Wednesday, March 02, 2011

2 March 2011 You Can Too Revisited

BAGAKOAA;

2 March 2011 You Can Too Revisited

Back on February 19 we made you an offer and only a few of you picked up on it. Here it is as a review, “What if I told you I could give you a stock tip that I guarantee will not ever loose more than 8% and has the potential of gaining 25% over the next 12 months. Are you interested? Now do you want to know what stock it is? I don’t know? But we have about 16 in our watch list that have to potential to be that stock. We will find about 4 more over the long weekend.

Now if you really want to know how to do it, just drop me a note at brian.cronin@padi.com. We can show you how to do it and all you have to do is commit one hour a week per stock that you want to trade or invest in. (We do not recommend trading in more than 10 stocks.) When you are ready, so are we.”

Our intent was to show you one or two from our watch list and show you how to do it. A few of you sent your own list which is cool. More than one of you cited Jim Cramer as the source of your pick. It is great that you are watching and listening to Cramer. Lately I have been forced to pick up his show as a podcast on my iPhone as I don’t have the house all hooked up with multiple DVR machines. As we have often said, Cramer is a Great teacher. We don’t always agree with his picks, because we do our own homework. You should too.

Annyway, here is a list of the companies under evaluation with brief descriptions.

CAP CAI International, Inc., together with its subsidiaries, engages in the intermodal marine cargo container leasing business worldwide.

AXK Accelr8 Technology Corporation develops materials and instrumentation for applications in medical instrumentation, basic research, drug discovery, and bio-detection in the United States.

MSFT Microsoft Corporation develops, manufactures, licenses, and supports a range of software products and services for various computing devices worldwide.

SGI Silicon Graphics International Corp. (SGI) focuses on helping customers solve their technology challenges by delivering clustered and high-performance computing and storage solutions, and software and services.

CHK Chesapeake Energy Corporation, together with its subsidiaries, produces natural gas in the United States.

EWC (This is an ETF) The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Canada Index (the underlying index).

DGX Quest Diagnostics Incorporated provides diagnostic testing, information, and services in the United States and internationally.

With that as the starting list, we filtered a few off and will communicate that to those who sent these in. Thank you by the way, this is fun.

We will take a very broad approach to this exercise. We have a new reader (Lance) who says they are neophyte to the market, but this guy is very sharp and if I know him, his self deprecating attitude means he probably only has 30 or 40 million trading in the market. We will present this with and effort to keep regular reader interested, but without going over the head of any new readers. A tricky feat indeed.

We have the benefit of many useful tools at our disposal many of which are subscription based. We will do this using as many FREE services as possible and if we use a subscription based service it is an indication that it is essential to anyone who is serious about making money in the market.

First off, we need to determine an overall goal for our return. Keep in mind the 10 Year Treasury Yield (Think of it as your safest place to park $10,000.00 for 10 year. Benenke is trying to convince the world that it is still the safest place, but I digress.) Your gains should be targeted for above that figure knowing the higher you go, typically the more risk you will need to handle. You should also consider where you are in your earnings cycle. If you just retired and your earning years are over, you will want to protect your assets and not take as many risks. If you just got out of college and have 40 years to build your wealth, you might consider taking on more risk.

Personally, we use twice the 10 Year Yield as our portfolio goal for the year. The 10 Year Yield is at about 3.5% so we look to make at least 7% in 2011. If you just retired, keep inflation in mind (Currently at just about 2%-and rising) and that 10 Year Yield, but also how much time you will commit to managing the portfolio. We would suggest that you COMMIT one hour a week per stock to your portfolio. That is not my recommendation but also Cramer’s, IBD’s (Investor’s Business Daily ESSENTIAL TOOL for all players with $10,000 or more in the market.), and AAII (American Association of Individual Investors (Recommend this subscription for anyone with a portfolio in excess of $50,000.)


For this exercise we will use our portfolio goal of 7%.


You now have your portfolio goal. Let’s go buy some stocks. Not so fast. If you have been reading the blog or done ANY basic reading about the market, 70-75% of a stocks price is influenced by _______________. I’ll give you a second to think about it. Last night we discussed that IBD would be indicating 5 distribution days for all three of the key markets. (DJIA, NASDAQ, and S & P 500), we were wrong as only the NASDAQ went to 5 days the other two stayed at 4 days distribution. Remember a distribution day is a day where there is heavy volume by institutional sellers (Think insurance companies, mutual funds, hedge funds and the like moving million of share. This is not you and I moving the needle.) Let’s go back to the question as we have just answered it. If you have been reading the blog, or done ANY basic reading about the market, 70-75% of a stocks price is influenced by the market and sector trend. In stocks, the trend is your friend. In options, the trend is your lover.


With that said, and knowing the volatility in the market at this moment and the IBD announcement of 5 distribution days in the NASDAQ and 4 each for the S & P and NYSE, is this a good time to buy stocks? (Newbies, it is good to know your indexes. Look them up and see what makes them tick. Know things like there are only 30 stocks in the DJIA and there are 500 in the S & P 500. Know that 20% ofr the inertia in the NASDAQ is driven by one stock. Any guesses? AAPL). The IBD calls this market an uptrend (good thing) under pressure (bad thing). All that means that you really have to have a stellar stock to enter the market at this point in time.


So let’s look at a few of these.


CAP was a new one that we had never run across. Wheneever we look at a stock for the first time we use FINVIZ.COM (FREE). It gives us top line summary of all the pertinent fundamentals and recent news about the stock in an interesting presentation. It is very efficient. Here is the screen grab from Finviz.com or you can lick on the link to pay a long.

The first thing I noticed was the huge jump it made today, ironically. Obviously that is because our blog is so influential that rumor had hit the street we would cover the stock today. Yeah, that’s the ticket. Actually if you read two of the news releases you will see why, perhaps we saw such a huge jump in the stock. First they had a great quarterly report. Revenues and Earnings are way up. Almost always a good thing. For the newbies you might wonder why I say almost always a good thing. Games can be played with the accounting and if your going to take a serious position in a stock, you will want to read the SEC filings to make sure there are no special one time transaction that make earnings look better than they are. Don’t get scared that information is free and relative easy to get to the heart of the matter.

On top of the great quarterly report, last week the Pitzker Family (Think Hyatt Hotels) sold their interest in another container company (Triton) so the rumor mill is that other might want to start buying container companies. The article even mentions Warren Buffet might be on the prowl for one. There is a very important adage in the stock market game. Buy on the rumor, sell on the news. It looks like quite a few folk jumped on that adage today.


Let’s keep looking at the fundamentals. Here is what we look at and it has served us fairly well. First is the market cap of the stock. The market cap is determined by taking the number of outstanding shares of the stock times the current price of the stock. This stock has about 19 million shares and it is trading in the 23 dollar range so as you can see the market cap is just under 400 million dollars. That sound like a lot of money, but this would border line on a small cap mid cap stock. Next let’s look at the multiple or P/E Ratio. This is an important measurement. You normally see this number presented at P/E ratio or Forward Looking P/E ratio. The P/E ratio is the historical P/E ratio and forward looking is based upon the company and analysts expectations for the future. All you do is take the current price and divide it by the current annual earnings or expected earnings for the forward looking multiple. For CAP, take the closing price today ($23.70) divided by next this years expected EPS (Earnings Per Share) $1.94. ($23.70/$1.94=12.22) That would be your forward looking P/E ratio 12.22. We use this number only as a comparison to like companies. To do this, got to Morningstar.com (A Lot of FREE info but some of the goodies is on the subscription side. Highly Recommended service if your portfolio is over $50,000) Go to the Morningstar website and type in the ticker CAP. That will bring up gobs of information about the company, but we want you to look at their competitiors. So under the tab that says Peers, click on MORE. . . . That brings up the following screen.


At the bottom you cans see the industry average P/E ratio is 27.5. Typically the lower the P/E, the cheaper the stock. That’s right cheap stocks have NOTHING to do with the price of a stock. Obviously if CAP has a P/E ratio of 12.22 (The 20.2 reflects the past P/E ratio.) and the industry average is 27.5 that mean it is fairly priced. You should also keep your ear to the ground as to what the average P/E for a larger index is. For example the S & P 500’s average P/E ratio or multiple is 14.1 as of today. So CAP is a little cheaper than the larger broader market. Get it? Ok back the FinViz Page.


Next we look at debt. We like companies with NO DEBT, but many companies have to maintain a certain amount of debt to run efficiently. CAP is one of those companies. They buy those big ocean going containers and then lease them out. They want to be leveraged to a certain degree so like a big industrial company like GE or Boeing or Catepillar they should have debt, it just needs to be managed carefully.


Another item we always look at is Return on Equity. It is a simple equation. You take the net income and divide it buy shareholder’s equity. It is a good indication of the stewardship of management. We look for anything above 25%. CAP is only at 15%, respectable but not attractive.


OK the fundamentals were not disgusting so the next step is to check a few other sources. For this exercise we will only use free or essential sources. Let’s look at IBD. (ESSENTIAL On Line version is $235.00 and the print edition and the print edition is $375.00. If you have to choose between the two, go with the on line edition as their charting feature will make you money. I’ll go as far to say anybody reading this and get’s the on line edition and follows this simple exercise and does not see the value of IBD on line, I will refund your money.)


Below is the IBD check up for CAP, there are books written about the IBD information and an entire industry built around the CANSLIM investment strategy so we will not take the time to explain it all to you, but just follow along.

The composite rating for CAP is a very strong 95. The EPS rating puts CAP as best in group. Relative strength (think price inertia) is a very strong 84 out of 100. The SMR (sales, margin ROE) rating is a B rating with A being the best. And one of the critical measurements and what makes the subscription worth every penny is the Accum/Dist Rating (Accumulation Distribution rating is a proprietary algorithm that measures institutional monies going in and out of the stock. This is not a reason to buy all by itself, but and important influence factor in equity pricing. We have saved profit on many positions by watching this rating come down a couple of grades and taking profit or exiting the position.) The rating for CAP is C+. Again we want to see the direction of this rating as well as the current rating.


We will take the liberty of showing you the some more of the IBD check up. We feel OK with this as we just gave you a guarantee even they don’t offer. Here you can see the general market trend as “Uptrend under pressure” we have already spoke about this. Then you see if the industry sector is in or out of favor. A yellow dot means it is in between. You can see the other categories are all easily graded with green, yellow, or red dots. These are great guides for reviewing fundamentals if you don’t want to dig and calculate them yourself.


In this screen shot you can see some of the technical indicators in the same format.


Then we look at the chart. We apologize as we are currently enrolled in a home study program in charting and have a trial access to charting software that we cannot publish, so I am using the screen grab from IBD. We spend a lot of time talking about charting and what they might be telling you.
 On this chart for CAP, you can see a 10 week base forming on this stock (This is a weekly chart so each hash mark is a week.) Last week you can see a break out indicated by the large volume (circled) and the increase in price. If you were to look at the daily chart you would see the base drifted in the 19.50 to 21.00 range. It broke out to 23 + today.


Ok let’s go ahead and buy the stock. Not just yet. Let’s use one more free piece of information. We will take a quick look at the SEC filings. Here is the link for the Securities Exchange Commission. Once on this page, just enter the ticker CAP into the ticker search field and hit search. There you will see all of the filing this company has to make with the government. Everything in this site is absolutely completely true. Well, of course its not but if you lie on this website, you be in big doo doo. It’s about as close to the truth as you can get. If you have done the search for CAP, you will see all kinds of documents. The first thing we noticed was three recent 13G filings. These are filings that announce a significant change in ownership of the outstanding shares. All three of these are the result of 13d-1 filings which are purchase which result in the change of ownership exceeding 5% of the outstanding shares. This is important as there are three big players showing interest in the stock. That is worth noting.


About 9 items down you will see a filing called the 10Q. That is the required quarterly filings by the company to the SEC. Go ahead and open it up, then click on the large htm file. You will see the table of contents for the quarterly report. I encourage all of you to go to one of the stocks you own and read the last 10Q of one of your stocks. It is interesting and informative. On this page go to Managements Discussion and Analysis. This is where you learn what is important to this companies exec. By doing this you will become familiar with the vernacular for that industry. You will also learn the important metrics. For example management at CAP is talking about TEUs. Have you ever heard of that before? I had not, but now we know the TEUs are twenty foot equivalent units (20’ Trailers). You can see that CAP improve their TEUs under management by 11.5 in the 9 months ending September 2010 compared to last year. Here is the type of news you want to hear from a CEO: “Total revenue of $52.7 million for the nine months ended September 30, 2010 increased $2.7 million, or 5.5%, from the nine months ended September 30, 2009, due primarily to the increase in container rental and management fee revenues resulting from the higher average utilization of both our owned and managed containers, offset in part by lower gains on sale of container portfolios and a decrease in finance lease income. Operating expenses for the nine months ended September 30, 2010 decreased $2.3 million, or 7.2%, from the same nine-month period in 2009, mainly as a result of higher gain on disposition of used container equipment and decreases in storage, handling and repairs expenses, amortization of intangible assets and impairment charges, partly offset by increases in MG&A expense, foreign exchange loss and depreciation expense. Our net income increased $7.4 million, or 70.6%, to $17.9 million for the nine months ended September 30, 2010, from $10.5 million for the comparable period in 2009. The increase in net income resulted primarily from higher revenue, lower operating expenses, interest expense and income taxes.”

So now you read the SEC filings so let’s go buy some of this stock. After all I said I would show you how to make sure you would never loose more than 8% and make up to 25% or more. Well, in reality I would not buy this stock. Why? Well it’s not bad and the recent big block purchases do have me intrigued and it is going on my watch list, but I am confident there are bigger fish in the sea so this one is going on my watch list. With that said, mechanically let’s assume we were going to buy the stock.

Again we are looking for a 7% return annually and the market is in an uptrend be it under pressure. Now the stock just had a 15% jump which is huge and might scare off some players. In fact I am hearing quite a few people say the market needs to adjust down so they can buy some stocks. Never try and catch a filing knife. Always try and buy on the way up. We will save the conversation about buy on dips for another day. We would look for one or two more days of upward movement on at least average volume, preferably 10-15% above the 50 day average volume figure. (You can get that on almost any finance page by just putting in the ticker and playing around with the chart.) So once we get that, look for a buy point of $24.00-24.25. (If you are a true blue CANSLIM fan you would not buy into a stock right after a 15% jump, but let’s play along.) If we get our volume and we get in at $24.00 then we IMMEDIATELY put a stop order in at 8% below our buy point. Don’t think about it, just do it. That is how we can guarantee you that you will never loose more than 8%. When CAP makes it way up, look for the next quarterly earnings report OR a 24% gain, which ever comes first. At that time go through the same exercise again. Between now and then, check in with IBD and FinViz. Have the fundamentals changed. Have the ratings changed? If the quarterly comes out before you see your 24%, read it. What does is say about trending of the TEUs. What is management saying about top line growth? Has anything critcal changed. If it has, get out with a small profit. If the stock hits 24%, go through the excersize again and if you still like the stock, move your stop up to 8% below your 24% gain. In other words if you got in at $24.00 and it is now at $28.00, move your stop to $25.75. You have guaranteed yourself 7.33%. Hey that is our annual goal. Cool how that works.

OK only 8 more to do.  Just kidding.  It's late.  We will do the analysis on the balance of the list and then show you some buy points, stops and when to review in the next Blog.

Salve Lucrum




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