Thursday, February 28, 2008

An Earnings Experiment

Since the market is in the midst of earnings season, I thought today it might be fun to perform a little experiment. The premise goes like this: What if I buy the stocks that reported the best earnings and shorted those with the worst? Would I make money and how long do I need to hold these stocks?

These are both good questions since many traders and investors out there do play stocks according to their earnings. I've never done it and so I am just as curious as you are to see if this approach is profitable. This scheme has nothing to do with my recipe, Earnings Etouffe, since that strategy involves playing stocks before they release earnings. This is a strategy for after earnings are reported.

Looking at todays earnings news, I came up with a list of both winners and losers and culled the five top ones in each category that I felt (based on their charts) looked like they might have the most potential for profit. Before I list them, I want to give you a brief primer on what constitutes “good” earnings news versus “bad” news.

Good News:
1. The company reports record profits.
2. The company reports increased sales orders.
3. The company blows away earnings estimates (made by industry analysts).
4. The company increases future guidance, meaning they expect to be more profitable than they previously thought.
5. Analysts upgrade the stock and/or raise their price targets.

The Bad News is exactly the reverse. Usually, the more of the above criteria contained in an earnings release, the bigger the move in the stock price.

Here's my list of stocks that jumped today on good earnings along with a brief explanation of why they moved:

Hurco (HURC): Up 32%. First quarter per share earnings jumped 45% over last year. New orders increased 30%, and they blew out analyst estimates.
VisionChina (VISN): Up 16%. Total year-over-year revenues grew 659%. Net quarterly income grew 53% . (There was only one brief press release on this.)
Chart Inds. (GTLS): Up 20%. Quarterly earnings jumped 91%, quarterly sales grew 26%, they clobbered analyst estimates, and raised 2008 guidance.
Ctrip (CTRP): Up 15%. Fourth quarter profit and revenues more than doubled, beating analyst estimates. One analyst raised price target from $75 to $78. (This is a Chinese stock that trades as an ADR here.)
Fluor (FLR): Up 10%. Fourth quarter profit more than tripled on increased sales and a one-time tax benefit. They also raised 2008 guidance.

Here's my picks of the losing stocks that reported bad earnings news today:

RH Donnelley (RHD): Down 44%. Even though the company narrowed its fourth quarter loss, it lowered 2008 guidance and stopped paying its dividend. A key company executive also stepped down.
Abitibibowater (ABH): Down 10%. This company is a recent merger (which is why the company name is a mouthful) and it's a little tricky to give exact numbers. In essence, company sales are down due to the decreased demand for its products (newsprint).
Dollar Thrifty Automotive (DTG): Down 9%. Reported widening losses and didn't meet analyst's earnings expectations.
Sprint/Nextel (S): Down 10%. Reported a massive fourth quarter loss, predicted continued customer weakness, and stopped paying dividends. Fitch also lowered the company's investment rating and put it on its negative watch list. Ouch! (I had Sprint once. They're coverage was awful and customer service nonexistent. I'm very glad to short this turkey.)
Cowen Group(COWN): Down 13%. Fourth quarter revenues swing to a loss missing analysts estimates.

What I'm going to do is set up dummy portfolios for each of these; that is, I will go long the above stocks that reported good earnings news and go short the five that reported negative earnings news. Each stock will be equally weighted according to price which I'm setting at $5000/stock. My entry point will be today's closing price, and I'm using $9.95 as my commission cost.

During the next week or so, I'll be revisiting each portfolio to see how we're doing. Not only do I hope this will be educational for both you and me, but fun as well.

As for last night's dinner, Ms. Bartiromo does indeed look as lovely in person as she does on TV, and she's as delightful as well. I was hoping for some light Italian fare, but unfortunately it was chicken. Ah least the company was stimulating.

Wednesday, February 27, 2008

Mining the Newsletters for Uranium-Part III

This is the last part in the continuing series of sleuthing out uranium mining and holding companies. (Yay!) Today we'll uncover the fifth stock mentioned in my newsletter's teaser ad and I'll also touch on the current world status of uranium to show you just how misleading their ad is. My hope is that by the time you finish reading this, you'll have a better understanding of how these teaser ads work so that you won't impulsively buy into whatever they're selling, often at a significant cost to your pocketbook.

Here we go with the last teaser stock.

Clues to the Fifth Uranium Mining Stock:
A little background hyped by the newsletter to whet your interest in this stock:

“In 2005, the Chinese government spent roughly $72 million dollars on this fuel. But according to current government estimates, China is about to increase that expenditure to a whopping $119 billion in the months ahead...

“The Australian government is on the verge of approving this sale of uranium to China. Trade agreements have already been ratified, and the Aussie government has already said that “… we could have uranium going into China in the first half of next year.” “

[Aside: The treaty between Australia and China was actually ratified in August, 2006. This is another piece of evidence that the original come-on newsletter was written well before that.]

Okay, here are the clues:

1. One Australian company has a near monopoly on sales of uranium to China.
2. This company paid $7.2 billion to buy the largest uranium mine in the world, and is spending “$5.8 billion to expand the mine into the largest uranium producer (not to mention the third biggest copper and gold producer, to boot).”

What is this company? It's BHP Billiton--again! That was the first teaser stock we uncovered in Part I. Yep, it's a pretty sneaky thing to do, and I can't fathom why they did it. Perhaps they felt you needed further enticement to buy their product..? Boy, if I had taken their bait and later found out I had been duped, I wouldn't be very happy nor would I trust their investment advice. On the other hand, I could be wrong in my assessment but I did the research and am quite sure of my findings.

Wrap-Up: The Case for Uranium
My newsletter portrays uranium as the next oil industry, promising significant gains to those holding their “block-buster” uranium stocks. They paint a rosy portrait, but they don't even touch on the risks and obstacles to getting the ore out of the ground, not to mention the problems of enriching or selling it. I feel it's my fiduciary duty to at least touch on the potential downsides of their uranium scenario.

What are some of these obstacles? In researching this piece I found that analysts were most concerned with infrastructure problems, the lack of experienced mine workers, and stable access to enrichment services which is a big legal problem for many countries. Environmental impact concerns continue to dog the industry as well as regulatory issues, most notably in Australia where new mining is still restricted, although that might change soon.

My newsletter contends that uranium is undervalued and is cheap even at $500 a pound. But that brings up two questions. One is: “Does that mean every pound of mined uranium is created equal?”

The answer is no. Here's the reason:

There's about five million tons of uranium world-wide that is known to be recoverable. Australia leads with 24% of the world's known supply, followed by Kazakhstan at 17%, Canada at 10%, and the U.S. and S. Africa with about 7% each. But more important than the amount of recoverable ore is the grade of the ore; the lower the grade, the higher the processing cost. The only country that has a significant holding (around 20%) of high grade ore (>1%) is Canada. On the other hand, roughly 90% of Australian deposits have grades less than 0.06%, and much of Kazakhstan's ore is less than 0.1%. What this all means is that companies with significant Canadian holdings will have an easier time processing and selling their uranium.

The second question is: “Can technology provide a way of making reactors more efficient thus using less fuel?"

The answer to this is yes. In an excellent article (which I strongly encourage the curious to read) written on Nov. 2, 2007 for the Council on Foreign Relations, writer Toni Johnson explains it this way:

“Currently, there are nearly one thousand commercial, research, and ship reactors worldwide, more than thirty are under construction, and over seventy are in planning stages. The world currently uses 67,000 tons of mined uranium a year. At current usage, this is equal to about seventy years of supply. The World Nuclear Association says demand has remained relatively steady because of efficiency improvements, and it is projected to grow “only slightly” through 2010. However, more efficient nuclear reactors, such as “fast-reactor” technology could lengthen those supplies by more than two thousand years. Experts say spent fuel can be reprocessed for use in reactors but currently is less economical than new fuel.”

What this means is that more efficient reactor technologies may actually decrease the rate of demand for uranium. Does that mean that uranium will never see $500 a pound? I think there are just too many variables to even make that, or any, prediction.

What can we take away from this? The point I've been stressing all along is that you need to view these newsletter come-ons with a jaundiced eye. It pays to do your homework. To blindly accept someone else's views is only doing them a favor, not you. And that includes me.

Tomorrow I promise some lighter fare. Tonight I'm having dinner with Maria Bartiromo and Tony Crescenzi. The menu had better be Italian!

What to wear, what to wear...

Council on Foreign Relations Article:
List of Uranium Mining and Exploration Companies:

Tuesday, February 26, 2008

Mining the Newsletters for Uranium-Part II

Continuing our investigation into the mysterious uranium mining stocks I introduced yesterday, we'll be looking at three more today. I was going to do all four, but due to space considerations I felt that three would more than suffice. Plus, I want to toss in my two cents on this entire sector, so that will have to wait until tomorrow.

As we go through this I'll show you just how old is the information in the newsletter I'm dissecting. Apparently they've been using the same come-on for at least a couple of years and haven't even bothered to update their info. I guess it must be working for them! I want you to note this the next time you get one of these undated come-ons as the information provided and the returns they promise might not be valid, in part or at all.

Enough of my admonitions. Let the sleuthing begin!

Clues to the Second Uranium Mining Stock:
1. Over 10 years ago when uranium was an unloved commodity and dirt cheap, this company bought up rights to uranium deposits that had been explored and confirmed, but not yet mined.
2. Today, the company owns the rights to 86 million pounds of uranium, most notably the Athabasca Basin in Canada to deposits in Peru.
3. It has acquired 900,000 acres of uranium properties in Alberta.
4. It owns the rights to 17.5 million pounds of uranium in New Mexico.
5. Another global Fortune 500 company, a $13 billion Canadian mining company, is looking to get in on the deal.

The newsletter claims that this company is on course to become the largest uranium producer in America, and that if you buy it right now you could reap four times your money. What is this stock?

Well, if you were looking for one company, you won't find it. That's because it's now two companies. The parent is Strathmore Minerals. Last year, it spun off its Canadian and Peruvian properties into Fission Energy Corp. (not to be confused with Fission Energy LTD, an Aussie concern) while retaining its U.S. properties in Wyoming, New Mexico and S. Dakota. (See how dated this information is?) Both are Canadian companies and trade on the Toronto stock exchange as STM.V and FIS.V. They also trade over-the-counter here as STHJF and FSSIF, albeit thinly.

So, should you buy these? They both hold attractive reserves in stable countries--always a plus. I guess the question is how they plan to get the ore out of the ground. Their stock prices are roughly tied to the price of uranium. In June 2007, uranium hit its high of $140/lb. Since then it's lost nearly half its value, and is currently trading at $75/lb. This price movement is directly reflected in the price of these stocks. My newsletter claims that because of the forecasted heavy demand, uranium is cheap even at $500/lb. I guess it all boils down to what you believe. The competition in this sector is increasing by leaps and bounds and a surfeit of uranium could keep the price depressed, just like any other commodity. For more info on both companies, visit their company websites: and

This website also has good info on Strathmore:

BTW, the $13 billion Canadian company is Cameco.

Clues to the Third Uranium Mining Stock:
This is an easy one. All this company does is buy and hold uranium, and claims to be sitting on 4.2 million pounds of it. What is it? It's a closed end Canadian fund called Uranium Participation, also called Uranium Corp. It, too, trades on the Toronto exchange and also in this country as URPTF. Since it's illegal for an individual to actually possess the radioactive metal, this is as close as you can get to owning it outright. It's the purest uranium play I've seen. If you're interested in buying it, I'd suggest snapping it up when the fund price falls below its Net Asset Value (NAV). The NAV is calculated monthly. As of Jan. 31st, its NAV was Canadian $9.70 or about $8.30 US. The stock is currently trading around $11. To find its NAV, check out their website:

Clues to the Fourth Uranium Mining Stock:
1. This company is sitting on proven reserves of 51 million pounds in the 7th largest deposit in the Southern hemisphere.
2. The company has only the historical price of its assets recorded on its books (when uranium was $10/lb)--a value of $31.7 million. The actual price of the assets is $6 billion. (I have no idea how they get this figure and they don't say.) They translate this value into stock price, claiming that the stock should be worth over $200 instead of $25, its current price.

There's not a lot to go on here considering the vast number of mining companies in the uranium universe. And, since we don't know when they wrote this, the stock price could be a lot greater than $25/share or a lot less. I hate to say this, but they got me on this one.

So far: Me three, Them one.

That's it for today. Tomorrow, the fifth dangling carrot will be revealed. In the immortal words of Larry Sanders, “No flipping!”

Posted by Dr. Kris at 11:37am PST

Monday, February 25, 2008

Mining the Newsletters for Uranium

I don't know about you, but I get about 2-3 dozen newsletters in my financial inbox everyday. It seems that if you subscribe to one, your inbox is instantly filled with “stuff” from other sources you've never heard of. I usually just send them to the cyber-shredder, but sometimes I open one up to see what they're selling. Who knows? I just might be able to pick up a few pearls of wisdom hidden among the hype.

One in particular caught my eye recently, although it isn't new. They've been dusting off this puppy for the past few years and using it as a selling tool. Here's the deal: If you subscribe to their investment service, they'll “give” you a free report on the next energy play that could “reap you more than 25 times your investment.” It sounds almost too good to be true, right? So, I thought I'd let out my inner Nancy Drew and investigate what they had to say. Perhaps I could beat them at their own game.

First of all, their “little” come-on isn't so little. I was going to print it out but that would have eaten up 27 pages of paper! (Maybe if they shortened their come-ons more people would be inclined to read them.) So that you, dear reader, won't have to suffer similarly, I've distilled the salient points for your reading pleasure.

The Come-On (er, Premise):
1. The world is running out of oil. (Duh)
2. Even “Big Oil” isn't investing in it. Rather, they're buying back their stock at the expense of further exploration and creating new refineries. One reason is that it takes too long for new refineries to be built and come on-line (10-20 years).
3. Major governments are committed to reducing their consumption of oil and gas (the US included) because it isn't eco-friendly.

Okay, so now that they've got you primed for the pitch, what is the new energy replacement?

Uranium, of course. (As if you couldn't guess that one.) I mean, this isn't new news. Uranium has been a hot topic (sorry for the pun) for that past couple of years. Now here's where the urgency comes into their pitch.

The Need for More Uranium:
1. It's much cheaper and cleaner than oil.
2. Current demand is exceeding supply by a ratio of 2:1 and with more reactors world-wide slated for construction, the demand will even be more severe. China in particular has a voracious appetite for it.
3. Uranium is mined in US-friendly countries as opposed to many oil-producing ones (i.e., much of the Middle East and Venezuela).

The Case for Mining Stocks:
According to this source, “Last year only 58% of the uranium consumed in the world came from mining. The rest came from the depletion of dwindling reserves.” The logic then follows that to make oodles of money, one needs to invest in uranium mining companies, but which ones? This is where they hope to snag you.

They list five stocks that they feel are due for “unprecedented” gains. Since they want you to subscribe to their service to find out, they naturally aren't going to come out and tell you the names. Instead, they offer hints. Today and over the next couple of days I'll be going through each of these five stocks to see if we can't come up with them.

Clues to the First Uranium Mining Stock:
1. The company is basically a copper miner and owns the largest copper assets in the world. It's a fact that many copper mines are naturally rich in uranium.
2. As the company mines the copper from one if its largest mines, the uranium comes along with it so the cost to mine uranium is essentially “free.”
3. J.P. Morgan owns 4.4 million shares and Citicorp owns 6.6 million shares.

They claim that if you buy the stock now, you can expect to gain over 300%.

So what is this stock? From what I can deduce, it's BHP Billiton (BHP). Their Olympic Dam mine in Australia is the world's fourth largest copper mine and it's also the one where the uranium comes along with the copper. Checking on institutional ownership of BHP, I found that JP Morgan does indeed own a large chunk of BHP (1.32 million shares), but couldn't find any reference to Citicorp. (They might have had to sell their shares because of the credit crisis, but this is just a conjecture.)

BHP's stock has been marching consistently upward since 2003, gaining over 570%. (Maybe if you had bought the stock a couple of years ago you would have realized a 300% profit as they claim.) It also pays a 1.6% dividend yield. The company boasts a 45% ROE (return on equity) and low institutional ownership (less than 6%). Technically, the stock has been taking a breather in recent months, but if it can break its $80 resistance level, then you might want to add it to your portfolio--but do your own due diligence first! This is a huge conglomerate with multi-national operations; copper and uranium are only part of it's holdings which means that if any of its other sectors underperform, the stock price will reflect that. In short, BHP is more than just a uranium play. For further info, check out the company's website:

Tomorrow I'll spill the beans on the other four stocks. Stay tuned!

[As a disclaimer, I do not have any affiliation with the investment newsletter firm mentioned above. It puts out a decent newsletter but I don't know anything about its investment advice services nor can I vouch for its track-record.]

Posted by Dr. Kris at 12:52pm PST

Wednesday, February 20, 2008

A Brief Update

Dimitri and I are feverishly working to wrap up our current backtesting of garbage stocks, so today's blog will be short and sweet. I was looking at the royalty trust stocks I mentioned yesterday and all but one is trading in the green. My favorite, Permian Basin (PBT) is today's winner, up 2%, followed by San Juan Basin (SJT), up 1.25%. In the interest of full disclosure, I bought PBT today for one of my managed portfolios.

The dog of the group, Williams Coal (WTU) is trying to break out of its trading range. A break above $10.60 that would be a buy signal.

Energy, metals, and mining stocks continue to be the market juggernauts although some of the mining stocks look like they might be set to take a breather. Because oil has broken through the magic hundred bucks a barrel mark, the oil drillers have been on fire. Those reaching new highs today are COG,KWK,REXX,and RRC. They all look technically compelling, but if I had to pick one, it would be Rex Energy (REXX). Not only is it the cheapest ($14.50) it has also suffered less in the way of draw-downs as the others. (I was going to say that it had the cleanest looking chart, but you probably wouldn't have known what I was talking about.)

That's about it. I'll do a "real" blog tomorrow.

Now back to the drawing board...

Posted by Dr. Kris at 1:18pm PST

Tuesday, February 19, 2008

The “Royal” Treatment--Income Trusts

Dimitri got our new backtesting software up and running--finally! I was hoping to include the results of our “dumpster diving” (we've been looking at pink sheet garbage) in today's blog but although the software is a boon, it isn't nearly as fast as we had hoped. I'm not going to make promises anymore as to when I'll have results but hopefully it will be in the next few days. (Keeping my fingers crossed.)

So today I won't be talking trash to you. Instead, we'll be looking towards the other end of the spectrum at income producing stocks. In particular, royalty trusts.

What is a royalty income trust? A royalty income trust is a passive entity, meaning that it doesn't produce anything itself. It operates by buying the rights to royalties on the production and sales of a natural-resource company (mostly oil and gas, but some also hold coal and mineral rights, too) and it passes on the profits to the holders of the trust. The reason they exist at all is because they offer more attractive financing to companies wishing to sell their cash-flow producing assets as compared with more conventional financing methods. Companies may need additional financing to help fund new oil exploration or for other capital improvements. Some trusts may be privately held, but others trade just like stocks (most are listed on the NYSE). Royalty trusts are similar in nature to real-estate investment trusts (REITs) and unit investment trusts (UITs), FYI.

So why should you like them? There are several good reasons. The first and foremost one is that their payout ratio is high compared with stocks and bonds. Annual yields on the trusts I'll be showing you are currently averaging 6-15%. What's not to like about that? Because of these high yields, royalty trusts make a great addition to any tax-sheltered account. They can also be used to generate income--most of them pay a monthly dividend although a few of them pay out quarterly. Unless you're already heavily weighted in energy stocks, royalty trusts also lend a bit of portfolio diversity. Since the profits of the trust are related to the current price of oil and gas, their stocks having been doing very well lately (for the most part).

Now that I have you salivating, let's talk turkey. Here's a table of some royalty trusts that I've unearthed, listed in order of dividend yield. (Note: The dividend yield is calculated by dividing the annual dividend rate (the amount of money you receive per trust unit you own in a year) divided by the current price multiplied by 100.) I'll tell you which trusts I like the most in a minute.

I can't get the table to format properly (GRRRR!!!!!), so here's what you're looking at: Stock Symbol, Current Price, Annual Dividend($), Dividend Yield(%), 5-yr Dividend Growth(%), 5-yr Div. Yield Growth(%), Pay-Out (Monthly/Quarterly)

LRT* 2.16 0.71 33.0 -31.2 8.1 M
BPT 84.28 12.18 14.4 25.4 10.0 M
SBR 48.41 5.78 12.0 8.2 8.4 M
PBT 18.40 2.21 12.0 10.7 8.1 M
CRT 47.70 5.52 11.7 12.4 7.3 M
NRT 32.80 3.04 9.3 9.0 7.9 Q
MTR 69.24 5.66 8.2 -1.6 8.1 M
WTU 9.60 0.72 7.5 -11.7 9.8 Q
SJT 38.20 2.67 7.0 11.1 8.0 M
HGT 26.93 1.83 6.7 N/A 7.2 M
TRU 10.26 0.62 6.0 -15.0 13.5 Q

*LRT was making monthly payouts until last year. The last payout was in October and the one before that was in March. No new payouts will be made as the trust is currently being liquidated due to a substantial decrease in yearly revenues. This is one caveat of owning a trust as I hope you will note.

Now that you have this information, which stocks should you own? Should you just dive into the ones with the best dividend yields? The answer is no. Don't forget, these trusts trade like stocks and they act like stocks, too. Not only is dividend yield a factor but so is stock appreciation. My two top favorites in both departments are Permian Basin (PBT) and BP Prudhoe Bay (BPT). PBT is making a new high today and BPT is nearing a new high. Both stocks have been consistently moving higher for 8-10 years. I also like Cross Timbers (CRT) and Sabine (SBR), although they both have been range-bound for a couple of years. If there's one dog of the group, it would be Williams Coal (WTU) which has lost more than half of its value since 2006. Its price decline is reflected by the negative dividend growth rate.

You wanna see just how profitable these trusts have been? As an example, if you had bought BPT five years ago in January 2005, you would have paid about $15/share. Since then, the stock has risen 69 points and amassed more than $34/share in dividends. That gives it a 5-year rate of return of 687%, or an average annual rate of 137%! Not too shabby, eh?

There are a few caveats to note: 1. The price of oil could drop substantially, and 2. The oil wells that pay the royalties could dry up, like in the case of LRT. If you do elect to own some of these trusts, you must watch them periodically. If their share prices and/or dividend rates begin to decline, that's when you might want to put your nest eggs into a different basket. But until then, sit back and watch the royalties roll in.

Posted by Dr. Kris at 1:36pm PST

Friday, February 15, 2008

Buffett Buffet

I'm in the midst of doing some backtesting on the garbage stocks that I mentioned in my January 29th blog. I wanted to get these results out sooner, but Dimitri ordered the wrong software (I blame everything on him) and we just got the new software installed last night. I'm hoping to get some results out to you either later day or tomorrow. But just so you don't suffer any withdrawal symptoms, I've taken a few moments off for a mini market update.

Today it was reported that the Oracle of Omaha is snacking on Kraft Foods. A recent SEC filing shows that Mr. Buffett has already gobbled up 8.6% of the company. Consumer non-cyclicals (Kraft's sector) have been on diet recently but today's report caused them all to jump 5-6%. Looks like this sector might be turning around. Besides Kraft (KFT), today's notables are Smuckers (SJM), Heinz (HNZ), and Hormel (HRL). Even Campbells (CPB) is looking mm-mm good. It's currently leading the pack percentage-wise. Although these aren't the sexiest stocks on the dinner table, they do pay rather tasty dividends in the range of 2-4%.

Metals and mining stocks are taking a breather from their recent run-ups. Tech is getting trimmed yet again with the semiconductor and software industries suffering the most. These stocks have been going down the toilet for a while, and the charts don't show any signs of a turnaround. Look at Cisco (CSCO) and Cray (CRAY) and you'll see what I mean. One of the few bright spots in the sector is Brocade (BRCD) which yesterday reported earnings and guidance in-line with estimates. Analysts deemed it a smashing achievement considering this unsavory economic climate. The stock is up over 12% on the day on heavy volume, handily breaking its $7 resistance level. You might want to check it out.

In other stocks, Cortex Pharmaceuticals (COR), Gastar Exploration (GST), Cell Genesys (CEGE) and Superior Essex (SPSX) all broke out of their bases today, but only COR and CEGE are trading on heavier than normal volumes. CEGE rose 42% due to a positive clinical trial report on one of their prostate cancer vaccines. If you want to jump on the Cell Genesys bandwagon, I'd wait a few days for the buying frenzy to settle down. This stock has been on a steady decline since its all-time high of nearly $62 in 2000. Yesterday it was trading below $2, so I wouldn't say it's back on the road to recovery just yet. Maybe when it breaks its 200dma at $3 it will be more appetizing...

Okay. Dimitri's throwing me some anxious looks. Better get back to the drawing board before he starts mumbling epithets in Russian under his breath. But first, some lunch. All this talk about food has made me hungry!

Posted by Dr. Kris at 12:37pm PST

Thursday, February 14, 2008

A Valentine's Day Card

Today's missive is a departure from my usual blog. I was trying yesterday to come up with something special for Valentine's Day. I thought about reviewing stocks that would be appropriate to the message such as flowers, candy, and restaurants, but it just wasn't working. So, I've decided to tell you a true story on the theme of “does money equal happiness?”

It was about a year ago when I met Mark. He was seeking investment advice and asked for my counseling. We had spoken a few times on the phone but never face to face. We agreed to meet at a restaurant to discuss his financial needs. I asked him what he looked like so I could identify him and he said not to worry; he'd be the only one walking with a cane.

I arrived first at the restaurant which was the nicest place I could think of that was equidistant from both of us. Sitting at a table, I was approached by an attractive man in his mid-40s walking with a cane. It was Mark, and he didn't look very happy. He said that he was caught in traffic and that he hoped the valets would accord his brand new $150,000 Mercedes with the respect and care he felt it deserved. He took in the surroundings with a look of disdain and asked me if this was the only place I could come up with? Needless to say, the evening wasn't off to a strong start.

We got to talking and he told me his life story, including the reason for the cane. Years ago when the internet was still in its infancy, he started an online service in an area where there wasn't yet a presence. The company did so well that it was eventally bought out for many millions of dollars, most of which went into Mark's pocket. Hurrah for him! I love a good rags-to-riches story. So, with the proceeds, he bought a big house in an exclusive area, purchased a couple of fancy foreign cars, traveled, partied, and basically did what most people usually do who suddenly find themselves with more money than they know what to do with. Not only did his bank account explode but, from what I was able to infer, so did his ego, and I don't think he had a small one to begin with.

Well, one day he was on the beach playing volleyball when, going up for a slam, he was accidentally hit from behind by another big guy. He crashed to the ground and literally broke his neck. The entire left side of his body was paralyzed. It was a miracle he didn't die but instead of being grateful, he was angry, and bitterness started to grow within him like a malignant cancer.

The life that he knew was suddenly gone and he wanted it back, dammit! He still had a ton of dough and used some of it to fund stem-cell research for the sole motive of curing himself. I applauded his action saying that if the research worked, it had the potential of possibly curing many other people with similar conditions. He snapped back saying that he didn't care about other people--he was only interested in curing himself. I was stunned. Here was God sending him a message: Learn from your selfish ways and do something to help others. But the lesson was lost on him. His heart was closed.

A few months later he called me from his brokers' office saying that although his portfolio was doing very well, he still wasn't making enough money--can you believe it?! He called again a month later to tell me that he put in a bid for an expensive new experimental car and that he had just moved into a larger, five-bedroom house. (I don't know what one person needs with a five-bedroom house.) He's still pouring money into his stem-cell research and is upset that they haven't as yet found a cure for his paralysis, more angry and bitter than ever.

Thankfully for me, we finally parted company, but not in a good way. Apparently I wasn't giving him the ego strokes he felt he deserved and he told me never to contact him again, not that I had ever initiated contact with him in the first place. His egotism and bitterness were a drain on my energy, and I was glad to have him out of my life.

Mark reminds me of the king in The Little Prince whose petty need for power and domination drove everyone away and is ultimately left to rule over a kingdom of one. Alone and friendless.

The message for this Valentine's Day is a simple one: It's not the amount of money you have in the bank, but the love you have in your heart that truly counts. Or as Suze Orman so succinctly puts it, “People first, then money.” I truly hope that Mark will wake-up and open his heart so that God won't have to send him another, more terrible message.

Happy Valentine's Day!

Posted by Dr. Kris at 11:25am PST

Wednesday, February 13, 2008

Girls Just Wanna Shop

In lieu of my recent blogs which have been technical and rather dreary, I thought I'd take a break and go shopping. Instead of hitting the mall, I thought we'd stay at home and do some online shopping. Not for clothes and shoes (a girl's second best friend), but for retail stocks.

Picking up a copy of Stocks, Futures, & Options magazine that Dimitri left lying around, I found an interesting interview of a woman named Dana Telsey who heads up her own firm specializing in retail analysis (you go girl!). Because of her work in the retail sector, she's invited to all of the runway shows and gets personalized tours of stores. If you're a girl who loves stocks and loves to shop, how great is that job?

Anyway, she offered some interesting insights into the retail sector. Did you know that consumers represent about two-thirds of the U.S. gross domestic product? I sure didn't. As for her opinions on what is hot in the retail sector, she said that J. Crew (JCG), Abercrombie & Fitch (ANF), and Tiffany (TIF) are the leaders because of tourism. Since these retailers have a very small presence overseas, tourists are coming to our shores with empty suitcases and raiding the American stores. In addition, she likes the Canadian yoga apparel company Lululemon (LULU) which was also touted by Jim Cramer a few months ago. (The stock is making a comeback but it's not a compelling buy right now, at least in my opinion.)

The retail sector has been hit particularly hard in recent months. Are we nearing a bottom? Ms. Telsey isn't sure, but thinks a rebound in the first half of this year is quite possible. Her prediction is based on past performance. According to her analysis, there have been 11 cycles going back to 1980. On average, retail stocks hit bottom when they trade about 26% off their 52 week highs. At the end of 2007, they were even lower than that with many stocks trading southward of 40%. (Tiffany was one of them). Her prediction may be correct. The charts of three retail ETFs (RTH, PMR, XRT) appear to have put in significant bottoms on January 22nd.

Assuming Ms. Telsey's crystal ball is accurate, what stocks are looking good today? Well, pretty much all of them are showing real signs of life--yippee! But after perusing the charts of hundreds of retail stocks, there is one that stands out in particular--Urban Outfitters (URBN). This stock put in a new 52 high yesterday and it's nearing its all-time high. In fact, this stock has been in a consistent uptrend since August, although it too succumbed briefly to the January blues. Ms. Telsey has a reason for liking it. She says that women today all want to look 30 years old. “If you're 20, you want to be 30, and if you are 40 or 50, you think you are 30.” (Hey, I've been 29 for years.) In short, today's active woman has a lifestyle very different from her mother's; in other words, Talbot's is out and Urban Outfitters is in. (She says that J. Crew is another retailer trying to capture this transgenerational market.)

Selected on a purely technical basis, here are some of my picks in the retail sector.

Stocks nearing their all-time or 52 week highs:
Urban Outfitters(URBN)
Buckle (BKE)
Aeropostale (ARO)
Wal-Mart (WMT)
Gymboree (GYMB)

Stocks breaking out from a base:
Charlotte Russe (CHIC) - also just broke its 200dma (200 day moving average)
Carter (CRI) - also just broke its 200dma
Hot Topic (HOTT) - recently broke its 50dma

Stocks on the verge of breaking out (put these on a watchlist):
Bebe (BEBE)
Jones Apparel (JNY)
The Gap (GPS) - *See note below
Retail Ventures (RVI) - (they own Filene's basement)
Tween Brands (TWB)
J.C. Penney (JCP)

Channeling Stocks (see Recipe #3):
Abercrombie & Fitch (ANF)
Dillard's (DDS)
Wal-Mart (WMT) - in an upwards channel
Alloy (ALOY)

* Ms. Telsy said that the prospects at the Gap are improving, citing targeted marketing, cleaner inventories, and better quality.

Well, I hope I've whetted your appetite in regards to retail. So dust off your credit cards, put on your walking shoes, do your due diligence, and let's go shopping!

Posted by Dr. Kris at 12:26pm PST

Monday, February 11, 2008

Portfolio Insurance--Is it just for wimps?

Several months ago a friend of mine asked me to take a look at his portfolio. The effects of the credit crunch were just beginning to be felt and he was concerned. His stocks were beginning to decline along with the market and he wasn't sure what to do. He wanted my opinion.

His portfolio consisted of seven high-cap stocks that had experienced terrific growth over the past year. Five were in the basic materials sector (all mining stocks), two were energy companies, and one was a tech (Apple). Besides the fact that his portfolio was highly undiversived, I told him that the major market indices were breaking major support levels and he should consider lightening up as well as rebalancing his positions. He wouldn't hear of it. He did his due diligence and felt that all of his selections were great companies with solid management teams and tremendous growth potentials, and that he was in them for the long haul. Fine. I said that if that's the case, he should at least take out some portfolio insurance. He snarled back saying that insurance is for wimps and besides, it cuts into one's profits. I pushed his portfolio back to him, smiled sweetly, and said that I couldn't help him since he obviously knows what he's doing and doesn't need my advice. (Actually, I think he only wanted to show me his portfolio just so I'd be impressed with his profits. He might just as well have pulled out a big wad of money. Ugh. Like that ever works.) I haven't heard from him since which is fine and dandy by me.

Glancing at his stocks today, the total value of his portfolio is down 25% from the October highs when I spoke with him. (I'm assuming that his portfolio is equally weighted, but I don't know that for a fact.) Not that I care anymore, but how could he have cut his losses without sacrificing his positions?

The answer is he should have purchased some insurance when he had the chance.

There's an entire field of investment theory devoted to the concept of portfolio insurance. Many a career has been built on it and a lot of it involves complex mathematical equations. But for the average investor who wants to minimize risk, a certain of amount of insurance makes sense and it's not that tough to comprehend nor to execute. The three most popular strategies for the individual investor are index puts, married puts, and collars. (Note: Fund managers also use index futures to hedge their positions but I feel that this is outside the scope of most non-institutional investors.) Each strategy deserves a discussion on its own, and I'll be addressing each one in upcoming blogs. Stay tuned!

(I can hear you groaning right now, but I feel it's my fiduciary responsibility to at least introduce you to these concepts. Insurance is never a sexy subject. Just be glad I'm not talking about taxes!)

Notes on Today's Market Action: Well, my friend might be feeling a little better today since the energy and basic materials sectors are up so far. The chart of the XLB, the materials Spider (an ETF), has been in a classic down trend since November making lower highs and lower lows. It may have put in a bottom on Jan. 22, but I don't think an upward trend can be confirmed until it surpasses its $42 resistance level. The energy sector Spider (XLE) has fared better in recent months, probably due to the high price of oil. Lately the price hasn't been able to break 71 1/2 (why is this trading in fractions???), and needs to break 74 1/4 before I'd pay attention to it.

Tech is the big winner today. The semis (SMH) and the internet architecture (IAH) ETFs look like they might be putting in a double bottom. Only time, as they say, will tell. Actually, none of the sector ETFs that I track are looking very attractive. Even the emerging market funds that were galloping upwards at break-neck speeds earlier in the year are looking wan. I still maintain that until the US economy shows signs of firming up, the safest place to be is in cash.

Posted by Dr. Kris at 12:25pm PST

Thursday, February 7, 2008

Finding Diamonds in the Rough

How does one go about finding stocks that have future potential for increased sales and earnings? You can read the usual financial journals and newspapers and watch CNBC and Bloomberg for tips on what Wall Street thinks is hot, or you can take a contrarian approach and buy stocks that may not have yet garnered the interest of analysts and before the stock has appreciated in price. So how to you find these undiscovered gems?

One approach is to buy a company that has a great new product. For example, years ago I read an interview with one of Oprah's friends (it might have been her best friend Gayle) who waltzed in to Oprah's office showing off a pair of snazzy new running shoes made by an innovative newcomer into the athletic footwear business called Reebok. She raved about how much she liked them. According to Gayle, “Oprah was so impressed that not only did she buy a pair of shoes, she also bought the stock.” And, as they say, the rest his history. Oprah is not only the queen of talk, she's an astute businesswoman as well.

Jim Cramer, on his show Mad Money, expanded on the “buy what you know and like” idea. He says that if you love a new product and see it flying off the shelves, that's a signal to buy the stock. Jim is a contrarian when it comes to reading financial news. He claims that the best ideas out there aren't in the financial section of the newspaper, but in the others such as the Arts & Entertainment and the Style sections where if you read a headline that goes something like “Ugly Plastic Shoes a Hit with Macy's Customers” you might want to check into it further. (You know I'm talking about Crocs.)

Once you unearth a new company with an exciting product, what do you do next? Let's look at a company I found yesterday while reading the National Enquirer. No, I don't buy it but Fifi does. She especially likes the issues that feature photos of celebrity cellulite and plastic surgery gone wrong. But I digress...

While flipping through it eschewing the endless melodrama surrounding Brittany Spears and her family (clearly her parents don't know how to discipline their children), I happened upon a blurb in the health section touting “an amazing libido-boosting drug for women” called LibiGel which is a testosterone based cream that's applied to the arm. Apparently, Phase II clinical trials have been extremely positive and the drug is now undergoing two Phase III trials to determine safety and efficacy. The product is just one of many hormone-based drugs under development by a small pharmaceutical company called BioSante (NASDAQ: BPAX) LibiGel is expected to be up for FDA approval and launch by the end of 2010 or early 2011.

Researching BioSante this morning, I found many things to like. This isn't a one-trick pony company where the success of it's sole product could make or break it; it has many other products to offset a loss. (See my anecdote at the bottom.) Looking at the balance sheet, earnings have been rising over the past several years, it has an attractive profit margin and return-on-equity (21.7% and 15.3% respectively), and it holds no debt. More importantly, company insiders have been gobbling up the stock buying over 100,000 shares since December. The fact that Wall Street hasn't glommed onto yet is reflected by the fact that less than 8% of the stock is owned by institutions, most notably Dimensional Fund Advisors who own about 2% of the outstanding shares divided among a half dozen of their small-cap funds. The people who run Dimensional's funds are no dumb cookies--I pay attention to stocks they own. Calpers and Vanguard also have signficant holdings.

Technically, the stock has been trading in the $3.50 to $4 range. (Actually, the chart is a pretty good example of a channeling stock.) It bounced off of its $3.50 resistance level yesterday and is up over 2% today. Okay, say you like the stock and you think that the product will be a smashing success. The $64,000 question is: When should I buy it? For that, I don't really have a definitive answer. You could buy it today at a relatively low price (historically speaking) expecting that perhaps nothing will happen for a year or two. You could buy it when it breaks above its $4 resistance. Or you could wait until the Phase III trials are completed next year and buy if the results are positive. If my crystal ball wasn't on the blink I could give you a better answer. One reason to buy it earlier rather than later is the success of the Phase II trials could possibly entice a larger company to either invest a significant amount of money into the company or just take it over outright. That would be a slam-dunk!

I hope this example has opened your eyes to other sources of stock inspiration. Next time you're stuck in the check-out line at the grocery store, pick up a tabloid and skim through it. If you don't get waylaid by the cellulite photos, you just might find a golden nugget in the slag.

Valuable Anecdote: Last year a friend of mine was really excited about a company called Northfield Labs (NFLD) and urged me to buy it. The company had developed a red-blood cell substitute for use in trauma cases involving significant blood loss called PolyHeme, but as it turned out, PolyHeme was the company's ONLY product. I pointed that fact out to him but he wouldn't listen, claiming that the product was great! blah blah blah and there's no way the stock won't triple. “Maybe if you're nice to me I'll let you ride on my yacht when I buy it from the proceeds,” he gloated.

I didn't buy the stock. As I said, I'm very cautious about one-trick pony companies. Well, he did have his comeuppance because last December Northfield announced the results of their Phase III clinical trials which showed that the use of PolyHeme significantly increased the number of deaths as compared to the control group. On the day of the announcement the stock opened at $14.33. The day following the announcement the stock opened at $5.81. Oops. Northfield is currently trading around $1. Guess my friend will have to settle for a rubber ducky, but it really is my loss--I was looking forward to taking a long cruise on a big boat.

Posted by Dr. Kris at 1:10pm PST

Monday, February 4, 2008

Pump 'n' Dump--If You Really Wanna Know How Wall Street Works

I'm at half-time watching the Super Bowl. Dimitri was conscripted to do some back-testing, but is nowhere to be found. Fifi is out somewhere with her current beau, probably chiding him that he knows nothing of fine cuisine. (Her paramours don't seem to last long.) So, I'm left to my own devices, looking at charts. Like Tom Petty, who is singing at the moment, I'm “Free..Free Falling.”

Right now I'm looking at charts of penny stocks. Looking at how they are bid up and down. I know that in penny stocks there's a lot of manipulation, not only on the part of market makers trying to drum up interest in the stock, but also with traders looking to make a quick kill. It doesn't take a lot of capital to move penny stocks. But with the gazillions of bucks behind major brokerage firms, I'm sure they're doing the same thing, only with on a bigger scale. Being a chartist, I see that reflected everyday in the price movement, and if these price manipulations were illegal, even if the SEC had all of the attorneys in the world, it still couldn't prosecute everyone. Even if they could, we'd have to build a prison the size of Montana to house all the offenders.

I remember the Enron scandal and the oil futures going crazy. The Los Angeles Times did an article on “The Bunny Slipper Lady,” the woman who worked out of her Long Beach condo (presumably in her bunny slippers hence her name) who was part of the Enron scandal. She was a skilled futures trader employed by Enron and others to make money for them. What she did wasn't ethical, but it wasn't illegal, either. The funny thing is that what she was accused of is done on Wall Street all the time. Her only error was that her clients finally got caught and went down in a spectacular flame of publicity.

The LA Times journalists had as much of a hard time understanding her manipulation of the futures markets as did the courts. I don't know what they couldn't grasp--her technique was pretty simple: buy low, sell high. On Wall Street, her fantastic profits would have granted her a partnership, a corner office, and, possibly, a cool house in the Hamptons. She was calculating, informed, experienced and manipulative--all cornerstones for success in the investment world.

What she had at her disposal was a lot of money. What she did was wake up in the morning (presumably in her bunny slippers--ha ha! LA Times!), watch the oil futures market, and, at the right times, start buying in dribs and drabs. Eventually someone on the sparsely populated futures floor (we'll call him Mr. Market) would scratch his head and think, “Hey, there's some interest here. I don't know what, but something must be going on. I'll be smart and buy now before the price goes higher.”

He buys more and Ms. Bunny Slippers buys more. The movement attracts the attention of other Mr. Markets and they jump on the bandwagon. Because of the escalating buying pressure, the price starts going up. Thus, the futures are bid up to an unreasonable price for no apparent reason other than people are buying.

That's when Ms, Bunny sits back, kicks off her slippers, runs her fingers through her hair, and says, “I am woman, hear me roar!” She starts selling her positions for a tidy profit as the oil market starts to tank. If she performed her act well enough, she made a ton more on the way down than on the way up. Buy low, sell high.

Ms. Bunny Slippers did this for a good while. And nobody caught on to it. As the Enron scandal devolved, her actions finally came to light but she wasn't convicted of anything because technically she didn't do anything wrong. What she did was unethical, but it wasn't ruled to be illegal. This type of thing is what Wall Street is made of. Buy anything saleable (whatever is mispriced and/or hot at the time), artificially run it up, then, on the basis of this fantastic run, sell this over-priced dog to your clients and pocket the profit. I'm wondering how many unsuspecting victims have been snookered into buying into their brokers' recommendations at, or near, a stock's high only to see their investment subsequently lose value? In his famous and hilarious book Liar's Poker on bond-trading at Salomon Brothers during the late 70s and 80s, Michael Lewis says that this type of stuff was done with regularity by the firm's bond traders.

The moral of this musing isn't anything more profound than caveat emptor: Let the buyer beware! The point of my relating this story is so that you, the individual investor, can be armed with this knowledge before you act on any investment advice. Knowledge is, indeed, power.

Super Bowl update: Congrats to the Giants. Who knew the game would be this exciting? After you read this, I hope you'll be more circumspect. As Tom Brady is now saying during the post-game interview, “You need to have the ball in your hands.”

I hope I've tossed the market ball into your hands. At least, you'll have a heads-up, and not be free-falling like Tom Petty.

Posted by Dr. Kris at 11:53am PST

Friday, February 1, 2008

Do You Yahoo?

Unless you've just crawled out of a cave, you know that Microsoft has today made another bid for Yahoo. The proposed deal is worth $44.6 billion which translates into $31 a share for Yahoo. Wall Street analysts hailed the move, but the merger is fraught with anti-trust issues both here and overseas. In other words, it's not a done deal. However, if you think that it's likely to happen, then you might want to pounce on writing a covered call on Yahoo.

As I write this at 10:30am PST, Yahoo is trading around $28 and still climbing. Writing an April 30 call that is currently being bid in the $1.50 - $1.60 range would yield an assigned return of around 12% and an unassigned return of over 5% if the stock doesn't move between now and expiration. I generally only write calls one to two months out max, but in this case, choosing the April call is the right move given that the merger is probably months away. The worst case scenario is that the regulatory hurdles prove too much and the deal falls through. Yahoo shares take a nasty tumble, and you're left with a loss, but at least not as large a one as if you just owned the shares. The covered call provides some downside insurance. The break-even point is the price you paid for the stock less the price of the call.

As I keep mentioning, if you've never traded options, please do not attempt this or any options strategy.


Posted by Dr. Kris at 10:52am PST