Monday, September 27, 2010

27 September 2010 Looking for Love In All The Right Places.


27 September 2010 Looking for Love In All The Right Places.

OK market was dull and directionless most of the day today, closing a teeny tiny bit down. The Dow was off a half a point and the S & P stayed well above the all important 1130. Who cares about NASDAQ. Why? It was down.4 % and AAPL was down .4%. As goes AAPL so goes NASDAQ. On a weighted basis Apple account for about 22% of the overall inertia of the Index. We have stopped watching it for a while. It was yet another light day with the volume of shares being about 26% off their average.

Ok so if you are one of the many who have money on the side line and ready to jump in where would you put your money? Last week we told you about an article in Barron’s about the Barron’s 400 index. In Michael Santoli,s article he explains the stock selection criteria that defines the index creating a phenomenal tool for finding equities based upon value and growth. Admittedly that combination has not meant much over the craziness of thee market in recent months, but it appears as though when we get people back in the market they will be seeking those two attributes.

The Barron’s 400 was launched about 3 years ago. It has beaten the DOW and the S & P 500 since it was launched. As of a week ago, the index was only down 15% compared to the DOW down 24% and the S & P down 21%. It tracks closely to the S & P 400 but has a lot more diversification. It was designed to be a glorified watch list of stocks based up key criteria of value and growth. It was created to provide Barron’s writers with a pool of high quality stocks to make comparisons to in various sectors and industries. It is balanced and recomputed twice a year and was just updated two weeks ago.

Here is a brief explanation of how the 400 are determined. The exercise begins with the Dow Jones US TSM (Total Stock Market Index) which has 4,113 components and a market capitalization of 12.5 trillion dollars. Then a group called MarketGrader runs the following analysis on that data base. For growth they look at the companies earnings-surprise history (how many time they beat expectations), the revenue/growth rate, short term and long term sales to earnings growth rates and the stocks relative strength index RSI (this is a technical analysis of whether a stock is over bought or oversold based upon the number of days the stock closed up versus closed down). Marketgrader then applies a proprietary algorithm that measures the stocks reaction to earnings calls to determine how much expectations by analysts are built into the stocks performance. Then they do some good old fashion value number crunching like debt versus equity, price to book, price to cash flow, market cap, P/E ratios, and price to sales analysis. Then the list is ranked by those criteria and no sector can contribute more than 20% of the overall weight of the index. There must be an average day volume of 2 million dollars and the company must have a market cap of at least 250 million. I encourage you to check out the entire list at Barron’s 400.

Here are the top 10. As usual, do your homework as you would on any stock. In taking a quick look at some we don’t own, DECK is a 56 dollar stock selling for 49 bucks. No debt, no dividend, ROE is a nice 27%, about 2 million in free cash flow, phenomenal gross margin, this is one pretty investment. Finish the home work. IPXL look fabulous as well although they just received two down grades and I can not see why. More work to be done. As I look at the list, these are very impressive equities.

Deckers Outdoor DECK, Impax Labs IPXL, Microsoft MSFT,
Apple AAPL, Aiad Pharma ARIA, Syntel SYNT, Alexion Pharma ALXN, InterDigital IDCC, Ebix EBIX, and Intel INTC.

Now I only see one flaw with the list. If a sector is out of favor, like energy is at the moment, that sector will be misrepresented in the 400. Other than that, this is the watch lists of watch lists.

A Little Closer To Home

Ok we just gave you a list of 400 very impressive stocks to go homework yourself to death on. When you want to take a break from that kind of homework, here is a little fun exercise I do about once a quarter usually towards the end of earnings season when newsbytes are a bit slow. I got this idea from Warren Buffet. He and I were having lunch, OK not really, I read his biography Snowball last year and he described how he would tear a part the Pink Sheets (named for the color of the paper the over the counter penny stock information used to be printed on) to find small local companies that he could do more research on in his own backyard. We can do this today quite easily and let us show you how.

Let’s say you live in the pleasant state of Washington. You can read the Journal and find out about all kinds of companies from all over the word, but you want to find a home grown stock. In a regional paper you read “Cardiac Science to present at Needham Biotechnology and Medical Technology Conference”. You then go to FinViz and check out CSCX, Cardiac Science Corporation develops, manufactures, and markets diagnostic and therapeutic cardiology devices and systems in North America, Europe, and Asia. Its cardiac monitoring products primarily include resting ECG systems that allow physicians to record and analyze patient ECG waveforms; cardiac stress testing systems to monitor and analyze the performance of the heart under stress; Holter monitoring systems to record and assess the performance of a patient's heart; cardiac rehabilitation telemetry systems to monitor the patient's heart rate, heart rhythm, and ECG waveform data during rehabilitation exercises; vital signs monitors to monitor noninvasive blood pressure, pulse rate, temperature, and oxygen saturation; and cardiology data management systems that automate the processing, storage, retrieval, and editing of electrocardiograms and other patient data. The company also offers cardiac monitoring related products and supplies comprising lead wires and electrodes, and thermal chart paper, as well as an array of complementary products, such as temperature and blood pressure monitors, spirometers, and pulse oximeters. In addition, it provides defibrillation products consisting of public access automated external defibrillators (AEDs) that are deployed in various settings; professional AEDs for use by hospital personnel, medical professionals, and emergency medical technicians; traditional defibrillators that are positioned in hospitals at various locations; and defibrillation supplies and accessories, including replacement electrodes and batteries, training devices, wall cabinets, and carrying cases. Further, the company offers training, maintenance, and support services. Cardiac Science Corporation sells its products through its sales force, independent distributors, direct sales representatives, and third party distributors under the Burdick, Quinton, and Powerheart brand names. The company was founded in 1953 and is headquartered in Bothell, Washington.

In doing the initial homework, you find out the stock is selling for $1.75 and has no debt. However they got stung on late 08 and 09 for some responsibility in faulty AED designs and the stock has been in the toilette ever since. In reading all the press release it looks as though the past is the past and it could be time for the stock to return to its days of ol’ around $6.00 a share. There is still a lot of reading to do, but you get the point.

Try this as an example. Go back to your hometown, mine would be Albany New York and look at the on line edition of the local news paper. In my case it would be The Times Union. Right there on the home page is a link to the business section and they lay out all the companies that are publicly trade that do business in Albany and the tri county area. Not all newspapers will be that user friendly, but you get the idea. From there using the tools we have discussed here, you can do the necessary homework to find small regional companies to invest in. Imagine in 1976 if you have been reading the San Jose Mercury News and picked up on a little company called Apple Computers. Food for thought.

Ooops got that one wrong.

I guessed that Paychex would miss their expected 34 cents a share and come in at 32 cents. Well they missed by two cents, but they went the other way to 36 cents. The stock closed down as the CEO dropped guidance number into the next quarter.

From the Happy Presidents Photo Gallery

Eisenhower and Nixon consider the concept of recording visitors in the Oval Office.
Salve Lucrum


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