|Written by Rob Goldman|
Well, our NCAA tournament picks may be terrible but we pegged last week’s rally and the statement on inflation and interest rates by the Federal Reserve could have been lifted directly from last week’s issue. In any event, now is not the time to look into the rearview mirror. After all, it is clear that last week’s rally is not a one-time event, as evidenced by extremely high volume that signals institutions are buying this rally heading into Q2. What may be more important are the signals that once again, individual investors are the key, on a contrarian basis, to stocks’ direction. We have some data points that illustrate why the next month…and only the next month, could be huge for small stocks, with a drop thereafter. See why believe the rally could stop in its tracks by late April.
Ever notice how some people see to have that “it” factor? Stocks have it too which is why they tend to make big runs when they engage in shrewd moves that raise their profile and can raise their stock prices as well.
This week we highlight two low-priced NASDAQ stocks that have that “it” factor. One that could bust through to its 52-week high can be found below:
IN THE MIDDLE OF A MAJOR BULL RUN
When my youngest son looked at my bracket this weekend, he stared at me in a deadpan gaze and said. “There is no way Kentucky wins it.” I asked him why. He responded by matter-of-factly saying that it was because I picked them to win it all and my selections might be the worst in the history of March Madness.
He is right. I confess that I did a lousy job and really wasn’t thinking of who I thought would win, but who I wanted to win. It is a stark reminder that we, as individuals that make up “the crowd” is usually wrong under most circumstances. Of course this contrarian sentiment is no more evident than with stock and tock market prognostications.
Look, I may suck when it comes to putting together a college basketball tournament bracket, but I nailed the market’s action and the Fed’s stance and sentiment this past week. If you look at the Fed statements about the economy and inflation it is as if the text was taken directly from last week’ edition of the guide. And, of course, stocks rocked. More importantly, small stocks really rocked, with a nearly 3% gain for the week, capped off by a new high for the Russell 2000 Index on Friday with volume for the day not seen since December.
Make no mistake, this volume number is significant! The index’s volume rose by 66% in one day (from Thursday to Friday.) Individual investors played a role here but institutions drove the bus. Considering that we are near the end of the quarter and most mutual funds and other institutions are setting their portfolios up for Q2, the message is that small stocks will be big winners heading into the second quarter of the year. We agree wholeheartedly, but like the brackets, the real indication of this trend is based more on your sentiment.
“Buy-Buy”, Followed by Sell Quickly
Let me explain. We highlighted the American Association of Individual Investors (AAII) weekly investor sentiment survey last week (as we often do) and found it odd that the “Neutral” stance was so high, indicating that individual investors are unsure of where stocks are headed. As a result, they were sitting on the fence when they should hav been buying. This is a common theme—when the crowd (of individuals) buy, you should sell, and vice-versa. Therefore, many market watchers, (myself included) strongly view this AAII survey as a contrarian indicator.
Think about it. Stocks had one of the best weeks in a long time and the Fed laid its plans out for us on a silver platter—and they are calming. Despite all the negatives, there really is nowhere to go with your money (domestically) other than equities. Add in the ferocious buying last week and one would think individuals would be very bullish.
Against this backdrop, the AAII survey last week showed that the percentage of investors in the “Bullish” category dropped and is at the lowest point since April 18, 2013! What happened after that? Stocks rose 10% in about a month and 20% within 90 days.
While the number of bulls dropped last week, the number of bears in the survey rose to above 31% for the first time since mid-October. What happened after that? Small stocks rose by over 10% in the next 60 days. You get the idea. Buy signals abound.
There are many indicators and just because the stars aligned (in a contrarian) fashion does not mean that these metrics are the “end all be all” or that they are always accurate. However, it has been our experience that they are more right than wrong. Importantly, what makes us feel very confident is the fact that the figures were posted around the same time that major volume and price increases occurred, and followed the Fed’s very dovish, equity-friendly stance.
CAUTION: With that in mind, adjust your time horizons to around 30 days as we think that the early release of Q1 results in late April might do more harm than good to stocks due to the horrible weather experienced across the country for much of this year. It is never too early to look ahead to earnings reports and we could see a number of companies pre-announce or guide results modestly lower. That’s when you take your profits.
The “It” Factor
I am not much of a pop culture aficionado and I still don’t understand why millions of people are obsessed with the lives of celebrities—especially those who have done nothing and really are not productive members of society. I guess they succeed because they exist and they have “it.” Oftentimes, that “it” factor can be enough to propel one to wealth and stardom. When that happens, if you can indirectly ride those coattails, you might as well do it, right? You can, by buying this stock.
Glu Mobile (NASDAQ—GLUU—$4.95) has a leadership team that is either very astute or very stupid. I tend to believe it is the latter. We have profiled the stock a couple of times over the past five years and it has made us look good more often than not. Based on recent events, I am confident that GLUU is on the verge of a breakout toward its 52-week high.
Founded in 2001, Glu is a leading global developer and publisher of free-to-play games for smartphone and tablet devices. Glu is focused on creating compelling original IP games such as CONTRACT KILLER, DEER HUNTER, DINER DASH, DINO HUNTER: DEADLY SHORES, and branded IP games including KIM KARDASHIAN: HOLLYWOOD. Having a game with Kim Kardashian West is genius. Having a contest where players could meet her is even smarter. Announcing an interactive game that will feature her younger half siblings, the Jenner girls, is very shrewd. And all of these steps, plus their existing games and marketing initiatives are likely to drive growth and the stock price.
At current levels, GLUU trades around 19x this year’s EPS forecast of $0.26 (down from last year) and only 14x next year’s EPS estimate of $0.36. However, these new games and other future titles are likely to get the Company lots of “play”. The stock is basing nicely after a drop and then sharp rise but is still well below its $7.60 year high. GLUU currently trades a hair below its 20 day DMA and above the 50 and 200 DMAs. As accumulation continues, and the Company moves further along the branded “celebrity” path, we believe the $7 mark is in reach in the coming months. At $7, the stock would still trade at a reasonable 20x next year’s EPS.
Have a great day!
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