|Written by Rob Goldman|
Some of you may be reading this while on vacation so I will cut right to the chase. In this week’s edition of The Goldman Guide, we have uncovered some simple benchmark numbers that have passed by all the talking heads and could be the key to why stocks could get a real bounce this week. This bounce may coincide with a similar rise in a well-known, yet low-priced NASDAQ stock that this year will sell over $150M worth of products that will shock you.
SIGNS ALIGN FOR MARKET BOUNCE?
As we approach the waning days of summer it is probably a good idea to address the status of the market with proper context and associated perspective. After all, we may get a nice bounce this week, building on last week’s performance.
On the surface, last week’s stock market performance, especially Friday’s late day bounce was way cool and unabashedly impressive. We had a feeling it would be a good one given history during this time of year but to go from up big to down big to basically flat following the Ukraine incident clearly relaxed a lot of investors. As good as it was, with the S&P 500 Index rising 1.2% for the period, it could have been better.
Volume for the week was one of the lowest we have seen in some time and was down about 18% from the week before. In fact, a number of stocks (including our 3 picks from last week’s Guide) peaked on Monday, despite the solid gains for the entire period. So despite index gains, too many stocks ended on a slightly sour note.
We have a real tug of war going on right now and the detractors have a couple of things going for them. Earnings season is essentially over, a lot of retail figures have been announced and it is prime vacation time, along with many parents engaged in preparations for the back to school season. That means low volume is likely ahead this week. Add in the skittishness regarding the political situations abroad (Ukraine and even civil unrest in nuclear-armed Pakistan now) along with the economic picture here and things aren’t looking so good.
Still, if I had to place a wager, I would say that stocks will end the week on a winning streak. Here is why.
It’s All in the Numbers
As odd as it may seem, the lower the stock volume, the better the chance that stocks could creep higher this week, since big sellers are likely absent. Given the factors above, I expect weaker volume this week as compared to previous periods, which meshes nicely with our theory.
Lost in all of the big stock market swings are two important figures that could trigger short term buying: the S&P 500 Index and Russell 2000 Index DMAs (daily moving averages.) As illustrated below, the S&P is just two points away from breaking through its 50-day moving average. It broke through on Friday and was poised to move higher until the Ukraine outbreak. Just a little buying could drive it higher for the short term.
It’s All in the Numbers II
The same goes for the Russell 2000 Index with the 200-day moving average. It broke through only to fall on the geopolitical concerns. Here is the thing. Small caps have sucked wind for some time, seeking a catalyst. Right now the index trades at 18.7x next year’s EPS. Its recent trough multiple (on August 4th) was 18.2x. If the index rises 4 points higher it breaks through the 200-day average, a bullish sign. Moreover, it will take just 14 points to break through the 50 DMA as well. This recent sell-off has been refreshing and good for small stocks as I have found more stocks to recommend after a review of 300 of the stocks in our universe than I have in months. I do not suspect that this rise will occur quickly and it may not be sustained, as we are negative on the market in general. But, it is very encouraging and could be used as a short term trading marker.
This Stock May Shock You
We wrote about Taser International (NASDAQ—TASR—$13.91) in the Market Monitor and in The 30-30 Report last year. The stock had a big move on Friday on massive volume after management commented that law enforcement agencies may procure its body camera products in greater numbers due to the unrest following the Ferguson, Missouri shooting and subsequent rioting and civil unrest.
For the uninitiated, TASER first transformed law enforcement with its electrical weapons, the TASER. TASER continues to define smarter policing with its growing suite of technology solutions, including AXON body-worn video cameras and EVIDENCE.com, a secure digital evidence management platform. More than128,750 lives and countless dollars have been saved with TASER's products and services. Sales are expected to be $154M this year and $176M next year with EPS jumping from $0.33 to $0.44 in 2015. If you are saying to yourself that the stock is not cheap, you are right.
It is a controversial company and stock and truth be told, this camera segment represents only 10-15% of sales currently. Still, it may get more play early this week and the stock does appear to be modestly attractive as a trade. It is above its $12.53 200-day moving average and about two points below the 50 DMA. Much like with our thesis on the Russell, TASR, whose 52-week high is $20.83, could move 15-20% higher where it would likely be fully valued in the near term, with just a little bit of continued buying.
I caution that if it breaks down below its 200 DMA, it could drop to $10, so be careful.
Separately, for those of you keeping score from last week, Cherokee Corp. (NASDAQ—CHKE), a great back to school play still looks like a beast. Check out the chart here: http://stockcharts.com/h-sc/ui.
Have a great week!
This newsletter was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces non-sponsored and sponsored (paid) investment research. Goldman Small Cap Research is not affiliated in any way with Goldman Sachs & Co.
The Firm’s non-sponsored research publications category, Select Research, reflects the Firm’s internally generated stock ideas, along with economic, industry and market outlooks. In virtually all cases, stocks mentioned in Select Research offerings are listed on the NYSE or the NASDAQ. Publications in this category include the weekly newsletter The Goldman Guide, daily Market Monitor blogs, Special Reports, and premium products such as The 30-30 Report.
Opportunity Research reports, updates and Microcap Hot Topics articles reflect sponsored (paid) research but can also include non-sponsored micro cap research ideas that typically carry greater risks than those stocks covered in Select Research category. It is important to note that while we may track performance separately, we utilize many of 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 company-specific Opportunity Research reports, updates and articles.
All information contained in this newsletter and in our reports were provided by the companies mentioned via news releases, filings, and their websites or generated from our own due diligence. Economic, market data and charts are provided by a variety of sources and are cited upon publication. Stock performance data is derived from Yahoo! Finance. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence.
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, other firms, or other financial news outlets. 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, update, article, blog, 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 newsletter does not take into account the investment objectives, financial situation, or particular needs of any particular person. This 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.