|Written by Rob Goldman|
This week, we highlight 3 ways to make quick returns, which actually include advocating day trading. Plus, there is a $12 NASDAQ stock that owns 60% of a sub-$1 stock on the OTCQB that will have news this week that could take both stocks to new highs. See how to take advantage of this and potentially make a few bucks.
How To Make a Quick Return
Another week, another few days of the government shutdown and the closer we will come to a debt ceiling agreement. It looks like stocks had a case of PME (Pre-Mature Excitement) last week as no deal was concluded and the weekend was not any better.
Still, I will venture to say that while the next couple of days could be a little scary, the market could be looking a bit better at the end of the week, as compared with the beginning. This assumption is based upon the fact that some of the uncertainty that is a bit of an overhang is lifted. Of course we still have earnings reports, but we will touch upon that later.
Last week, we introduced Top Ten Ways to Invest Now. Given where we are right now, we recommend doing something which is a bit of a departure from our typical ideas. This week is all about quick returns and here is how to generate them—but be aware that these ideas are fraught with risk.
1. Play Your Favorite Names. We are in an environment that is a bit schizophrenic and it is reflected in the way stocks are trading. So, what should you do? Everyone has their favorite stocks that they watch religiously, right? More than likely, you know how the stocks trade as well because you have been following them closely for a very long time. So, trade them! Make a little here, and make a little there, in preparation for pretty steady and strong moves later this quarter.
2. Be a Chaser, not a Follower. I can’t even believe I am suggesting this. But, if you chase stocks that are moving big time early in the day’s trading and trade out of them later in the morning, you could make more than a few bucks. Moreover, be wary of even consider touching big movers once the afternoon hits, unless the stock has already given back gains and begun to pick up, incrementally. If you are aggressive on the buy and sell side, the tactics can work. If you are passive, it is less likely to succeed. I realize I am advocating day-trading, but every once in a while it is not a bad idea to step out of one’s comfort zone.
3. Know When a Trigger is Coming. Yes, the cliché knowledge is power is apropos here. The worst thing that canhappen to an investor or trader is to be blindsided. One has to know when events are coming and what will drive a stock in either direction. A great example of this is the pending 2Q14 news for 2 related stocks on Tuesday, after the close. Rocky Mountain Chocolate Factory (NASDAQ—RMCF—$12.60) is a major producer of premium chocolate candies and other confectionery products. The Company also owns 60% of U-Swirl (OTCQB—SWRL—$0.86), operator and franchisor of self-serve frozen yogurt cafés. If the quarter is a good one for these stocks, and guidance is solid, these underfollowed but potentially high-performing stocks present an opportunity for the prepared investor. If not, we would stay away. Still, we are pretty confident that some real gains are to be had here, despite the market risk and risk of higher chocolate ingredient costs.
Here is a little background on a situation that offers 2 related stocks.
Halloween is around the corner and it might be an opportune time to profile a stock that is well-positioned to benefit from both the Halloween and year-end holiday season. Or, in other words, maybe now is the time to highlight a stock primed for a short term trade. RMCF typically produces approximately 300 chocolate candies and other confectionery products, using proprietary recipes developed primarily by its master candy maker, along with up to 100 specialty products during key holiday seasons. Approximately 40% of the products sold at Rocky Mountain Chocolate Factory stores are prepared on the premises. All told, RMCF has 6 company-owned, 59 licensee-owned, and 294 franchised Rocky Mountain Chocolate Factory stores operating in 41 states and abroad.
SWRL and/or its franchisees operate 90 self-serve frozen yogurt cafés in 25 states, including some co-branded locations with RMCF. Earlier this year, SWRL acquired frozen yogurt café assets, franchise rights and certain other assets from Rocky Mountain Chocolate Factory, Inc. in exchange for a 60% controlling ownership interest in the company.
In our view, both stocks are a sweet deal at current levels. Looking at the big picture, ever since the U-Swirl spin-off, both companies have recorded improved operating performances. On a company level, RMCF has enjoyed increasing sales due to its expansion/franchise strategy and with a more direct focus on confectionary products, is reporting greater profitability as well. SWRL just recently announced the acquisition of a smaller rival, which increases its number of locations by over 30% and adds 2 new states to the company’s reach. Given the highly fragmented nature of the industry we expect more deals in the future.
RMCF trades around 2x revenue and we expect it to break through its $14 high soon and it could happen this week. Likewise, SWRL is growing like a weed both organically and through acquisition and appears set to break through the $1.00 mark, which would surpass its year high of $0.98.
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 The Stock Junction (www.TheStockJunction.com.)
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