|Written by Rob Goldman|
After the wild and wooly week, we thought we should get back to basics. We had microcap madness in the form of big selling last week but we expect them to roar back with a vengeance this week.
Seven Tips for September
Whether it is concern over Syria, the economy, monetary policy, the stock market is clearly sending us a message that the road ahead is full of potholes, bumps, peaks, and valleys. In today’s edition, we highlight lagging and leading indicators and attempt to make heads or tails of them for this week.
Last week, microcaps began the trading session with very low volumes and little relative strength. By week’s end, stocks were sold off indiscriminately.
As fear that the U.S. may enter yet another conflict in the Middle East, the most vulnerable stocks, i.e., the ones that carried the most risk and had great year-to-date returns, were sold off or shorted. In times of uncertainty, unusual volatility can wreck small cap and microcap stocks for short spells. Now that the geopolitical threat of another war is not imminent (though we appear to be impotent), look for gains this week.
Sometimes lagging indicators tend to be more constructive and destructive than leading indicators.
We, along with other firms are sometimes guilty of highlighting key information that can be viewed as a lagging indicator, such as money outflows. Interestingly, we hit upon this notion pretty early in the downward cycle and are a direct result of the uncertainty principles and perceived market and earnings risk we referred to above. In the absence of substantive leading indicators, lagging indicators should not be given the short shrift. Instead, investors should use them as a guide of what is happening now and how they affect stocks going forward.
We occasionally forget that stocks are bi-directional, not uni-directional.
When a stock performs well by continuing to rise or staying “up” in a narrow range we are lulled into a comfort zone that makes us believe a stock must continue to rise in value. Since stocks, like indices and markets, trade within ranges of valuations, investors must not panic when things go wrong. If fundamentals are the same or better, the courageous buy while the Nervous Nellies sell. Guess who wins in the long run?
The stock market indices are roaring but I do not see that in my stocks.
Stocks indices, like the pros that designed them and the investors that trade them, are fickle. Depending upon weighting of stocks in the best-performing industries and their money flows, some stocks will do extremely well and others will not. For example, if a narrow segment of tech is weighted heavily in the NASDAQ Composite, and that group is on fire, it does not necessarily translate to all or even related tech stocks. Thus, what appear to be broad market moves can be deceiving. We see this more and more. How to stay on the right side of this coin?
Follow the volume leaders and segment’s movers and ride the train.
The market moves less on fundamentals and more on knee jerk reactions.
With a teetering economy, potential conflicts abroad, questionable earnings, and the dreaded bond purchase tapering, the stocks market should not be as strong as it is today. It is trading at a slight premium to historical valuations. With nowhere else to put one’s money, if you can’t beat ‘em, join ‘em, if only for trades—-not for long term holdings. In fact, holdings beyond 6-9 months may not be wise, in most cases.
Two years ago stocks were buoyed by corporate buybacks. That seems to have dissipated. What should we use as a measure of future prospects for companies now that earnings uncertainty seems to be widespread?
Not only are stock buyback programs for the most part ending or are over for many companies, we have witnessed increases in insider selling in the past few weeks. That also added to some of the earlier down days of the stock market. In addition to the money flows and volume that we alluded to earlier, clusters of insider buys should be viewed as a major factor in buying one stock over another. In a perfect world, a stock that has multiple insiders executing meaningful purchases bodes well. For example, Regado Biosciences (NASDAQ—RGDO—$4.66) had several insiders buy a ton of stock 2 weeks ago and the stock is up 15%. And at the end of last week, Green Earth Technologies Inc. (NASDAQ—GETG—$0.14) executed transactions as well.
Embrace the buying opportunities on down days as well as up days.
Those investors that have taken profits or have sold stock will be back which bodes well for the market in general in the coming weeks. In the meantime, as we near year-end, avoid the big movers as they will not likely carry that over into next year. Seek out recent movers and shakers since they will not have the cap on them from potential sellers as is the case with the big movers.
Until next week...
Analyst: Robert Goldman
Rob Goldman founded Goldman Small Cap Research (GSCR) in 2009. Rob has over 20 years of investment and research experience as a senior research analyst and as a portfolio and mutual fund manager. During his tenure as a sell-side analyst, he was a senior member of Piper Jaffray's Technology team. Prior to joining Piper, Rob led Josephthal & Co.'s Emerging Growth Research Group. Rob has also served as Chief Investment Officer of two boutique investment management firms, where he managed Small Cap Growth and Balanced portfolios and The Blue and White Fund. As an investment manager, Rob's model portfolio was once ranked the 4th best small cap growth performer in the U.S. by Money Manager Review. In addition to his work at GSCR, Rob is the editor of The Stock Junction (www.TheStockJunction.com.)
I, Robert Goldman, hereby certify that the view expressed in this newsletter accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the recommendations or views expressed in this research publication.
This newsletter was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces research via two formats: Goldman Select Research, which typically highlights small cap and mid cap companies, and Goldman Opportunity Research, which includes micro cap companies. The Select product reflects the Firm’s internally generated stock ideas while the Opportunity product reflects sponsored research reports. It is important to note that while we may track performance separately, we utilize the same coverage criteria in determining coverage of all stocks in both research formats. Please view the company’s individual disclosures for each engagement, which can be found in each company-specific report. All information contained in this newsletter and in our reports were provided by the Companies or generated from our own due diligence. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence.
Goldman Small Cap Research is in not affiliated in any way with Goldman Sachs & Co.
The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, or other firms. Goldman Small Cap Research relied solely upon information provided by Companies through filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research report, note, or newsletter is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed. This report or newsletter does not take into account the investment objectives, financial situation, or particular needs of any particular person. This report or newsletter does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with the FINRA or with any state securities regulatory authority.
ALL INFORMATION IN THIS REPORT OR NEWSLETTER IS PROVIDED “AS IS” WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.
For more information, visit our Disclaimer: www.goldmanresearch.com.