|Written by Rob Goldman|
This issue is not your run-of-the-mill investment newsletter. After all, how often do you see comments about orgasms or the NCAA Basketball tournament come into play with investing?
Look, after last week's performance it is time investors are shaken out of their paralysis so they can wake up, smell the roses and get out of neutral. The good news is that most of the market signals point to Smallville and key segments of the small cap arena which right in the sweet spot of you, the subscriber. Of course, we would be remiss if we didn't highlight a stock that could gain nearly 30% in the coming months. It's a bit out of the box but a stock with a high profile founder, great brand recognition and happens to be coming off highs and then lows following a wildly successful late 2014 IPO that flew too far too fast.
WHAT THE MARKET IS TELLING YOU TO BUY
Does recent trading mean that investors should beware the ides of March? We don't think so. Ask the average investor and the current sentiment is more like "to be or not to be"—or in the current environment, "to buy or not to buy, that is the question."
One example of this stance is the change in the latest AAII Investor Sentiment Survey. There was a big jump in the Neutral category and slight increase in the Bearish category, with a decline in the Bullish sentiment. In fact, the current 43% Neutral sentiment is substantially higher than the 31% long term average, indicating investors know not what to do..
This paralysis is fueled by concerns over rising rates (which we outlined last week), the rising dollar, weak oil prices, and fair value for equities. As we head into the most exciting week of the year where millions of Americans will fill out their brackets by picking winners in the NCAA Basketball Tournament, we see no reason not to be decisive and buy. What is most important—it is telling us what to buy, and not to buy.
Signal #1: Rising rates.
In our view, the Fed is not in a rush to raise rates. They know that the "favorable" unemployment numbers are as fake as my friend's wife's orgasms. Higher unemployment should mean higher GDP growth but it simply is not there. And, inflation? Key non-gasoline prices are de-creasing.
Look, rates will rise, but not today. It will likely occur mid-year and this event is already reflected in stocks. Interest-rate sensitive stocks like utilities are down and financials, which benefit from higher rates, is the #1 or #2 biggest sectorweighting in some leading indices and ETFs. Regardless, rising rates means growth stocks are the place to be.
All Signs Point to Smallville
Signal #2: The Rising Dollar
Signal #3: Weak Oil Prices
Signal #4: Fair Value for Stocks
A Virgin No Longer
Now that we have determined that the place to be is in the small cap growth category, are there stocks that fulfill the previously outlined criteria?
The answer is affirmative of course and there is even one that has a bigtime face of the company to lead the brand. Plus, since I already made an allusion to orgasms, this week's featured stock is perfect for this issue.
Virgin Airways Inc. (NYSE—VA—$34.77) is known for its mood-lit cabins, three beautifully designed classes of service and innovative fleet wide amenities — like touch-screen personal entertainment, Wi-Fi and power outlets at every seat, VA has built a loyal following of flyers and earned a host of awards since launching in 2007 — including being named both the "Best U.S. Airline" in Condé Nast Traveler's Readers' Choice Awards and "Best Domestic Airline" in Travel + Leisure's World's Best Awards for the past seven consecutive years.
Founded and 25% owned by famed businessman Richard Branson, VA went public in November in one of the largest airline IPOs in history, to much fanfare. The Company is very forward thinking in its technology offerings and approach and it is already winning many fans in the U.S. The stock is cheap now that is down about 20% off of its December 2014 high. At current levels the stock trades 7.7x 2015 estimated EPS, despite its newfound operating leverage. Now that it has some trading history behind it, and it benefits from the factors above, we believe that accumulation will occur in the near term. We expect the stock could approach its $45 high in the coming months, which still reflects only a 10x multiple on FY15 earnings per share.
Have a great day!
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