On Tuesday, February 2nd, we will “celebrate” Groundhog Day. As the legend tells us, if the groundhog sees its shadow it means 6 more weeks of winter. If not, then spring comes early. We believe that this week is also a “Groundhog Day” of sorts for stocks, where we find out if the current stock market malaise continues or whether there is near term daylight ahead. (Hint: We are optimistic.)
Already investors should feel a little bit at ease given the better market returns of late as oil prices have stabilized and the Bank of Japan and even the European Central Bank have given us some cause for comfort.
Some market pundits believe the worst is yet to come and we agree that we do need more pain in order to really move ahead.  We may getting it via the amalgamation of events such as the current oil crisis, deflation in key markets, and the complete lack (as in zero) of IPOs thus far in 2016. Plus, the just-released news that South Korea imports hit a 7-year low with the most recent month dropping by a whopping 18.5% does not bode well.
In any event, if history is any guide, February could be a real good one for us. The S&P 500 Index has risen in February every year since 2010 and averaged a 3.45% monthly gain.

“Stocks’ Groundhog Day”

A similar return could be determined this week, much like the Groundhog’s forecast, given this week’s key economic calendar highlights such as personal spending, crude oil inventories, construction spending, auto sales, and factory orders. 

Throw in the expectation of favorable earnings for a ton of small cap, midcap and key large cap companies and this is an important week. In the first two days alone, the market will eagerly watch stocks like Alphabet (NASDAQ—GOOG), Aetna (NYSE—AET), Chipotle (NYSE—CMG), UPS (NYSE—UPS), and Yahoo! (NASDAQ—YHOO), among others.

In addition to the stocks listed above, this week we will be profiling key small cap names as before and after reporting this week as we believe that many bargains exist our there. We expect that in the near term, this group could enjoy the greatest bounce as compared with large cap and midcap companies—as long as they derive the bulk of their revenue from domestic sources.

Feeling Lucky?

It is difficult to ignore the impact the drop in oil has had on the markets as well.  Have we reached a bottom?  Everyone from T. Boone Pickens to Jed Clampett has an opinion on the matter.  One thing is certain, whether it is two weeks, two months, or two years, oil WILL rebound eventually.  Right now there are some bargain basement oil plays in the small cap space that would be ideal to add as a trade or investment, especially if you have not taken any loses in the space to date.

Going back to the relatively way back machine, we featured offshore driller Hercules Offshore, Inc. (NASDAQ - HERO - $0.98) in the Market Monitor in July of 2013 at $7.55.  The Company filed for bankruptcy last August, but reorganized and is still viable.  HEROQ is also trading at $0.06 on the OTC markets as part of the melee.  We cannot say that any of the standard metrics look decent, but this one might be worth watching for a while as a cheap oil play in the small cap space. 

On the services side we featured both Cypress Energy Partners, LP (NYSE – CELP - $9.08) and CSI Compressco, LP (NASDAQ – CCLP - $6.15) about a year ago.  Both had a great run for a few months going up a little over 50% in price on average, but have been clobbered since.  Stocks like these will probably be the last ones to benefit from any recovery so options at much lower strike prices than the current stock prices is a good idea. 

Finally, a new cheap pick that is primarily an exploration firm, but does offer services also is Parker Drilling, Company (PKD – NYSE - $1.37).  The stock was up around the $9.00 mark two years ago and has plummeted since.  The Company has over $100 million in cash on hand and $500 million in debt.  Not ideal figures, but not nearly as horrific as similar companies in the same space and market cap.  Additionally, the short float technical indicator is under 4%, which is fantastic considering how awful it has been for oil recently.  Look for PKD to double this year if oil prices move to the upside as an overall trend.

The Stock Market Today

AAII Sentiment Survey (figures rounded)

  Current Last Week Long Term Avg
Bullish 29% 22% 39%
Neutral 30% 30% 31%
Bearish 40% 49% 30%

It is no surprise that a jump at week-end made investors feel a little better, and aided in ending the month on a somewhat of a high note, all things considered. The Ticker Sense poll is also indicating a light rise in the Bullish category, but the majority of respondents are still Bearish, which is understandable.

Profiled Stocks Performance

How did our early 2016 picks do? The answer is mixed due mainly to two stinkers but we are overall pleased, given the disaster it could have been.  Of course it is a marathon and not a sprint.  Our big cap picks soundly beat the S&P 500 but the small cap picks were clearly worse than the Russell 2000.

FIT, IMMR, and MBLY may be lost causes but the others have great potential, especially ROVI and VCRA.

As for the big ass group, I confess I am surprised that CVX outperformed CAT. Still, DOD and VZ seem to offer the greatest potential at this time.

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