AA), and Allegheny Technologies (ATI) to replace Freeport McMoRan or Allegheny, you’re now up 49%, 63%, and 75%, respectively. The S&P 500 Diversified Metals and Mining Stock Index surged today, which we think will mark a short-term top for all these charts. So, we recommend you sell X, AA, and ATI if you bought them in March.

As before, the overall uptrend is still alive for the group, and we’ll shop for the laggards when it looks like the index has bottomed. For now though, we just want to take the money off the table.

While this certainly puts our stock-picking acumen in a positive light, I didn’t post this simply to boast. My goal was to illustrate just why sector rotation is such a big deal, and why I spend so much time talking about sectors and industries. Picking a rising stock or shorting a falling stock isn’t good enough. You want to buy the BEST, and short the WORST stocks.

If you’re messing around with mediocre or weak trends, you’re not getting paid enough for the risk you’re taking. I’m convinced investors could double their returns simply by focusing on the highest quality trends like this one.

Just for the record, the only other sector/industry trends I’m following right now are the demise of education stocks, and biotech’s woes. Both of those have been very profitable - bearishly - as well.

Are you missing out on the kind of detailed sector rotation analysis that actually makes you money (like what you just read)? If you’re relying on television, newspapers, or magazines to help you navigate the market, you’re getting worthless help. Sign up for our free newsletter today, and start getting this kind of profitable information immediately.

4/3/2009

Op-Ed: Biotech Secretly Stinks - We’ve Been Duped

Filed under: — SmallCapNetwork Editor @ 10:26 am

I know I’m supposed to be enamored with biotech right now. After all, old-school pharmaceutical companies are wildly desperate for new great products, and only biotech can supply them. That’s why Roche bought the rest of Genentech, and why Gilead (GILD) acquired CV Therapeutics (CVTX), right? Surely this must be the beginning of a wave of biotech acquisitions and mergers that are going to make current biotech owners a small fortune when their particular stock gets snatched up at a premium, right?

Funny thing though…. the biotech indices are still headed lower, even while the broad market is rising. What gives?

Here’s what gives…there’s more hype than hope here. After Merck (MRK) and Schering-Plough (SGP) teamed up, and after Pfizer (PFE) joined forces with Wyeth (WYE) - plus the Gilead/CV Therapeutics deal - not only have we NOT seen a firestorm of M&A, we’ve actually seen none at all… at least none that I can think of.

I know the entire pharma sector (biotech in particular) has been put on a pedestal of late, as some of these stocks were the only thing that did reasonably well in a very nasty 2008. In fact, as of early March, on a proportional basis, there were more ‘buy’ ratings on pharma stocks than for any other industry. And brother, the market is singing pharma’s praises right now, potential or real. Most of this stemmed from M&A hopes, it seems.

Call me contrarian, but doesn’t it feel kind of uncomfortable that everyone else seems to have so much confidence in the group right now? I can’t shake off an old Wall Street adage I’ve personally known to be true way too often…. “When everyone else wants it, sell it. When nobody else wants it, buy it.”

Here’s the even-bigger irony - investors who have placed bets on strong performance from biotech stocks have not only lost ground, they’ve underperformed the overall market. Year-to-date, the average biotech stock is down 16%, while the market is only down about 8%. This week, the average biotech stock is down 8%, while the market is up about 2%.

Correct me if I’m wrong, but aren’t “sure things” (like biotech is right now) supposed to, you know… go up?

No, I think we’ve all been duped following 2008’s plethora of pharma M&A, and then this March’s flurry of it from some of the biggest names in the biz. The buzz in March was that the Merck, Pfizer, Gilead, Roche, Genentech, Wyeth, and Schering-Plough deals were the sign of the beginning of M&A madness. However, I think it actually may have been the culmination and finalization of a trend rather than a beginning. Check this out…

Prominent mergers and acquisitions attorney Adam Berger recently said 2008 was the biggest biopharma M&A year in the last ten. And, that’s true…. in calendar 2008 there were 150 biotech deals done, worth a combined $97 billion. Despite a few huge mergers in March, 2009’s biotech M&A rate is nowhere close to that pace.

In other words, 2008’s mergers are not evidence of a trend, but rather, 2009’s mega-deals could be a hint of a blowoff top and exhaustion of potential mergers.

Even if we do see a few more deals flow through in 2009, a recent story by IBD columnist Peter Benesh illustrates more risk than reward if you’re fishing for an acquisition.

In the column, Benesh states Peter Becker (former CEO of VioQuest and Cytogen) believes more than 100 biotech companies could be out of money by the middle of the year. One of the cash-rich mega-companies could wipe those woes away, but I seriously doubt the majority of them will be salvaged by big pharma; big pharma’s got enough to take care of already. Hopefully you’re not speculating on one of those 100+ stocks that won’t be bought out.

On that note, I want to stress something else that suggests to me that major drug-makers aren’t nearly as interested in small biotechs as we want to think they are….

Big pharma doesn’t need to finance the acquisition of anything - they can pay cash for most of the second tier companies in the biotech group, meaning if an acquisition was going to happen at all, it would have happened by now. I suspect that’s why we saw so much M&A in 2008 (much of which was off the radar)…. because stocks were so cheap. Now, in the shadow of what looks to be a real shot at economic recovery, stock prices are rising again. That cheap acquisition window is closing.

I’m going to close with that thought, as the message has been delivered adequately. However, I urge you to come back to the blog and the newsletter next week, as I have at least two more columns I’ll need to write - about specific companies and market caps - that further support my minority thesis about biotech stocks’ foreseeable futures.

Stop following the crowd, and start leading it. Stop listening to TV’s talking heads regurgitate press releases, and start getting some real, money-making perspective like this. Sign up for the Small Cap Network newsletter, and we’ll tell you when it’s the right time or wrong time to buy biotech.

4/1/2009

Apollo Group Inc. (APOL) Likely to Lead ITT Technical (ESI), Devry (DV) Lower

Filed under: — SmallCapNetwork Editor @ 2:02 pm

Though I’m surprised at the path these stocks took over the last month, I’m not at all surprised about the worrisome news we heard from Apollo Group (APOL) regarding a slew of bad debt they’ve be dealing with in the foreseeable future. Though no specifics were cited, the for-profit school was worried enough to mention it, sending the stock lower by 15%.

I think this just the first wave of disappointment though; a lot more could follow…. and not just for Apollo. I suspect Devry (DV), ITT Technical (ESI), Coronthian Colleges (COCO), Career Education (CECO) and the rest of the gang are going to fall into the same line.

So, maybe it’s time to start stepping out of these names.

I know, I know…. not only does the opinion make me unpopular, it keeps me in the minority. After all, despite the concerning news, Apollo’s numbers were stellar. The school earned 77 cents per share last quarter (their Q2) versus the market’s estimate of 65 cents. And, enrollment was up a solid 23 percent last quarter in comparison to the same quarter a year earlier.

All of that’s good, right? So why’d the market give the school an F for the day (in the form of a 15% haircut)?

The superficial reason was the bad debt thing. Makes sense. However, I think there’s actually a more meaningful, unwritten - perhaps unrealized - reason. It was the same reason I gave back on February 24th when I first went bearish on these school stocks.

At that point, my message was simply that for-profit schools had probably hit their maximum performance threshold. A painfully high degree of unemployment had given plenty of people the time and reason to re-enroll in school in an effort to become a more qualified job applicant. However, there are really only one of two eventual outcomes for that situation.

The first possible outcome (and this is the camp I’m in) is simply that as the economy improves and employment improves accordingly, enrollments will start to dry up - students become workers again, so they won’t need the education service. And, though enrollment was up last quarter for Apollo Group, the pace of growth slumped for the first time in three quarters. Think of this premise as the “as good as it gets” theory.

The second possible outcome would be that if the economy gets worse, so will unemployment. This condition may have helped for-profit schools in the early stages of the recession, but eventually - if a recession festers long enough as this one has - even paying for school becomes an impossibility for most people (employed or not). This was not the camp I was in, but based on the news we heard from Apollo today it looks like it’s just as valid of on idea.

There’s yet another possible outcome that I’ll now acknowledge - maybe these schools will suffer a combination of possibility #1 and possibility #2.

No matter what though, I still think the party’s over for ITT Tech, Corinthian, and the rest.

Don’t get me wrong; I think they’re all reasonably well run, bad debt or not. But, after these stocks rallied 115% between March of last year and January of this year, was there really anywhere to go after that? Would these stocks really be likely to double in value again? Doubtful.

Educational StocksSo, here’s my bottom line (or lines, in the case)…

At best, educational stocks have maximized their potential after last year’s 115% move from their low point. Even if the companies survive a few bad debt issues, they probably won’t be able to grow enough to satisfy the market’s craving for last year’s explosive returns. May as well go ahead and lock in the profit. This is the optimist’s view.

At worst, schools are going to see decreases in enrollment due to increases in employment, and/or they’re going to suffer from a combination of bad debt and fewer interested students (i.e. willing payers). This is the pessimist’s view.

Either way, I think it’s time to sell. The market has spoken today, pushing Apollo et al lower on what was actually pretty good news. When the market speaks this loudly though, it usually speaks this loudly for a while… sending those stocks lower the whole time.

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3/19/2009

Freeport-McMoRan Inc. (FCX), Metals and Mining Peaking Today - Lock in Profits

Filed under: — SmallCapNetwork Editor @ 10:38 am

If you were lucky enough to heed our advice back on February 13th and buy Freeport-McMoRan Inc. (FCX) or another metal miner, then congratulations - you’re up about 30%. If you waited until we reiterated the call on March 4th and mentioned the confirmation we were looking for with the S&P 500 Metals and Mining Index, that’s ok too - you’re still up about 22%. Whatever group you were in though, we’ve got a new recommendation for you today….. if you’re a short-term swing trader, sell whatever stocks you bought in this group and lock in those profits.

Say what? Isn’t the trend going strong? Yeah, but a bunch of these stocks gapped up today…. Freeport-McMoRan, Rio Tinto (RTP), BHP Billiton (BHP), and AK Steel (AKS) just to name a few. Considering the group is up almost 30% in about month (even if from very depressed levels), the gaps today just say now’s a good time to take short-term profits.

The same goes for Ivanhoe Mines (IVN). Though it’s not technically part of this group, it trades with the group and should be treated the same. It’s up sharply today too, but looks like it’s straining. Lock it in and wait for the next pullback.

If you’re a longer-term investor, then you’ve got a decision to make. Just prepare for a bit of a pullback if you decide to stay in. On that note….

We alluded to this a little bit on March 4th, but now’s an important time to say it again - the previous bottom dwellers in this group like U.S. Steel (X), Alcoa (AA), and Allegheny Technologies (ATI) are probably your better bets for the group’s next bullish wave. Freeport, Rio Tinto, and BHP were all great picks for the first wave. But, intra-industry rotation forces are telling me we need to look for other ideas in the group to tap into once these stocks dip a bit and start another upside move.

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3/4/2009

Freeport McMoRan Copper & Gold (FCX) Leading Metal Mining Industry Higher…Again

Filed under: — SmallCapNetwork Editor @ 8:54 am

I rarely have gut feelings I actually act upon, but the whole reason I even mentioned how strongly I felt about metal mining stocks back on February 13th was based on an unusually strong opinion that the group was a slowly-emerging leader. The last two weeks - and today in particular - have validated my expectation. Better still for investors, I think this move is just the beginning. After a slight cool-down period following today’s 8%jump, I’m looking for Freeport McMoRan (FCX), Rio Tinto (RTP), Ivanhoe (IVN), Cliffs Natural Resources (CLF), and all the other usual suspects to put the pedal to the metal….so to speak.

Here’s a chart of the S&P 500 Metals and Mining Index.

As I mentioned in mid-February, breaking past the 189 mark was the key to unleashing the group’s full potential (though 185 seems to be the more important resistance line at this point). As you can see, we haven’t done that yet, but we did peak at a hair over 184 today. Another decent shove - which may not be until tomorrow - could do the trick.

Now, against my better judgment, I’m also going to show you a screen shot of one of my ‘hot spot finding’ tools. (I’m hesitant, because the more ideas and tricks I share with you, the less effective they are for me. However, I also feel strongly about transparency in my thought process so…) The ‘PC’ in the column labels means ‘percent change’…. that’s all I really care about with this particular screen.

Did you see the second line into the grid (which is ranked here by 2-week performance)? It was the S&P 500 Diversified Metals and Mining Index. No big deal, but did you also see how it was ‘up’ (in green) for all the major time frames in question? Being near the top in one time period is nice, but not a big deal. The metal/mining index, however, has been in the top three for all time frames over the last few months. That nagging persistence unveiled a pretty strong group that would have otherwise been overlooked.

This kind of constant search for relative strength in multiple time frames - with industry and market cap detail - isn’t easy, or cheap. I think it is worth it though. It shows me emerging trends very few other people see, most of which I’m able to pass along to you.

That said, here’s an updated percentage change comparison chart for all the major metal/mining stocks. This is the same chart I showed you on February 13th, just updated as of yesterday. After I factor in today’s explosive changes it could change quite a bit.

Based on what you see here you might be inclined to look at Freeport and Rio Tinto first, since they’re (still) leading the pack. However, I think one of the chart’s laggards could be just as rewarding, if not more so. Why? The ones at the bottom may offer a little extra ‘catch up’ strength; the ones at the top may even experience profit-taking pressure. Just play it smart, on a case-by-case basis.

Again, note that this chart does NOT include today’s huge moves. Once I download today’s results (tomorrow morning), the landscape of individual stocks could look different.

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2/24/2009

Tuesday’s Biggest Loser Wasn’t Gold, It Was….

Filed under: — SmallCapNetwork Editor @ 11:18 pm

I was shocked that anything (besides gold) managed to lose ground Tuesday, until I saw what it was. Then I wasn’t surprised at all. Literally, every single sector and every single industry was up on the heels of Tuesday’s rally, except one…. educational services. In other words, the for-profit schools industry was a solo loser.

What’s up with that? It is a little weird, if you don’t know the back-story. If you think about it logically though, it actually makes sense.

Did you know that the S&P Educational Service Index gained 115% between March of 2008 and January of 2009? Say WHAT? It’s true. Think about it. What do people who get laid off (and can’t get rehired) do when they have plenty of time but not enough qualifications? Right...they go back to school. That’s why these stocks became more compelling as the economy - and unemployment - worsened. (continued below)

Therefore, what would be the most detrimental to for-profit schools? Right again… a strong (well, strengthening) economy. The market seems to think so anyway.

Normally I wouldn’t jump on board the ‘obvious logic’ wagon train, as ‘obvious’ is also frequently ‘wrong’. However, I also uncovered this looming weakness before Tuesday.

I routinely scan all the major stocks using a system that’s designed to highlight the very best bearish and bullish opportunities. Care to guess what showed up on my bearish list a couple of weeks ago? Apollo Group (APOL), Corinthian Colleges (COCO), ITT Educational (ESI), Devry (DV), and a few other lesser-known educational names.

Now, if it had just been one or two out of the group showing up on the bearish list, I may have thought nothing of it. But, when I start seeing the majority of an industry telling me to at least get out of these stocks - if not telling me to get outright bearish - I listen. I may not trust people or ‘obvious logic’, but I sure trust my system. Why? My system never lied to me. It may be wrong sometimes, but it doesn’t lie about my odds.

The point is, I’m taking Tuesday’s hint at face value. Educational stocks are probably not where you want to be right now. You may even want to take on bearish trades in these stocks.

I know, I know…. the unemployment trend is still on the rise, which should theoretically push more students into these schools, not out of them.

However, stocks also trade about six months in the future. And let’s face it - the economy has to get better sometime; the stimulus is going to take hold sometime too. Will that be six months from now? Sounds about right, which also means unemployment - and therefore school enrollment - will also start to slide soon. That’s exactly why I think these stocks are headed lower now. It ain’t an errant move or a blip.

Here are a few more relevant charts. It’s pretty amazing how all the hints are there, if we just learn to take ‘em.

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2/13/2009

Rio Tinto PLC (RTP), Freeport McMoRan Copper & Gold (FCX) Push Metals, Mining to the Leaderboard

Filed under: — SmallCapNetwork Editor @ 6:08 pm

This may not have anything directly to do with small caps, but it’s got a lot do with something very near and dear to all of us … making money in the stock market. So, be advised there’s an emerging bull trend in metal and mining stocks. In fact, the leading industry from the large cap (S&P 500) world over the last two weeks is metal and mining, mostly led by Rio Tinto PLC (NYSE:RTP) and Freeport McMoRan Copper & Gold (NYSE:FCX). Based on our view of the shape of the chart and the current momentum, more of the same could be on the way.

The chart of the S&P 500 Metals and Mining Index is what first grabbed our attention; it was appearing at the top of the performance rankings for just about every time near-term time frame (3 month, 1 month, 6 week, 2 week, etc.) To see that kind of consistent-but-measured progress is usually an omen of a healthy - and possibly prolonged - move.

Though it’s been choppy, the rally off of December’s low has also been big (about 80%). Yet, the compelling part about this chart is that we’re still nowhere near the highs hit in the middle of last year - there’s lots of room for recovery. The fact that the MACD buy signal has been renewed is just a simple hint that the uptrend is in full swing again.

Higher highs? Higher lows? Renewed momentum? We’re not going to argue with the obvious. If the S&P 500 Metals and Mining Index can crack the ceiling at 189, I can see this group really starting to fly.

On that note, take a look at the percentage change chart of this group’s stocks. Rio Tinto PLC (RTP) and Freeport McMoRan Copper & Gold (FCX) are up 37% and 32%, respectively, for the last month. Neither seems to be slowing down either.

Between an industry on the verge of a breakout and a couple of its stocks that are accelerating, I think there could be a decent trade in there somewhere.

Do your own due diligence, as always. At the same time though, don’t forget that stocks can still rise even without a great underlying reason. This is strictly a momentum-spotting exercise. (There may well be a fundamental reason for the recovery effort; I just don’t know if there is.) 

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2/9/2009

Molson Coors Brewing Company (NYSE:TAP), Brown-Forman Corp. (NYSE:BF.B) Find Alcohol is Recession Resistant

Filed under: — SmallCapNetwork Editor @ 8:53 am

Though I have not seen it for myself, I completely believe reports that a bar in Santiago, Chile is serving drinks specifically named to beat the recession blues. The Catedral bar (appropriately in Santiago’s financial corridor) has created what they’re calling a “Crisis Menu”, which offers (again, appropriately) discounted drinks to help ease the pain of an economic implosion. Some of the cocktail monikers include “The Subprime”, “In Recession”, “Madoff Nectar”, “Down Jones”, and “Bailout”.

There’s an old saying, ‘When life gives you lemons, make lemonade.’ I’m not sure what life would have to be giving us that’s so potent that we can make a mixed drink out of it, but this recession is obviously more than just one of life’s little lemons.

Anyway, the rumor is that alcohol sales have not been hit at all despite the recession. In fact, taking a cue from Chile’s Catedral, I’m wondering if the economic crunch is actually the reason for a strong liquor and alcohol market. It wouldn’t be unusual if it was though - alcohol sales usually do improve in a recession (liquor more so than beer). Consumers are more apt to drink at home during a recession though, as opposed to buying a drink at a bar or restaurant.

All joking aside, there may be an investment opportunity built into this quirk. The brewer and vintner stocks haven’t really been acting like things have been fine (i.e. they sank in the latter part of last year), but that may have been more market-related than performance related. Now with the selling frenzy over and cooler heads starting to prevail, I’m wondering if there are some big bargains in this group.

Molson Coors Brewing Company (NYSE:TAP) boasts a twelve-month P/E of 16.40, and a profit margin of 18.8% for their last quarter. Foreign brewers seem to have created a great deal of success too. Take Fomento Economico Mexicano (NYSE:FMX) and Companhia de Bebidas Das Ameri (NYSE:ABV) for instance - both of them have numbers comparable to Molson’s.

Brown-Forman Corp. (NYSE:BF.B) sells stuff that’s a little harder than beer, but has also managed to do well lately. And, they may continue to do well according to an industry research group. The Vinexpo/IWSR (which tracks wine and spirits sales trends) recently forecasted that consumption of hard liquor and wine in the U.S. will grow by more than 10% between now and 2012.

An overly optimistic outlook? Not necessarily. Spirit sales grew by more than that between 2003 and 2007, when we were coming out of the last recession. So, the pace doesn’t seem unreasonable now. If the economy really starts to recover in a big way, the pace could be even more impressive.

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1/7/2009

Microchip Makers Are Lowering Their Forecasts … Significantly

Filed under: — SmallCapNetwork Editor @ 11:53 am

Not that we should expect any industry to do particularly well as of the latter part of last year, but have you guys been keeping tabs on the microchip and computer memory makers like Intel (INTC) and Micron (MU)? It’s not so much that they’re reporting poor numbers - we all saw that coming. It’s that the forecasts seem to keep being adjusted lower as inventory piles up.

It was Micron that got the ball rolling a few days ago. They acknowledged they had to cut prices last quarter to compete in an oversaturated memory and chip market; a nervous consumer base didn’t help either. Yesterday Standard Microsystems (SMSC) reported a terrible third quarter - revenues were down 20%, and income (non-GAAP) was down more than 30%. The company cited weak demand (again) as the primary culprit… an they’re sitting on too much inventory too. Then Intel told us today their fourth quarter sales would be about 23% short of last years. Though Intel didn’t directly discuss any inventory problems, they did say their customers didn’t order as much as they had last year. Translation - their customers had enough of whatever they’d normally buy from Intel, which may well mean Intel is also sitting on more goods than they really care to.

I’ll say this much for the computer technology and part makers… they made damn sure they didn’t run short of the goods. Unfortunately, those kinds of things - technology ‘toys’ - are the first to suffer when a recession gets ugly. Now they’re all sitting on too much of their product, which may well become outdated by the time they get around to selling it.

Of the three companies I mentioned, only one of them gave a clear forecast of what to expect next quarter - and that was a grim forecast. Standard Microsystems is planning on quarterly revenue being down 40% to 70% the next tune they report. Can Micron, Intel, or any of the others be in a drastically different boat? Doubtful.

Don’t hear me wrong - it’s not that I think every company is going to get crushed. In fact, I remain optimistic about 2009. It’s just that some companies that overshot with their projected demand are going to really struggle to get through all their inventory on hand. Be a little concerned if you own - or are thinking about owning - a tech company that stocks inventory months in advance…. the demand just isn’t there.

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1/5/2009

Monday’s Top Small Cap Industries

Filed under: — SmallCapNetwork Editor @ 12:28 pm

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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12/23/2008

Today’s (and tomorrow’s?) Big Small Cap Winners - Distributors

Filed under: — SmallCapNetwork Editor @ 7:44 am

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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12/11/2008

Coal Reignited

Filed under: — SmallCapNetwork Editor @ 10:57 am

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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11/28/2008

Online or Offline? Internet Retailers Perk Up In November

Filed under: — SmallCapNetwork Editor @ 10:48 am

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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11/24/2008

Obama’s Brain-Trust Picks Nudges All Industries Upward, But Which Ones Can Keep Rallying?

Filed under: — SmallCapNetwork Editor @ 12:15 pm

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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