whateverworks

Gone North, South or East Enders

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What goes up does not come down, or at least not much. Overall, it continues to go up. That's one of the basic principles in O'Neil's CANSLIM method. Although I don't strictly invest by CANSLIM rules, I do look for stocks trending up. If the stock is way overvalued chances are it will come down; however if the company is growing so fast that the rising stock remains bargained priced then I've probably found a winner.

When researching, I tend to apply this process backwards. The screens are best at finding companies with both good fundamentals plus top-line and/or bottom-line growth. They also can find stocks with good price-to-book, price-to-sales and/or price-to-earnings ratios. At one time I thought this was enough. But when I started my first Marketocracy fund a couple of years ago I discovered that if a stock had been flat (or trending downward) forever, it was likely to continue that way regardless of the rise in price I thought it deserved.

Although my free screeners can find price changes in a limited way, too often a rise or fall is a fluke. There's nothing better than my own eyes looking at charts to discern the overall trend. Therefore, once I have a candidate I look at it with Yahoo's Beta charting. This lets me see it for 5 yrs., 2 yrs., 1 yr., YTD, 6 mos., 3 mos., and 1 mo., one view after the other, in short order. I can add indexes such as the Dow Jones, NASDAQ and the S&P 500 to put things in even better perspective. Of course the best news I can get is that the stock consistently goes upward in all these views but, especially with microcaps, I really care most about the last 2 years.

Also, when I have an entire group of good candidates I can see them all together on the chart. (I have to be careful that they all load successfully.) The chart lets me eliminate those lines consistently lagging at the bottom of the group. For recent bear market periods, when even good companies look lackluster, I often add a proven winner for comparison purposes.

Also, when a company has been flattish for the past year, a glance at the charts can confirm that their usual growth pattern has somehow changed. It is probably time to sell.

A trend is hardest to see when the stocks are roller coasters. Some very active traders love this type of pattern and will happily make money from the ups and downs. I don't have the skill to do this; so have to decide if the overall yearly progress upward is strong enough to make the ride worth the nausea.

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Port Charles

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Are marine transportation companies still hot or are they now over-valued? In spite of getting in late on this industry, I hoped to find a decently-priced stock in the field. Back in October Eagle Bulk Shipping (EGLE) showed up in one of my experimental screenings; however, price to sales (ttm) was 12.41 (higher than I like) and many candidates surpassed it in other areas, too.

Looking at competitors to the recently popular Dryships (DRYS), Excel Maritime Carriers (EXM), then at the competitors to competitors, I found 21 shipping companies: NPTOY.PK, HUWHY.PK, CKH, DAC, DRYS, DSX, EGLE, ESEA, EXM, FRO, GMR, GNK, NM, OCNF, OSG, PRGN, QMAR, RAMS, SSW, TDW, TK, TNP, TRMA, TRMD. (The first two tickers were immediately ruled out because they are on the pink sheets.)

Are there really no outstanding deals left within this group? I decided to compare company figures to their industry as well as to the market in general. Yahoo shows the following industry averages:
          Qtrly. Rev. Growth (yoy), 14.00%
          P/E (ttm), 15.90
          PEG (5 yr expected), 1.39
          P/S (ttm), 4.25

Well, those statistics look like reasonable value. But where did they come from? Many of the shipping companies had "NA" for various data. Plus, the 5-yr. estimated PEG always makes me nervous. Who is making that projection, anyway?

I decided to make an Excel spreadsheet for all companies listing the above data plus 3 more columns: price-to-book, CAPS rating and stock price trend. Ten stocks went to the bottom of the heap immediately because prices were down, flat or squirrily. A few more (including the aforementioned EGLE) did not have the very top year-over-year growth rate. For the rest, I looked for low Pr/Bk, low Pr/Sls and 9 to 30 P/E combined with low projected 5yr PEG.

DRYS and EXM were close runners-up in spite of people saying they may no longer be the deal they were. The "Finalists" were QMAR, ESEA, DSX, and NM. In addition, I tentatively kept PRGN. This is a very new Greek company with few figures showing up at Yahoo; however it has received favorable writeups and has a CAPS of 4. As it turned out, neither PRGN nor NM shows up at Marketocracy under the correct company name. That left only Quintana Maritime (QMAR), Diana Shipping (DSX) and Euroseas (ESEA).

In my StrategyLab Fund I recently sold Jones Lang LaSalle (JLL), which was still down in spite of the fact that it is bargain priced, is growing, and does a lot of business OUTSIDE the US. This left me with about $70,000 to invest; so rather than try to decide among the remaining 3 companies I simply bought $20K of each.

May they and their stocks sail onward!

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Another (Brave New) World - Question of the Week

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The recent down trend and volatility are not affecting my portfolio decisions because I decided back in August that we were in for a long bear market with occasional rallies. The beginning of this contest coincided with the beginning of the downturn. My initial group of companies plummeted like a stone. Ideally, I would have switched to a shorting strategy; however I don't have any skills in that area. So I quickly modified my overall basic strategy by beefing up on foreign stocks and looking for bear-resistant industries. This is an ongoing search.

At the beginning of the slide, I read that ARMs will reset through March '08; therefore I predicted that this drag on the banking system, the construction industry, the economy and everyone's spirits would maintain an overall decline at least through the first quarter of '08. I was hopeful that during the summer of '08 banks could vigorously sell off the remaining foreclosed properties and we could start getting back to normal. Now, withmore heavy dominos falling than I'd thought, I'm looking toward lasting recovery starting in 2009.

More importantly, I think this slowdown, added to the falling dollar, has accelerated some long-term changes. Everyday investing in foreign stocks is not just coming; it's here. Permanently. A year ago investors were buying ADRs. Six months ago foreign ETFs were the newest, hottest thing. Today investors are looking for brokers who have relationships with traders located in foreign countries so as to buy and sell directly whatever they want while minimizing the necessary fees and commissions. I thought these changes would take place gradually over 5 or 10 years but instead they are taking place in 2007.

Worldwide markets are even more of a challenge and interesting than domestic. The fast change to global investing is great. As "Larry the Cable Guy" would say, "Git 'er done!"

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Betty La Fea (aka Fannie Mae) - Question of the Week

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You have GOT to be kidding. "Do you agree with Ken that Fannie Mae is the smart way to profit from the subprime meltdown? Would you add the stock to your portfolio?" -- No!

I don't care that FNM deals mostly with "conforming loans". Their decisions have been bad enough that investors are selling. Granted, their stock price drop has been less than their Government Sponsored Enterprise (GSE) siblings FRE and SLM. This is some sort of accomplishment, especially since SLM is down even though it does have loans which are guaranteed by the US government whereas FNM does not.

However, brother AGM has dropped less than FNM. In addition, although sister Ginnie Mae (owned by the US government) is not publicly traded, Fidelity's Ginnie Mae Mutual Fund (FGMNX) has actually held even!

I believe we do need loan secondary markets and loan guarantees. But why do FNM, FRE and AGM have "Govt. Sponsored Enterprises" (GSE) status and therefore the ability to raise funds they need at lower cost than other corporations? As far as I can see, this "status" is meaningless. The government does not guarantee these loans, nor does it manage these corporations. The public is just now waking up to this fact and the public is not happy. Therefore, I think FNM's stock price will go even lower. FNM's price is approaching book value and will, at some point, become a decent deal. However, their bottom line is down and the mortgage industry will be stagnant for some time. There are plenty of better industries to invest in at the moment.

Eventually, when the mortgage industry picks up again, FNM may be the best, undervalued stock to pick up. But I'll bet you a chocolate milkshake that a brilliant, young banker will put together a new corporation which will fulfill the same role, regain everyone's shattered confidence and pick up all the business.

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Dynasty - Looking Toward the New Year

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I recently sold Simclair (SIMC) out of my StrategyLab fund when it took a huge nosedive upon releasing 3rd quarter results. This increased my cash to the point I wanted to put the money to work to see if I could improve the fund before the end of the first contest. My best bet might be to hold the maximum amount of cash allowed and remain in compliance but that's no fun! I was still able to get a few more ETFs before being are over the maximum of 25% ETFs allowed in a portfolio; so I bought IIF (India), EWP (Spain), EWZ (Brazil).

My Magic Micro-Caps (MMC) fund turned 2 this October. Now that we're in the 4th quarter it was time to do my periodic review and probably eliminate any stock not up at least 5% or so over the past 12 months no matter how well it may have done before. (Stocks which I haven't held for at least a year don't count.)

For MMC I sold AWX, ANGN, BDOG, DLA, WVVI, TII. On some of these I'd lost money; however overall I'd made $242,032 on these companies. It was hardest to say goodbye to AWX and ANGN which had, previously, gone up over 100%. (When a stock goes up that much, or if it makes a big spike that I think is temporary, I sell half, thereby safeguarding profits.) I still like BDOG but sold feeling that its flat year is not likely to improve with the retail slowdown I believe is coming. At least it was still up 15.02% from when I bought. My holdings in WPCS, USAP, TRT, SPAR and EDGW are iffy. I'll re-evaluate before the end of the year.

I also recently sold ESMC, on bad news, and HDNG which took an inexplicably bad nosedive.

I bought more of companies I already held which have held up relatively well in recent months: ACTU, ARSD, ATRI, CTGX, FSTR, HMSY, KSW, LTFD, NEOG, NGS, TWIN.

MicroCaps tend to make the majority of their gains at the beginning of the year but they also do worse than larger stocks whenever the market is shaky. It will be interesting to see if these 2 factors cancel each other out in January and February '08.

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Ordinary (Chinese) World

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Shortly after "cleaning house" (Dynasty - Looking Toward the New Year) I read that China had frozen bank lending in an attempt to curb runaway investment in their market. So I quickly sold FXI, the Chinese ETF in my StrategyLab fund, managing to preserve some of the gains it had made. This freed up some more ETF (or non-ETF) dollars to invest -- but what to buy?

Every, single, foreign ETF I'm following went down, today -- Monday, Nov.19. (They are: FXI, China; EEB, BRIC; EWZ, Brazil; HDB, Bank India; PGJ, China; VWO, Emerging Mkts.; ILF, Mexico & So. America; FNI, Chindia; IIF, India; EWH, ChinaHongKong; EEM, Emerging Mkts.; EWP, Spain; EPP, Pacific ex.Japan; EWA, Australia; RSX, Russia; EWC, Canada; EZU, European Monetary Union; IEV, Europe; EFA, EAFE; EWS, Singapore; VPL, Japan; EWN, Netherlands; VEU, Emerging & Developed; EWQ, France; DLS, IntlSmCap; EWD, Sweden; ITF, Japan; EWJ, Japan; JSC, Japan; EWO, Austria; MXE, Mexico.)

Of my StrategyLab fund only VSE Corp. (VSEC), UltraShort Real Estate (SRS) and UltraShort Financials (SKF) went up, today.

Of my 53 Magic MicroCaps only 12 went up today. And I don't trust that figure because, especially with microcaps, Marketocracy can continue to update during the night. However, checking the Yahoo information for the biggest winner, HMSY, this health benefit services company was truly (and inexplicably) up about 6%! Well, that's the microcap market for you. Unfortunately I didn't feel this was the best stock for the StrategyLab contest fund.

Then doing a Google search for ETFs which are up recently I discovered ProsShares' new International Short and UltraShort ETFs! The outcome was simple. I replaced the long Chinese FXI with ProShares' UltraShort FTSE/Xinhua China 25 (FXP). I am still bullish on China for the long haul but for the short term of this contest, and maybe the next, I think there will be enough of a market correction to make the short-ETF a good bet.

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