|Written by Rob Goldman|
Four out of five investors surveyed said that if you read The Goldman Guide each week, you will be smarter than your neighbors. And certainly better looking. Well, I don’t know about the smarter part…
3 MARKET SIGNALS CAUSING INSOMNIA
I am typically a glass half full kind of guy, but recent market signals and events are keeping me up at night.
Maybe it is the fact that it rained for 15 days straight recently. We have also had period of “sun-showers”, or as my father would call it, times when “the devil was beating his wife.” Not exactly a politically correct statement these days but being PC is pretty bullshit anyway.
Anyway, if I were you, I’d mentally and investmently (should be a word) prepare for more retracements. Here’s why we will be down before up:
Sentiment breadth sucks. As noted in Notable Numbers, the Ticker Sense poll (investment advisers) indicates 50% of respondents are bearish for the first time since the market trough of mid-February. This time, it does not follow a major sell-off; thus we believe it portends future selling.
Retail sales are great but they are not. Like the devil beating his wife, retail sales were up nicely for April but driven by internet sales, while bricks and mortar dropped. That means closings, layoffs, etc. ahead. Terrible weather also means apparel sales will still be rocky. We have been preaching this for months so use the high consumer confidence and retail figures as a kind of a false positive.
New crowdfunding means more risk. I love the new crowdfunding rules which now allow the Average Joe to invest in private deals. But, this means that risk opportunities are at their highest, which is sometimes a signal for a market top. (See our Say What? Section.)
The Stock Market Today
Although the big cap indices closed above their 200 day moving averages (DMA), they aren’t exactly screaming buys. And, for that matter, the NASDAQ Composite seems to be a screaming sell. I wonder how the DJIA and S&P 500 Index react to new, adjusted 200 DMAs later this week. Considering they reached their 52-week highs almost exactly a year ago, and these highs will drop incrementally from current levels, technicians will follow trends closely. If stocks remain weak, it could begin a path towards more positive sentiment territory, as the current RSI (Relative Strength Index) on all four indices is in the low-mid 40’s. A RSI score below 30 is usually considered an oversold condition.
Meanwhile, even when things are good they are bad. The unemployment rate for April remained steady at 5% but the labor participation rate declined. The University of Michigan Consumer Confidence Index rose sharply last month, which was a surprise. But, the consumer growth and rise in confidence was driven by low-income and young consumers. Not exactly what we are looking for as the ones leading the charge.
With most of the Q1 earnings season behind us, it will be interesting to see how stocks perform during this high volume conference and roadshow season, and if stock buybacks commence again. Anything could help because we are seeing bids run away from even small sell orders as market makers have reverted to their Chicken Little forms again. Be cautious but mindful that GARP stocks are the best plays in this environment.
Great info, insights, and hard-hitting stories make up this week’s Say What? feature...
The New York Times
The most important investment change in years.
The Wall Street Journal
Off the beaten path but way cool.
The New York Post
Uh-oh. Add in the leverage used by hedgies and this could escalate quickly.
What savvy investors always knew...Bet he won’t scream these numbers...
Not a new notion, but very thought-provoking.
Event: There is some talk (see the next page) that with redemptions coming into the hedge fund world, to the tune of tens of billions, if performance continues to suck eggs, as much as $500M could be redeemed.
Impact: There are often redemption restrictions (such as annual or semi-annual opportunities) so the big potential sales could be more Q4 than Q2 or Q3. What is disturbing is the leverage used by hedge funds. For every dollar in assets, 3-5x could be used for purchases. As holdings are unwound it could have a big negative effect on stocks. For me, that would be a 2017 issue.
Event: The price of oil is over $45 per barrel.
Impact: The market’s assumption was anything over $40 would put oil companies in danger of failing on semi-solid ground. Or, at the least, stem the bleeding. Not only could oil prices decline, but even at the $45 per barrel level, bankruptcies could still occur.
Event: Russia, China, and North Korea are all engaging in saber-rattling against the West, particularly the U.S.
Impact: Negligible, although anything related to trade between the U.S. and key partners seem to continue to have an external effect on stocks.
Event: Sell in May and Go Away seem to be a sound strategy as earnings and revenue guidance are not up to snuff.
Impact: GARP stocks, those with a history of meeting/exceeding expectations gain buyers as high growth high, value takes a back seat. The more stocks sell-off the more bottom-fishing becomes popular, albeit potentially dangerous.
AAII Sentiment Survey (figures rounded)
On December 31, 2015, the Neutral percentage for the AAII survey was 51% while the other two categories where roughly 25% each—the height of “I don’t know where stocks are headed.” Today’s 48% level is the highest since then, which is interesting. The current 20% Bullish percentage is good, but for a quick bounce, we really need these Neutrals to jump to say, 45% Bearish. Unfortunately, it seems that Neutrals at this 48% level can portend a brief, near term selling run.
We have seen time and time again that the Ticker Sense poll can be just ahead of the curve. Therefore, its 50% Bearish stance also signals more pain ahead.
Which Kind of Bottom-Fishing?
There are two kinds of bottom fishing and they are both fun. The one to the right is after you get a few drinks in you...the one we are highlighting here is after a bunch of bad stuff has happened and a stock appears oversold,
Last week, our bottom fish candidate was Perion Network Ltd. (NASDAQ – PERI—$1.39—NR) which had a nice run after the results release but since sold off a tad. This was expected and may be more of a 1-2 quarter play, but a goodie nonetheless.
Not to be confused with PERI is Perry Ellis (NASDAQ—PERY—$16.46—NR). I know...we just slammed retail, especially apparel. Don’t mock me just yet.
PERY designs, sources, markets, and licenses apparel products through its few dozen stores and major retailers around the world. We have written about PERY before, when it appeared that a hostile takeover was in the cards. That could still be the case because shareholders are totally fed up with management. Let me net it out for you. This valuable brand and other labels, distribution channels, etc. are projected to generated about $900M in sales in the current year ended January 2017, with EPS of $1.92 , and carries a low $250M market cap. PERY will release results on May 19th (along with a dozen other retail stocks) and Wall Street consensus calls for $0.94 versus $0.99.
Look, PERY is down 37% for the year, only 4% from its low, and I admit it looks terrible. Moreover, we would not be surprised, given the current environment, if management guides lower. My take is this. PERY has a RSI of 26, which indicates it is oversold. And, we predict PERY’s EPS for Q1 will be light, guidance to drop by 10%, and the stock to reach a trough of about 10-15% below its current price to $14-$15. But, with activist investors pissed, and the oversold/written off nature of this stock, we see a 25% or so move on a bounce from the low, over a 30-90 day period. So, consider playing it for a bounce, following the drop.
1498 Reisterstown Road, Suite 286 Baltimore Maryland 21208 Phone: 410.609.7100
Launched in May 2010, The Goldman Guide is a free weekly publication of Goldman Small Cap Research and is written by Founder Rob Goldman with contributions from the GSCR contributor team. This non-sponsored investment newsletter seeks to provide investors with market, economic, political and equity-specific insights via an action-oriented, straight to the point approach. No companies mentioned in this newsletter are current sponsored research clients of the Company or its parent, unless noted, With some exceptions, all companies or investment ideas mentioned in this publication are publicly traded stocks listed either on the NYSE or the NASDAQ. Goldman Small Cap Research members and contributors’ bios, certifications, and experience can be found on our website: www.goldmanresearch.com
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, Market Monitor blogs, Special Reports, and premium products such as The 30-30 Report. Goldman Small Cap Research analysts are neither long nor short stocks mentioned in this newsletter.
Opportunity Research reports, updates and Microcap Hot Topics articles reflect sponsored (paid) research but can also include non-sponsored microcap 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.
Goldman Small Cap Research has not been compensated for any content in this issue.
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 and information are derived from Yahoo! Finance and other websites or sources, as noted. 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. Statements herein may contain forward-looking statements and are subject to significant risks and uncertainties affecting results.
Separate from the factual content of our articles about the company featured in this newsletter, we may from time to time include our own opinions about the companies profiled herein, their businesses, markets and opportunities. Any opinions we may offer about the companies are solely our own, and are made in reliance upon our rights under the First Amendment to the U.S. Constitution, and are provided solely for the general opinionated discussion of our readers. Our opinions should not be considered to be complete, precise, accurate, or current investment advice. Such information and the opinions expressed are subject to change without notice.
ALL INFORMATION IN THIS REPORT 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.