Stocks to Watch This Week

Each week I publish stocks to watch for the upcoming week as potential momentum trades. The stocks below all have a 50k minimum average daily share volume and traded at a 52-week high on strong volume, with a minimum of two times relative volume on Friday, May 27th. In addition, stocks were required to close Friday higher than the open price. This week 20 stocks made the cut, the entire list of 20 stocks as well as the current performance can be viewed on the right hand side of Scott’s Investments.

Two stocks and 1 ETF on this week’s list deserve further attention and I featured in an article on Seeking Alpha here.

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Memorial Day Readings

Hopefully everyone had a nice Memorial Day/Weekend.  Below are a few investment articles:

Small Windows in an Unfavorable Long-Term Picture – John Hussman

Greece’s Debts are Europe’s Problems – The Big Picture and Les Papillons Noirs – David Kotok via The Big Picture

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Don Coxe – Investment Recommendations (May 2011) – via Investment Postcards from Cape Town

A Random Walk Through the Minefield (pdf) – John Mauldin

Commercial Traders Foretell Market’s Movements – Tom McClellan

The Value of Ira Sohn (Hedge Fund Stocks Picks) – Mebane Faber

Is It Time to Buy, Sell, or Hold?

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I have previously detailed multiple methods for hedging equity portfolios using ETFs.  During periods of market drawdowns or corrections, it is helpful to ask yourself if “now” is the time to either hedge or sell your long positions or if further patience is warranted until further confirmation of a more significant drawdown.

Hedging in its simplest form is purchasing securities in order to reduce portfolio risk. The purchased securities are intended to have negative correlation to the remainder of the portfolio in order to help offset any potential losses in the portfolio. Holding uncorrelated assets, such as stocks and bonds, are one of the most popular methods for reducing portfolio risk since historically stocks and bonds are relatively uncorrelated.

However, there are alternative methods for hedging portfolio risk and multiple methods for timing one’s long and short positions.  This article asks if now (May 27th) is the time to buy/hold US equities or sell/hedge an equity portfolio based on 3 of the strategies I detailed here.

Strategy #1 – Moving Average

One of the more popular methods for minimizing downside risk and one I track frequently on Scott’s Investments is to exit long positions when they fall below a long-term moving average.  This may not technically be a hedge, since the entire position is exited.  However, as Faber showed in The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets, it is an effective method for reducing volatility and risk in a portfolio.

There are other options for investors who hold individual equity positions and hedge. For example, say you hold a position in two stocks, ABC and XYZ and wish to hold both stocks for the long-term.  However, the overall equity market has you a bit nervous and has recently begun to struggle, showing signs of weakness. One option would be to short the overall equity market and one of the simplest ways to do so would be via a 1x inverse ETF such as SH (Proshares Short S&P 500), which seeks daily investment results that correspond to the inverse of the S&P 500 Index.  You could also use an inverse small cap, international, sector, etc. ETF depending on the long positions you currently hold.

For backtest results of one variation of this strategy, please visit my study here, which has avoided a down year (including 2008!) since data was available (2000).   What is the strategy telling us today?  There are numerous variabilities to consider, primarily the moving average length an investor wishes to use and the index or trading vehicle an investor wishes to use as an indicator.

Using the 10 month SMA for some widely followed ETFs, we do not yet see a “sell” or “hedge” signal, nor do we see sell signals using the 200 day moving average:

SPY (SPDR S&P 500) – Currently above 10 month & 200 day moving average
EFA (iShares MSCI EAFE Index) – Currently above 10 month & 200 day moving average
EEM (iShares MSCI Emerging Markets Index) – Currently above 10 month & 200 day moving average
IWM (iShares Russell 2000 Index) – Currently above 10 month & 200 day moving average

Strategy # 2 – Relative Strength

Using ETF Replay, we can compare the relative strength and volatility of ETFs and backtest various ETF strategies.  One strategy previously tested was to combine a long ETF portfolio with a position in either SPY, SHY(iShares 1-3 Year Treasury Bond, used as a proxy for cash or a relatively neutral position) , 0r SH.  The position in SPY, SHY, or SH would be determined by which of the 3 ETFs had the highest relative strength. 

On May 27th this strategy switched to SHY, or cash.  Thus, if an investor used this strategy to determine when to go long, short, or neutral, the current signal indicates a neutral/short-term bond position based on relative strength.  We will keep an eye on this indicator for either continued weakness, which could lead to a short signal, or a reversal to a long position in SPY.

Strategy #3 – Market Conditions & Market Valuation

A third hedging strategy is to based long/short positions on overall market conditions.  There are a myriad number of ways to gauge “market conditions” and how one hedges these “conditions” depends on your time-frame and current portfolio.  However, assume we hold a portfolio of US equities or US equity ETFs and wish to hedge them during “unfavorable” market conditions.

Doug Short tracks the P/E Ratio Market Valuation to gauge current market valuation on a long-term basis.  The S&P 500 is currently overvalued based on its price to earnings ratio. Ideally, we could employ a hedge or avoid long positions altogether when the market is “overvalued”. However, markets can stay over and undervalued for lengthy periods of time, sometimes years.  Thus, basing  a hedge on relative long-term market valuation alone can be a costly and lengthy experiment.

Stockscreen123 has devised a timing system suitable for longer term investors that has historically still reacted quickly enough to serve as a hedge during unfavorable market conditions.  The system uses 2 factors to determine “market conditions”:

It assumes conditions are favorable for equity investing if EPS estimates are rising and if valuations are reasonable.

  1. The estimates test is whether the 5-week moving average of the aggregate of the consensus current-year estimates for S&P 500 companies is above the 21-week moving average.
  1. The valuation test is based upon risk premium, specifically, whether the S&P 500 risk premium (earnings yield minus 10-year treasury yield) is above 1%

When conditions are “favorable”, one would be long equities (hold SPY) and during unfavorable conditions, short equities (hold SH).   The strategy currently indicates a position in SPY.

In conclusion, we currently see some mixed signals.  Relative strength is weakening in SPY but equities remain above long-term averages and market conditions remain favorable for the time-being, even though the market is currently overvalued.  Discipline is essential in investing – research data and strategies and then devise a strategy you feel comfortable with and consistently follow the signals to avoid the emotional aspect of investing.

No positions

Return discussed exclude commissions/taxes

Investment Articles

Below are a few investment articles for the long holiday weekend:

The U.S Fiscal Solution – Follow Canada’s Lead (pdf) – David Rosenberg

Macro E.U. – D.O.A. (pdf) – Greg Weldon via John Mauldin

An Economic Approach to Tactical Asset Allocation – Mebane Faber

How to Build a Low-Risk High-Income Portfolio – Geoff Considine

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24 High Quality Momentum Stocks for a Market Correction

The US equity markets are in the midst of a correction, consolidation, pullback or whatever other euphemism can be used to describe the recent modest decline in equity prices.  During periods of decline it can be helpful to find long ideas among stocks which a) have low levels of debt, in case the market decline deepens, b) have a history of high returns on equity and investments c) have shown price momentum despite waning momentum in the overall markets.  I also find PEG (Price-to-Earnings Growth) a useful metric for identifying stocks which are reasonably priced compared to their anticipated earnings growth. However, the PEG ratio is using forward looking expectations, which, can at times be unreliable.

I update the following portfolio/screen on a monthly basis on Scott’s Investments. April’s list of 35 stocks is here and the top 10 rated stocks returned an average of  1.92% versus -1.24% for SPY. The entire list of 35 stocks last month returned an average of .07%, led  by Varian Semiconductor (VSEA) at 34.97%.

The screen looks for the following:

  • earnings growers still reasonably priced as judged by the PEG ratio 
  • low debt 
  • a history of high return on equity and investment, and 
  • price momentum as gauged by the percentage the stock is trading to its 250 day high. 
  • The stocks are then ranked based on fundamental factors as compiled by stockscreen123.

24 stocks qualified for this month’s list. This tells us individual stock momentum still exists in the market and the fundamental factors on the list are easy to find among the high momentum stocks.  However, the number of qualifying stocks is less than last month’s list, which is not surprising given that overall equity momentum has waned in May.

As with last month’s list, Apple (AAPL) and Intel (INTC) are two of the more popular names on the list.  Both companies short-term momentum has waned but their long-term momentum remains in tact.   INTC yields 3.7% which is outstanding when one considers the strong balance sheet, positive earnings, and low payout ratio.  It is in a cyclical business so earnings could fluctuate, however, the strong balance sheet and powerful brand combined with low payout ratio gives the dividend a significant margin of safety.

Ascena Retail Group (ASNA) is a new addition to this month’s list and is the top ranked stock on this month’s list.  Ascena Retail Group inc. operates as a specialty retailer of apparel for women and tween girls in the United States and Puerto Rico. It operates its stores under the dressbarn, maurices, and Justice brand names.  The company has shown strong earnings and sales growth this year and is projected to grow earnings at 11.59% next year (source:Finviz) and forward price-to-earnings is projected at 11.81.  The company reported quarterly earnings after the close today (May 25th), and the top ranking is based on data prior to earnings.  However, the company reaffirmed its 2011 earnings guidance of $2.28 – $2.33/share, giving it a price/earnings ratio for 2011 near 13. Net income and sales grew 8% and 9%, respectively, when compared to the same quarter last year.

The rational for this strategy is based on backtests showing stocks with low PEG ratios, debt, and high returns on equity and price momentum have produced good historical returns. The screen has tested well historically in bullish periods and, as with most long-only strategies, has suffered during significant market drawdowns. Strategies an investor could use to avoid major drawdowns would be to either abandon this type of strategy entirely when the SP 500 or another major index is below a long term moving average, or hedge positions using one of the methods I profiled here which detail short ETF strategies for hedging long equity positions.

Below are the backtest results for this strategy starting in March 31st, 2001. Returns exclude commissions and taxes and assume .25% slippage.  No position accounts for more than 25% of the portfolio (relevant in cases when the screen produces less than 4 results) and it was equally rebalanced every 4 weeks.  The backtest and the screen was conducted using stockscreen123. The cumulative returns are in excess of 550%:

Two possible tools an investor could use to conduct this screen on his/her own are stockscreen123 or Finviz. This screen was conducted using stockscreen123. For the full list of stocks and real-time results, please see the right hand side of Scott’s Investments.

Ticker Name Rank PEGLT Dbt Tot 2 EqQ ROE% 5YAvg ROI% 5YAvg
ASNA Ascena Retail Group Inc 99.8 0.96 0.02 16.28 12.84
AIT Applied Industrial Technologi 98.88 0.82 0 15.4 12.47
EZPW EZCORP, Inc. 98.31 0.79 0.03 20.36 19.63
AAPL Apple Inc. 95.71 0.66 0 31.92 28.48
NSR Neustar, Inc 95.2 0.83 0.01 17.96 16.84
LECO Lincoln Electric Holdings, In 95.06 0.97 0.08 15.69 12.28
TRLG True Religion Apparel, Inc. 95 0.77 0 28.88 27.84
NSP Insperity Inc 94.43 0.91 0 16.52 13.25
FCFS First Cash Financial Services 94.1 0.9 0.01 18.99 15.95
DV DeVry Inc. 93.55 0.97 0 18.43 16.49
BBBY Bed Bath & Beyond Inc. 92.07 0.99 0 19.87 18.22
INTC Intel Corporation 91.28 0.9 0.05 16.28 14.96
WSTG Wayside Technology Group, Inc 89.93 0.55 0.01 14.97 14.9
JOSB Jos. A. Bank Clothiers, Inc. 87.33 0.95 0 20.55 17.5
DTV DIRECTV 85.3 0.78 0 30.78 12.76
PLT Plantronics, Inc. 82.92 0.99 0 13.81 13.07
GIL Gildan Activewear Inc. (USA) 80.87 0.76 0 18.33 17.19
MA MasterCard Incorporated 79.63 0.89 0 29.76 22.24
TNDM Neutral Tandem Inc. 77.15 0.95 0 15.65 13.92
CRR CARBO Ceramics Inc. 77.04 0.96 0 14.35 13.55
QCOR Questcor Pharmaceuticals, Inc 73.18 0.91 0 43.34 42.57
DECK Deckers Outdoor Corporation 71.02 0.82 0 24.8 24.7
TSM Taiwan Semiconductor Mfg. Co. 65.51 0.89 0.06 20.19 22.56
CKSW ClickSoftware Technologies Lt 40.36 0.43 0 26.52 22.28

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Tuesday Readings

Below are a few investment related articles I’ve read in recent days:

Scarcity, Usefulness, and Getting an Edge – John Hussman

Roundup of Managed Future Funds, or What Worked Part II – Mebane Faber

S&P 500 – Possible Market Top? Carl Swenlin

S&P 500 – the “soldiers are deserting” says Richard Russell – Investment Postcards from Cape Town

NY Investors Should Learn to Like the Rain – Tom McClellan

The Muni War of Words Continues – David Kotok

Economic versus Political Theory (pdf) – John Mauldin

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Gold and Silver Outlook

I do not consider myself a “gold bug” or commodity expert, so I prefer to let other’s do the in-depth commodity/gold/silver analysis on my site.   Below are two articles, the first is actually an interview with Chris Vermeulen of TheGoldandOilGuy. Chris gives his gold and silver outlook here.

The second article is from David Banister of The Market Trend Forecast. The full article is here, an excerpt below:

Silver and Gold have another three Fibonacci years left in a 13 Fibonacci year bull market cycle, so other than some intermediate term tops and bottoms and chopping action, I am looking for much higher prices by the year 2014 in both metals.

16 Breakout Stocks to Watch This Week

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Each week I publish stocks to watch for the upcoming week as potential momentum trades. The stocks below all have a 50k minimum average daily share volume and traded at a 52-week high on strong volume, with a minimum of two times relative volume on Friday, May 20th. In addition, stocks were required to close Friday higher than the open price.

Last week’s list of 17 stocks returned an average of -2.49% versus -.32% for SPY. Purchasing the entire list of stocks may not be feasible for individual investors. However, with this list we can identify stocks with high price momentum that may be viable short to intermediate term trading candidates, and, in some cases, long-term investments.

This week we have 16 stocks and ETFs qualifying for the top momentum securities. As with last week, this tells us that positive price momentum continues to wane, as exemplified by the overall equity markets performance for last two weeks. 

Data Source: Finviz

The entire list of 16 stocks as well as the current performance can be viewed on the right hand side of Scott’s Investments.

Ticker Company Industry Trend Score 52-Week High Relative Volume
ALKS Alkermes, Inc. Drug Delivery Here -0.47% 2.01
ASPS Altisource Portfolio Solutions S.A. Mortgage Investment Here 4.38% 3.03
ATHR Atheros Communications, Inc. Semiconductor – Integrated Circuits Here 0.25% 2.83
CSII Cardiovascular Systems Inc. Medical Appliances & Equipment Here 4.10% 3.71
ELGX Endologix Inc. Medical Instruments & Supplies Here -0.24% 2.63
FL Foot Locker, Inc. Apparel Stores Here 8.42% 4.03
FTF Franklin Templeton Limited Duration Income Trust Closed-End Fund – Debt Here 0.14% 2.86
GLBC Global Crossing Ltd. Diversified Communication Services Here -1.39% 2.35
KNXA Kenexa Corp. Business Software & Services Here -0.39% 17.33
LNG Cheniere Energy, Inc. Oil & Gas Drilling & Exploration Here -4.65% 4.21
LVLT Level 3 Communications Inc. Diversified Communication Services Here -2.49% 2.18
MAKO MAKO Surgical Corp. Medical Appliances & Equipment Here 5.44% 3.35
MEDH MedQuist Holdings Inc. Healthcare Information Services Here 1.52% 2.7
RRGB Red Robin Gourmet Burgers Inc. Restaurants Here 17.88% 10.84
SUG Southern Union Co. Gas Utilities Here -1.43% 5.85
USPH US Physical Therapy Inc. Specialized Health Services Here 1.56% 2.61

10 Micro Cap Value Stocks

On a monthly basis I conduct a close replication of AAII’s (American Association of Individual Investors) Shadow Stock screen. The goal is to find small, undervalued stocks with high price momentum over the past 52 weeks.

The screen and date below is courtesy of Stockscreen123. I use the following screen criteria to identify high momentum value stocks:

  • No over-the-counter stocks
  • No financial stocks
  • Market cap > $20 Million and < $200 million
  • Previous EBITDA quarter and trailing twelve months are positive
  • Share price > $1
  • Price/book < .80
  • Price/sales < 1.2
  • Top 10 stocks are selected based on highest 52 week returns
  • Minimum average daily volume > 5k shares

The results for this month are at the bottom of the article. 

April’s list returned an average of 3.67% (excluding dividends, commissions, and taxes), primarily because of the 1 month return of Fuwei Films (FFHL) which returned 108.44%.  Fuwei Films remains on this month’s list; it plunged in April after receiving a delisting notification from Nasdaq.  However, on May 19th the company received notification the delisting notification had been withdrawn and the company would resume trading on The Nasdaq. 

Silverleaf Resorts (SVLF) also has high price momentum and solid fundamentals. However, in February SVLF’s board agreed to sell SVLF to Cerberus Capital Management for $2.50/share. Thus, any position in SVLF at this point will only serve to place you in the middle of an acquisition with little upside (unless shareholders are successful in fighting the sale of the company). K-Sea Transportation Partners (KSP) announced in March it is being acquired by Kirby Corporation for $335 million.  Again, any position in KSP  could offer little upside at this point.

Ticker Name Trend Rank MktCap Industry
FFHL Fuwei Films (Holdings) Co., L Here 99.92 61.38 Fabricated Plastic & Rubber
ABL American Biltrite Inc. Here 97.97 31.83 Constr. – Supplies & Fixtures
AWRCF Asia Pacific Wire & Cable Here 96.59 82.71 Communications Equipment
GFN General Finance Corporation Here 94.68 66.04 Real Estate Operations
SURW SureWest Communications Here 90.98 196.14 Computer Services
SVLF Silverleaf Resorts, Inc. Here 90.43 94.96 Hotels & Motels
TGX Theragenics Corporation Here 73.15 64.39 Medical Equipment & Supplies
WCAA WCA Waste Corporation Here 66.52 133.4 Waste Management Services
KSP K-Sea Transportation Partners Here 63.52 155.97 Water Transportation
CNTY Century Casinos, Inc. Here 54.46 68.77 Casinos & Gaming

No positions

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Market Readings

Below are a few articles of note for this week:

Does Unreal GDP Drive Our Policy Choices? (pdf) John Mauldin

US Stocks-ETF Account Strategy Changes – Cumberland Advisors

Impossible Dream, Part 2 – The Aleph Blog

Chris Vermeulen’s video analysis of stocks, commodities, and the dollar for this week is here.

Gold’s Chart Offers 3 Technical Lessons – Tom McClellan

Voodoo Economics: Policy Responses to the Global Financial Crisis – Satyajit Das

Still Home Sick (pdf) – Gary Shilling via John Mauldin

Kicking the Can to the End of the Road – John Mauldin