Three Stocks for 3 Weeks
|Written by Rob Goldman|
A bad ending to a bad week could mean a favorable beginning to this week. While generally speaking we remain less than sanguine about the market due to economic issues and valuation, there is another threat that could mute growth in global equities. It is a story you won’t read anywhere else but it could be that history (from 10 years ago) could repeat itself.
Did You Know...
The inevitable finally happened. The NASDAQ Composite and the Russell 2000 Index got really smacked last week.
The year-to-date returns on these indices decreased by over 25%.
While the leading cause for the decline was anemic job growth of 88,000 for March compared with 268,000 in February, and versus the 190,000 estimate, the real story is the number of people that left the workforce.
Nearly 500,000 gave up looking for work during March which masked the cuts in retail employment and other sectors. Not a good sign when the labor participation rate is at a 35 year low.
We have been cautioning about this for weeks. However, there is another issue that could affect global markets.
Ten years ago, the SARS health outbreak hit East Asia causing a short term health pandemic. It negatively affected most emerging markets as businesses related to tourism, airlines, etc. were affected.
We may have the beginnings of a new pandemic in China with the emergence of a new strain of avian bird flu.
We suggest avoiding Asian stocks due to the saber-rattling of North Korea and this potential health outbreak. But, this region, along with Japan, which has initiated a massive stimulus plan, could be a source of equity growth again in the coming months.
Earnings season is upon us and investors are rattled.
We talked about the sell in May and go away strategy last week. This week, we highlight 3 stocks that could see big moves before the seasonal downturn commences.
The party isn’t over but the fun people have left the building. Still consider buying May 2013 puts on the market.
Three Stocks for Three Weeks
Okay, enough of the concerns about this, negative news about that, sell in May, high valuations, buying puts, etc. You can still make money in the market. Moreover, although this has once again be a fairly narrow rally that has killed stock pickers and rewarded index huggers, we have identified 3 themes that are primed to rock the house and 3 associated small cap stocks that will not just benefit from these themes but lead their market segments.
You can probably make money even heading into the middle of May which is when all of the stocks will have released their 1Q13 financials. Still, to be on the safe side, we are recommending that you lean towards viewing these picks as April holdings only.
#1: A Play on UAVs, Missile Defense, and Cyberterrorism: Kratos Defense & Security Solutions, Inc. (NASDAQ—KTOS—$5.09)
Given the saber-rattling in North Korea, proliferation and use of UAVs abroad and now in the U.S., and a great deal of press regarding cyberterrorism, KTOS is in a great spot to be a major player in all 3 categories. If heaven forbid anything happens on the Asian front, the stock will likely be a beneficiary. In the meantime, looks poised to set a new 52-week high, breaking through the $6.09 mark. It appears that once the stock breaks through the $5.12 mark, it could be off to the races, as technical characteristics are very favorable.
We liken the expected moves of KTOS to Innovations Solutions and Support Inc. (NASDAQ—ISSC) a stock we featured in our Market Monitor blog last week and still like a great deal. ISSC jumped 27% in a matter of days, aided in part by a new commercial contract and KTOS could do the same, possibly aided by a short squeeze. KTOS has over 4M shares short and is a bit debt-heavy. ISSC is much smaller but profitable, and trades at a much higher valuation than KTOS. Still, KTOS trades only .3x revenue and is a great deal at $5.09.
#2: A Play on Mobile Advertising (Millennial Media Inc. (NYSE—MM—$6.43)
MM is the proxy for advertising on mobile devices. Hundreds of millions of monthly uniques are reached on behalf of brands using its platform. The Company is growing revenue like mad, has nearly $2.00 per share in net cash, and just closed a key acquisition. The stock’s chart looks terrible and 17% of the float is short. Still, as themes go, this is a category killer in a high profile space that should do well following 1Q13 results due out on May 8th.
#3: A Play on Online Gambling (Zynga Corp. - ZNGA— $3.55)
The bottom line is that with $1B in cash (over $1 per share), a lessening dependence on FB and greater focus on the real growth concepts in its space make this stock, which carries a beautiful chart, and increasing volumes, a major candidate to move beyond the $5 level in the coming weeks.
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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