Trading Secrets Revealed
|Written by Rob Goldman|
Today, we decided to be a little different and instead of beating around the bush, we cut to the chase and tell you how to make money on stocks in the short term. We also highlight 2 buys from our daily blogs and 2 sells as well as illustrating how small stocks rule!
Trading Secrets Revealed
At the risk of minimizing the reason why you read what we write here at Goldman Small Cap Research, I am going to give away the absolute secrets to making money in the market this week. Since I am giving it away freely today, I won’t be so dumb as to blurt it out on the front page of this week’s edition of The Goldman Guide. So, read on.
Unless your head was in the sand last week, you know that stocks performed pretty well. Heck, I defy anyone to tell me that The January Effect is bogus. The Russell 2000 Index hit an all-time high and rose by 3.5% in just 3 trading sessions— which was 29% better than the NASDAQ Composite. Ok, I admit I am going off the deep end. It was up 3.5% vs. 2.7%, but still, there were a ton of companies that reached new 52-week highs last week.
In fact, 44 companies under $10 reached new 52-week highs as compared with 8 stocks under $10 that recorded new 52-week lows. That is a ratio of 5.5 to one!
Interestingly, volumes were not really that different from much of 2012, with the notable exception of the heavy volume on Wednesday, January 2nd.
Look, we pounded the table on how great this period can be for investors. But, we cannot expect these types of returns every week for the balance of the month. The key is to participate in the big gains when they occur and not be all in when the stocks retract. If we had to guess what would prompt a short term retracement, we would venture to say that it could be more fiscal cliff/higher taxes talk, debt ceiling issues, and any foreign nonsense, over the next week or so. By the time we get to the middle–end of January all eyes will be on earnings.
But until then, here are the simple secret solutions to gains...
I implore you to not get fancy. Don’t be cerebral. Don’t be a gambler. Ignore bottom fishing candidates and turnarounds. And for heaven’s sake, stay away from controversial stocks. The risk/reward ratio is not in your favor. There are so many stocks to choose from but most of them are really crap. Really. If you understand that straight away, then you can focus attention on the “good” sub-$10 stocks, which probably number fewer than 150 or so.
What are these “good stocks”? Simple. Of course they have low P/E ratios and high growth rates, but that is not all. While a large number of stocks may exhibit these traits, the good stocks have low P/Es and are expected to record major EPS gains in 2013. A low P/E for a low-growth stock is not worth the risk.
Instead, seek out stocks these growers that have reached or trade just below 52-week highs. They are likely clear short term momentum stocks. What does that mean? Not just that they have hit new highs. It means that the volume must be on the upswing lest the momentum can be lost quickly. Perhaps the sector is under accumulation with respect to money/sector rotation or there are secular changes in a given segment that make these stocks hot.
By the way, when sector rotation is used as an investing strategy, a great way to play it is through the use of ETFs. (Cue a daily blog later this week.)
We use many of these simple screens and characteristics with our The 30-30 Report with great success, as well as our daily blogs.
For example, one of our most recent blogs highlighted stocks under accumulation that should exhibit huge EPS growth in 2013 and have low P/Es. This includes Amkor Technology Inc. (NASDAQ – AMKR - $4.70), which was up 6% for the week. The Company was founded in 1968 and provides semiconductor packaging and test services. With revenue of over $2.7 billion this small cap stock is no small player. Here is the kicker. EPS is expected to jump by more than 50% from 2012 to 2013. Estimates call for $0.39 in 2012 and $0.61 on 2013, representing a P/E below 8x for next year! The chart is trending higher as the stock has climbed steadily from a floor of $3.65 in November and should continue its ascent.
Look for a $6.00 price target in the not too distant future.
One M&A Target and Two Sells
We have noted recently that by virtually all accounts, the Street consensus is that bank M&A activity could be extremely robust this year. It just so happens that on Friday we highlighted a stock that reached an intraday 52-week high buoyed by a more than 50% increase in volume. Plus, it is a real M&A candidate.
With a market cap approaching $2 billion, Synovus Financial Corporation (NYSE – SNV - $2.69) is no small company. That is a big advantage as its size, standing, approach and business model make it a real target for mid-large size banks. Fortunately for us, it is also a small cap stock.
Synovus is a well-regarded southeast regional financial services company with $26 billion in assets based in Columbus, Georgia. Synovus’ divisions provide commercial and retail banking, investment, and mortgage services to customers through 30 locally branded divisions, 293 offices, and more than 300 ATMs in Georgia, Alabama, South Carolina, Florida, and Tennessee.
Synovus is one of the most widely followed and heavily traded stocks in its peer group. Synovus has nearly 20 analysts following it and the stock trades over 2 million shares daily. Moreover, the Company enjoys major institutional ownership to the tune of 70% of the outstanding shares. On a fundamental business basis, one could argue that the Company has underperformed a bit. Yet, given its size, model and attractive regional market, we could see a buyout of this bank well north of the $3.00 mark.
A number of retail stocks rallied on Friday after reporting December sales and forecasting January sales figures. Still, not all retail stocks are created equal and we think that 2 stocks in particular may be good sales candidates. JC Penney (NYSE—JCP—$20.62) is expected to earn $0.09 next year after a loss in 2012, with declining revenue. Suffice it to say that JCP is troubled and if its EPS turnaround does not occur, we could see it drop below its $15.69 52-week low. It already has a high short ratio (45% of the float) and it should grow.
Macy’s (NYSE—M—$37.94) is only 12% below its 52-week high and appears to be under accumulation. Moreover, estimates call for higher EPS next year on a small rise in sales. We think that there may be some risk to earnings with this highly leveraged company so we would take profits. Any misstep could cause a big stock price drop.
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 Penny Stock Junction (www.pennystockjunction.com.)
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