Follow up on a couple of ideas

In addition to BKI and ROC from last week, readers might want to take a look at Darling International symbol DAR.  DAR is in what most people would say is a pretty ugly business.  It operates in some segments that most of us don't want to think about.  Rendering, recycling, and recovery for the food services industry.  Rendering accounts for about 75% of the sales and recovery the rest.  The fundamentals of the stock look pretty good while the technical's look higher.  DAR has a market cap of about 1.7 billion, is trading at about $15.20 a share, does not pay a dividend, has grown revenue at about 14.3% per year over the last ten years and has averaged a net profit margin of almost 5.0% over this same time frame.  With a  beta of around 1.76 it is not for the faint of heart but, it could produce a decent return.  Buy the stock in this price range wait for an up-tick in the price and look to sell a June or July call contract against it.   Now here is a stock that has a great deal of upward price momentum  Ariad Pharmaceutical ticker ARIA.  This is a bio tech company that must have some good news in the pipeline.  First, some facts on ARIA.  They do not make money.  They do have what appears to be some good news on drug therapy for soft tissue cancers.  The stock has gone from the $6.00 per share range to the low 9's.  There are some  announcement's on these various therapies coming out in late June.  If current market action in this stock is any indication it looks like the news will be good.  Even with about 11% short interest of the daily float ARIA has managed to go up.  Here is a decent way to play the June FDA/Ariad announcement buy a June 10 for about .40c and sell the June 11.00 for about .15c.  As long as ARIA gets and stays above 10.25 you are in the money.

Correlation.... what's an investor to do?

"The only thing that goes up in a bear market is correlation".  Wiser words have never been spoken.     During this last market melt down, that was the result of the financial crisis, it was pretty darn hard to find any investment that was not headed south.  Traditional asset classes that in the past several years had performed quite differently, suddenly became married and turned downward.  The decline may have been at different rates, but they all went down.  Today, it looks like all asset classes are again correlated.  Only this time in the opposite direction.  If you look at the TLT (the 20+ year treasury index) you see a bit of the dreaded double top back in the late summer of last year.  Then that index started a downward trend, hit a low in February of 2011 (so far) and has started moving up in price.  (Don't forget if it is moving up in price then yields on similar treasuries are getting lower.)  While this drama has been  playing out in the debt markets the stock market has continued its climb upward, closing Friday at over 12,700.   This thing is getting pretty close to its pre-financial crisis levels and it is getting there without that much help from the financial services or bank stock sectors.  As the crisis was just getting started Citigroup was in the 50's,  Bank of America was in the high 40's, and there was even a Merrill Lynch.  Think for a second about Bank of America....the stock was in the high 40's before it acquired Merrill Lynch and now after the acquisition the price is in the low teens.  Can you imagine what that loan portfolio must really look like?   But, Merrill probably brought some crap to the table too (sold to them by Goldman no doubt).   Sorry for the rant.  My point, keep a sharp eye on the asset classes you are invested in.  Either the economy is slow enough that even the slightest upward movement in interest rates will put us back into recession.  Or, things are picking up enough that this upward trek in the stock market is the pre cursor to an economy that is set to take off.   Now if that is the case why are long treasury bonds yielding so little?   Maybe it is part two of the Greenspan years.  Keep those interest rates low no matter what.  After all it only hurts the saver, and in America there aren't that many of them.

A couple of small cap stocks worthy of attention

Today a client gave me a call and wanted to know why the mutual fund she just purchased  2 weeks ago is down about 2.5%.  I explained to her that the fund had a front end load of 3% and she should at least give the thing a chance to pay a dividend before she condemns it.  It seems that the 3 minute holding period, I mentioned the other day, has invaded the brain of the average investor.  

I posed the question..."Can an individual make money with the perspective of a long term hold?"


My answer is YES!  Here are a  couple of smaller cap stocks that I think are worthy of attention: 


1.  Buckeye Technologies  (BKI) 
BKI has a market capitalization of about 1.0 billion and trades on the NYSE.  The yearly price range of the stock has been between $9.32 and $28.50, it pays a very nominal dividend of .20c per share per year and has a forward PE of about 9.5.  Fundamentally the stock looks pretty strong as shown by year over year revenue growth of almost 14% and a net profit margin of 8%.  Debt makes up only about 28% of capitalization so interest funding is very solid.  Technically, the up momentum has slowed just a smidge these past few days (probably because the company is about to report first quarter earnings which are scheduled to show up on the 28th of April).  In the past 6 quarters BKI has beaten the street estimates 4 times and no doubt these positive earnings surprises have carried the stock up.  If BKI can hold, and move up a little, it will give you a great opportunity to sell calls against your position which will help on the total return front.  After the earnings announcement, I'll address the call strategy. 


2.  Rockwood Holdings (ROC) 
ROC is about a 3.5 billion dollar company that is also listed on the NYSE.  At $48.50 per share it is pretty close to its yearly high of just under $52.00.  The earnings momentum on ROC has been great as the company has beaten street estimates 10 of the last 12 quarters.  ROC is a decent size player in the lithium market (can you say batteries?) as well as other speciality chemicals.  Like BKI, ROC has a decent beta and with just a bit of an uptick will provide a great chance to sell calls against your position.


Disclaimer: The opinions provided herein are intended to inform. They come with no warranty of any kind. If you should choose to interpret this information as investment advice, you do so at your own risk.

Investor vs. Trader? Can the Average Joe make money in today's market?

How many financial planners or brokers out there talk to their clients about the need to take a long term perspective on the markets?  The investment professional researches a company's financial reports, reviews market trends and recommends a "buy".  The Average Joe makes an investment in the company based upon this information. 
There is a study I recently came across that deals with the NYSE's pending merger that follows the volume of trading in the exchange.  It appears that 70% of the daily volume of the NYSE is held for around 3 minutes.  A few years back the Big Board did 2.5-3.0 billion shares a day in volume.  Now the volume is about 1/3 of that level; and roughly 70% of this number is only held for 3 minutes.   No doubt the big hedge funds and high frequency traders are the main drivers of this phenomenon and are affecting the market place.  Are these high tech gamers affecting volume?  Yes.  Are they affecting value?  Probably.  Is that bad?  Not necessarily.  Value/stock price can be improved with attention.


I believe in they system.  I have to.  I'm a broker.  Does the US economy need to believe in the system...absolutely.

Can the Average Joe make money in the stock market if your philosphy is to be a long term investor?  I think you still can.  Check back tomorrow...I'll have some suggestions for you.

Bigger is not Better!

Since I began my career in the financial services industry the market has become bigger and bigger and so much more complex.   Like the markets, and some of those really opaque financial instruments they trade, Wall Street firms have responded.  How?  By getting bigger and more complex! 

Do you remember these firms?

A.G. Edwards?  Gone...swallowed up by a wolf in sheep's clothing who had already absorbed Wheat First, Everen (which used to be Prescott, Ball, and Turbin, and Blunt Ellis), First Albany and a slew of others.  If you go back in time you can also throw in Bache and Prudential.   Even Wachovia has been taken over by Wells Fargo.

Do you remember the great advertising slogans of the old big firms...

"Thank you Paine Webber"

"When EF Hutton talks, people listen"

"We make money the old fashion way..we earn it"

Even mother Merrill...owned by a bank??? 

All of them...gone!  

Top management of these new gargantuan firms justify their size with great buzz words like "it gives us the scale, the scope, and a much larger footprint to compete".   Sometimes I think that is just a cover for inept or poor management.   On the surface these guys all look unique but after you peel away the veneer you find there is not an ounce of difference between any of them.  Bigness just means sameness. 

Big equals contempt for customers and for employees as well.  For the monster to continue to grow it needs more food.  What has all of this size meant to the small investor?  "Sorry your account is not big enough; try our toll free number".

My perspective on Goldman Sachs

Every day, on my way to work, I see a hand made sign that reads "Deport Goldman Sachs".  Not really the type of message one might expect to find here in the Midwest but, I must say, at least someone is paying attention. 

It is hard to blame this entire mess of an economy on one company.  But I find it interesting that Bob Rubin, former Treasury Secretary under Bill Clinton; or Hank Paulson, former Treasury Secretary under W. Bush just happened to be from Goldman Sachs.  How about "Turbo Tax Timmy", our current Treasury Secretary, who as former president of the New York Federal Reserve Bank had a great deal of contact with the Goldman crew?  Hummm? 

Was the demise of Bear Stearns a payback for Bear refusing to help in the 1998 bailout of Long Term Capital Management?   Did the Goldman group hate Sandy Weil?  How come JP Morgan Chase and Jamie Dimon were able to miss most of the credit bubble? 

By the way, if you get the chance to read When Genius Fails it is the story of the collapse of Long Term Capital Management and it is just as timely today as it was then.  Hummm...Bear Sterns?

It appears to me there is some kind of an axis that runs from the hedge fund capital of the world, Greenwich CT, through New York City and on down to D.C.  The hedge guys need someone to trade with so they enlist the guys from New York to provide the funding and liquidity.  The NewYork guys then get some new rules and some help from the guys in D.C.  This concentration of power, influence and money can't be good for the American investor. 

A Perfect Hedge Market

While searching the market for a few ideas today an idea hit me like a lead balloon....

This market is almost a perfect hedge!

Take a look at TLT... it is an ETF for the 20+ year treasury index.  The strength of this stock does not surprise all that much because it moves up when the bad news hits; and in this market there is plenty of bad news.  Now, if I am not mistaken, out of all of the members of the S&P 500 that have reported earnings for the second quarter of 2010 65 to 70% have surpassed analyst's estimates.  (Outside of Mondays rally the S&P just kind of sits there.)  Now I know those earnings look good because of cost cutting and analyst's expectations that have been turned down; but still some of these companies look pretty good overall, i.e.low PE's, decent revenue growth, dividends. 

Now go to BigCharts.com and use the interactive chart option and punch in TLT and compare it to the S&P...you will see that they are mirror opposites of one another.  But if TLT is a reflection of what market participants are thinking then I say that a 3.70% yield for 20+ years of maturity is a "big ouch" if we ever get any hint of inflation or job recovery stats. 

(A little education:  Historically speaking the rate of return on long term treasuries has been around 150-200 bps above the rate of inflation. So if inflation ever rears its ugly head again the price of TLT will be going down.)
TLT and the bond market are saying: Obama wins which equals the Dems stay in.  The stock market is saying the opposite:  Come November things are going to look a whole lot different. 

Think about it.