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Tuesday, December 28, 2010

Is CSC on the verge of better things?

Computer Sciences Corp (CSC) popped up this weekend on one of our screens at Alert HQ Premium. It was on the short list of stocks that had just raised their dividend and that showed value stock characteristics.

CSC just increased their dividend by 33%, going from $0.60 to $0.80. The valuation measures are quite attractive: trailing PE less than 10, PEG = 1.12, Price to Sales less than 0.5, Enterprise Value/EBITDA less than 4.

Better things on the way?

First, the technical picture. CSC appears to be in the process of breaking out. It has pushed above its 200-day moving average. In addition, its 50-DMA has achieved a bullish crossover above the 200-DMA though, truth be told, by only one penny. The chart below shows the situation. Another half a buck and the stock will be breaking above the previous recent high. That higher high would be a confirmation of a bullish trend..


Looking back at the company's financials over the course of the last year, the results have not shown accelerating earnings or revenues. On the contrary, sales and earnings have been stuck in a narrow range.

Is it possible that CSC is turning the corner? Can some of the company's latest initiatives finally begin to yield results? Will the company start to show better results in some of its traditionally strong segments?

As background, CSC provides consulting, systems integration and design, IT and business process outsourcing, applications software, web and application hosting to its clients in industry and government domestically and internationally. All things being equal, an improving economy should translate into growth in all these sectors. With legislators tightening the purse strings, however, government clients may not be as plentiful as the company would normally expect despite CSC's contention that improved IT efficiencies will increase productivity and reduce costs for governments.

What is interesting is that the company is pushing into some newer areas that have the potential to pick up the slack. The company is now touting its capabilities in the following currently hot areas:
  • cloud computing
  • health care billing systems and electronic records management
  • cyber-security
None of these initiatives will yield overnight success but, given that these areas are where industry attention is focused, they should allow CSC to position themselves for improved future growth. In the meantime, company management has increased expected earnings for 2010 by $0.05.

In summary, the story on this stock is future potential while the downside is limited by its reasonable value characteristics. CSC seems like another good candidate for your watch list.

Disclosure: no position at time of writiing

Wednesday, December 22, 2010

IT spending to increase in 2011 -- how should you invest?

A big part of overall technology industry profit is driven by spending in the Information Technology sector. Information Week recently released the results of a survey that provides a glimpse into 2011. The following chart summarizes the results of the survey:


The good news is that a total of 55% of of the 552 respondents do expect to see budgets and spending rise next year. Last year the number was 45% so we see continued improvement. Only 19% expect to cut IT budgets compared to 24% of respondents in the previous survey. Finally, 26% expect to keep budgets flat compared to 30% previously. The biggest increase was seen in the group expecting to increase spending to rise 5% to 10% which went from 16% up to 27%. Supporting these budget expectations is the fact that 59% of respondents report growing demand for IT services at their companies.

This next chart shows where IT investments are expected to be made:


In general, every category is expected to see a modest increase. At the top of the list however, is virtualization. That suggests VMWare (VMW) should have a good year in 2011 as they are the leaders in the virtualization field.

The next category, data center infrastructure hardware, is much more varied in terms of the players. Companies including IBM, Dell, HP and recently Cisco are competing to supply servers. Cisco, Juniper, HP again and others are active in the networking sector. It becomes harder to determine a winner in this category. As a result, an investor might want to consider one of the hardware focused ETFs such as the Merrill Lynch Internet Architecture HOLDRs (IAH).

Then there is a plethora of semiconductor companies that support all the hardware vendors mentioned above. There is a good choice of ETFs here including the iShares S&P GSTI Semiconductor Index Fund (IGW), PowerShares Dynamic Semiconductors Portfolio (PSI), SPDR S&P Semiconductor ETF (XSD) and Merrill Lynch Semiconductor HOLDRs (SMH).

Back-office software is expected to improve and here we would expect to see continued strength in Oracle, currently the leading company in that sector; however, there are certainly many other players including Salesforce.com, Microsoft and SAP. Again there are several ETFs that cover the sector well including the iShares S&P GSTI Software Index Fund (IGV), Merrill Lynch Software HOLDRs (SWH) and PowerShares Dynamic Software Portfolio (PSJ).

If you can't decide on a particular sector, there are always a number of broad technology ETFs, most of which have the advantage of trading large daily volumes. The most well known are the iShares Dow Jones U.S. Technology Sector Index Fund (IWY) and the Technology Select Sector SPDR Fund (XLK).

Finally, if you want to truly focus on IT, there is the Vanguard Information Technology ETF (VGT). This ETF includes all the stocks listed above plus various outsourcing/consulting companies, a number of chip makers and even Apple (the ETF's largest holding), Mastercard and Visa. As the weekly chart below demonstrates, this ETF has performed quite well and is at 3-year highs.


Based on the results of the Information Week survey, VGT has a good shot at hitting further highs next year. This should be one of those times where buying on a pullback could be a very good strategy.

Disclosure: none

Source: Outlook 2011: IT Trends to Watch

Wednesday, December 15, 2010

Intevac -- breakout in progress, more room to run?

One of the stocks that popped up on Alert HQ earlier this week is a tech stock that looks a lot like a value stock. I'm talking about Intevac (IVAC).

Intevac is a small cap stock that has broken out in a big way. It's up over 50% from its most recent low in mid-September. The question is, however, is it now over-priced?

First, let's take a look at the weekly chart:


You can see that it's gone from around $9 to almost $15 which is a sizable move. A pull-back seems almost inevitable. Yet, after that potential pull-back runs its course, there could be room for further gains. Here's why:

The basic scenario is that this stock currently looks like a value stock. If it is perceived to be a growth stock, then there is opportunity for its multiple to increase.

Let's take a look at the financials and establish its value qualifications. Here are some valuation characteristics:
  • Trailing PE is 11.48, which is quite reasonable for a tech stock. Forward PE is 17.61 which is not excessive.
  • PEG is only 0.9 which is in a range considered to be good value
  • Price to Sales and Price to Book are both about 1.6, again good value
  • Enterprise Value/EBITDA is less than  6 which is definitely value territory
  • Ratio of  Enterprise Value to Free Cash flow is 8 which is in the value sweet spot
  • The company has virtually no debt
So the company is still quite reasonably priced thus far. Is there a growth pattern appearing that will allow the stock price to continue it's climb? Here is the chart from Google Finance:

There has been a big jump in both revenue and earnings from Q2 to Q3 but a slowdown in growth from Q3 to Q4. If the company can just resume modest growth from current levels, there should be room for stock price appreciation. What factors might provide investors some confidence that this might actually happen?

Management effectiveness seems to be pretty good. Return on Assets and Return on Equity are both in double digits which suggests that management is providing good returns for shareholders.

What about the company's product mix and industry outlook? Intevac is a major player in the manufacturing of magnetic media for disk drives. Over 60% of the world’s hard disk output is produced on Intevac systems. The companies solar processing segment is involved in providing manufacturing and inspection platforms for thin film solar cells. The photonics segment is involved in sensors, specialized cameras, night vision, material identification (including biologic and explosives detection).

The good news is that in the age of pervasive computing, PCs are not the only products that use disk drives. Everything from iPods to massive enterprise data center disk storage systems need magnetic media. As the volume of data continues to grow nearly exponentially, in the cloud, in the data center and in your hand-held devices, it would seem that Intevac is in a good position as the major supplier of disk manufacturing systems.

Similarly, sensors of all kinds are proliferating so the company's photonics segments has a shot at doing well in the niches servicing the law enforcement, pharmaceutical, industrial inspection and laboratory markets.

Thin film solar cells are considered to be the latest, leading edge technology in the photovoltaic industry. It is promising that Intevac is involved in thin film manufacturing and inspection systems at this point in time and that perhaps the company can leverage this into a leading position.

All in all, the company is priced reasonably and still has the potential to follow through on its recent breakout. It's worth it for investors to keep an eye on Intevac and be ready jump in if the company begins another leg up.

Disclosure: no positions at time of writing

We'd like to hear what you have to say!

For anyone who has tried the Trade-Radar Stock Inspector, I have set up a facility that will allow you to give your opinion. I now have a survey page available.

Basically, I am very interested in hearing what new features users might like as well as anything that users feel really needs improvement.

Even if you are not a user of the software but would consider using it if it could do something you need, go ahead and tell me your ideas. I am open to all suggestions.

The survey page is available on the drop-down menu associated with the "Stock Inspector" menubar item. Or, you can just click on the following link:


With the current version of the software fairly stable, it is time to look for improvements. I look forward to hearing your ideas.

Saturday, December 11, 2010

ETF Trending Report -- one sector to avoid, one sector to consider

One of the first things I like to check every weekend is the ETF Trend Performance week-over-week report. It gives a great summary of what happened to more than 300 ETFs with respect to change in trend. (It is currently available at the free preview of Alert HQ Premium.)

Some weeks, ETFs in certain sectors dominate the top spots or the bottom spots and in other weeks it's a mix. This week it's pretty clear who the biggest winners and losers were.

The winners --

Financial ETFs held the top four spots this week. The following chart is from the report:

Change in Trend Score Symbol Name Current Trend Score Change in Price Percent Change in Price
3 UYG ProShares Ultra Financials ETF 5.5 4.05 6.71
2.25 IYG iShares Dow Jones U.S. Financial Services Index Fund 4.25 2.55 4.67
2 RKH Merrill Lynch Regional Bank HOLDRS 4 4.02 5.05
1.5 XLF Select Sector SPDR Fund - Financial 4.75 0.58 3.82

Given the highest possible trend score is only 6 (denoting a very strong bullish trend), an improvement of between 2 and 3 is pretty significant.

The following chart shows IYG. Trend lines are drawn in blue. You can see that the down-trend seems to have ended and an up-trend seems to be solidly underway.


For these ETFs, even after a big gain in trend score, there is still room for further improvement.

The losers --

Bonds are clearly in trouble. The following 8 ETFs all registered a noticeable decline in trend score even while the overall stock market showed a weekly gain. The following chart list them all:


Change in Trend Score Symbol Name Current Trend Score Change in Price Percent Change in Price
-1 TIP iShares Lehman TIPS Bond Fund 3.25 -2.35 -2.16
-1 TLT iShares Lehman 20 Year Treasury Bond Fund 1.5 -1.74 -1.83
-1 VCIT Vanguard Intermediate-Term Corporate Bond ETF 3.25 -1.36 -1.7
-1 VCLT Vanguard Long-Term Corporate Bond ETF 2.25 -0.44 -0.56
-1.25 VGLT Vanguard Long-Term Government Bond ETF 1.75 -1.39 -2.26
-1.5 IEF iShares Lehman 7-10 Year Treasury Bond Fund 2.25 -2.41 -2.51
-1.5 VGIT Vanguard Intermediate -Term Government Bond ETF 2.75 -1 -1.6
-2 AGG iShares Lehman Aggregate Bond Fund 2.25 -0.96 -0.9

Whereas the problems in the bond market started with municipals and 30-year Treasuries, you can now see that corporate bonds are getting hit, too.

Conclusion --

As much as I dislike the financial sector, perhaps a recovery is actually on the way and this isn't a head fake. After all, these results are based on weekly data so perhaps the move has some real strength. We shall have to see.

As for the bond ETFs, in mid-October I wrote a post titled "Has the bond bubble burst? ETF trending provides a clue". At that time I used daily data and the post met with some skepticism. Today's trend score results provide confirmation that bonds aren't getting any better.

Thursday, December 9, 2010

How much longer for the semiconductor rally?

Two of the leading ETFs on the Trade-Radar ETF Scorecard report at Alert HQ Premium are semiconductor ETFs, specifically the Merrill Lynch Semiconductor HOLDRS (SMH) and the ProShares Ultra Semiconductors (USD).

Both of these ETFs carry the highest possible score for maintaining a bullish trend. As an example, take a look at the chart of SMH below:


How long can this go on?

KPMG conducted a global survey of semiconductor executives. Most of the results are quite positive. Executives expect mid-single digit improvements in hiring, R&D and profitability in 2011 compared to 2010. That sounds good but in actuality, 2010 was a very strong year and the outlook for 2011, while quite decent, reflects a potential moderation in the pace of growth.

In particular, the surveys indicates only 39% of executives expect revenues to increase by 10% or more whereas 54% expected 10% revenue gains in 2010. Similarly, 37% of respondents anticipate profitability growth in excess of 5% for 2011, while a year ago 76% expected that level of growth for 2010.

More ominously, survey results show that 53% of respondents anticipate the semiconductor cycle will peak within the next 12 months.

It's OK to ride the trend but investors should be alert and exercise caution. Note that just today (Thursday, 12/8), National Semiconductor (NSM) reported Q2 EPS of $0.34 (+78%) which beat estimates by $0.02. Revenue was $391M (+13.3%) vs. $400M. In after hours trading, shares initially fell 8% before recovering somewhat to -4.7%. The drop was attributed to a weak revenue forecast that came in significantly below analyst expectations. This just goes to show how volatile the chip sector can be and it may also be an early confirmation of the more downbeat predictions of these survey respondents.

Thursday, December 2, 2010

Labor shortages in the most populous nation on earth?

Factory workers in China
Earlier this year there were a series of articles in several mainstream newspapers and magazines and on a number of blogs that described labor shortages occurring in China. At the time, I missed all these articles but now I've seen the topic pop up on a couple of tech sites that I visit and I became interested.

Accordingly, this post is not intended to provide a specific piece of investment advice but is more an exploration of a news item that I thought might be worth exploring since many of us are focused on China as the engine of the global economy.

On the DigiTimes web site, an article declares that China's labor shortages are worsening, particularly in the eastern region. Labor shortages are now an annual issue, but the problem has occurred earlier this year and is more severe. The situation is expected to get worse before the Lunar New Year (in February). In particular, the authors quote managers of electronics firms involved in manufacturing flat panels and related components.

One of the companies mentioned in the article indicated that orders for November and December are even higher than those in October, which registered record monthly sales, but the labor shortages could affect sales in the last two months of 2010.Essentially, they are implying that they cannot accommodate all the business that is available.

The component makers indicated that labor shortages typically worsen as the Lunar New Year approaches and many workers return to their hometowns. Most laborers should return after the holidays but some will decide to stay home. Though the labor shortages will ease, manufacturers will have to continue to monitor the issue.

Land of migrant workers?

I never realized this, but many Chinese factory workers are actually migrant workers. In China's case, migrant workers go from the country to work in factories in cities. In contrast, what we are familiar with in the US is that migrant workers end up in the country working in farmers fields.

There are several reasons contributing to labor shortages beyond holiday vacations. The cost of living in factory towns and cities has increased dramatically while wages have not nearly kept pace with price increases. Many workers feel it is just not worth it to leave their hometowns and families behind in order to work for wages that, after subtracting basic living expenses, leave little left over for savings or discretionary spending. In the meantime, more and more young people are getting college degrees and are unwilling to work in factories for low wages. This further reduces the pool of potential factory workers.

These cost of living issues are foremost among the many important reasons why the Chinese government and central bank are actively taking steps to slow inflation. And factory managers are finding that they need to offer more competitive wages.

Slowing inflation reassures the workers they will have some money left in their pockets after payday. Increasing wages will help transform China into more of a consuming economy instead of single-mindedly being a manufacturing/exporting economy. Reducing labor shortages allows Chinese manufacturers to avoid turning down orders. If the government is successful in taming inflation and workers get raises, it could be a win-win situation. With respect to the manufacturers, however, it remains to be seen whether increased sales will offset higher wages.

Given the lag in the effects of government actions and the pace at which wage increases are being rolled out, some company managers are choosing to build new factories further in the western, more rural part of China instead of in the crowded, high-cost eastern half. This, in turn has its own effects, some of which are actually very good. It reduces the need for workers to live a migratory lifestyle. It makes it worthwhile for China to continue its binge of infrastructure projects, especially the energy and transportation projects (which also happen to provide jobs), in order to make the west more friendly to manufacturing and hi-tech. This will spread prosperity more evenly across the country and reduce social tension between rural and urban and east and west.

If labor shortages persist, I wonder how China will respond. It's clear that they are reluctant to allow anything to impede the manufacturing juggernaut that has resulted in China being called the world's factory.  Will Chinese companies begin to build factories in other countries? Will China invite in foreign guest workers like Germany did? Similarly, if labor costs increase, will China act like the US and send the jobs to the next lower cost country like perhaps Vietnam?

It's a complex issue and an important one now that China has assumed such a significant place in the global economy. It will be interesting to see how China deals with the situation.

Disclosure: no positions

Monday, November 29, 2010

Top trending ETF last week -- PowerShares Dynamic OTC

An ETF I wasn't familiar with showed up on the ETF Trend Performance Report at Alert HQ this weekend. At the top of the list, with an improvement of 2.5 points out of a total of  6 possible points was the PowerShares XTF: Dynamic OTC Portfolio (PWO).

This ETF is not based on the typical market cap weighted passive index. PWO is based on the Dynamic OTC Intellidex. This is an "active" index that selects holdings based on a variety of investment criteria including fundamental growth, stock valuation, investment timeliness and risk factors. In other words, this ETF is an actively managed fund, whether managed by computer or by a human investment committee, the literature does not say. In any case, the goal is provide alpha beyond what the typical ETF would offer.

The following diagram, from the PowerShares Dynamic ETF prospectus shows how the selection process is handled:


The 5-year return of the Dynamic OTC Portfolio ETF may not be especially impressive when compared to the NASDAQ Composite but over the course of the last year, PWO has indeed outperformed the NASDAQ as shown in the chart below:


In terms of market cap, this ETF is currently holding roughly 37% mid caps, 35% small caps and the remainder in large caps. With respect to styles, PWO is clearly over-weight growth stocks as opposed to value stocks.

This Intellidex approach to selecting stocks for this ETF seems to be working for the time being. As we all know, markets change and what used to be successful can lose its luster. But for now, PWO is trending strongly bullish. Investors should take notice.

Disclosure: no positions 

Thursday, November 18, 2010

7 value stocks that just increased dividends

Now that the Fed has rolled out QE2, many investors are surprised that bonds have been struggling, especially the longer maturities. Those ETFs that hold 20 and 30 year Treasuries and corporate bonds, for example, have been especially weak. While this has resulted in higher yields it is having the unfortunate effect of decreasing the capital gains that investors have enjoyed after a multi-month run-up in prices. This is making life complicated for dividend and income investors.

Among the features of the Alert HQ Premium site there are several stock screens that focus on dividends. In particular, I will be identifying those stocks that just raised their dividend during the previous week and yet are still more or less in the value stock category.

The following list is from this weekend's screen:

Symbol Name Last Price EV to EBITDA PE Ratio Price to Sales New Dividend Yield New Annual Dividend Old Annual Dividend
AFSI AmTrust Financial Services, Inc. 16.27 7.1 8.13 1.17 1.97% 0.32 0.28
DDIC DDi Corp. 10.56 6.89 13.09 0.89 3.79% 0.40 0.24
LFUS Littelfuse, Inc. 44.01 8.28 17.96 1.81 1.36% 0.60 0
LINC Lincoln Educational Services Corporation 14.91 2.59 5.97 0.61 6.71% 1.00 0
MHLD Maiden Hldgs Ltd 7.68 5.78 8.69 0.5 3.65% 0.28 0.26
PFG Principal Financial Group Inc 28.34 8.81 15.32 1.02 1.94% 0.55 0.50
PH Parker-Hannifin Corporation 79.39 9.53 18.26 1.24 1.46% 1.16 1.08

Many of these stocks have been discovered by investors and are in solid up-trends.  AmTrust Financial Services, DDi Corp, Littelfuse, Principal Financial Group and Parker-Hannifin all fall into this category.

One is beginning to recover from a sell-off:  Lincoln Educational Services which I recently wrote about in the post titled "For-profit education stocks -- throwing Lincoln Educational Services out with the bathwater?".

Then we have Maiden Hldgs. This stock seems to have been consolidating for a couple of months now. It was threatening to break out when the recent pull-back began. After today's gains, it is now positioned for a breakout again.

This list of stocks fits the bill for anyone who considers themselves to be value investors but who want the safety of dividends and a bit of momentum, too. For the most part, then, these stocks have three important things going for them:
  • Rising dividends which are generally an indication that management considers the company's financial position to be strong 
  • Reasonable valuations indicating the stocks are not particularly over-priced
  • Rising trend-lines that are an indication that the market has some confidence in these stocks
As such, these seven stocks are good candidates for income investors and value investors alike.

NOTE: To see the original page from which this list came, click on this link to see Value Stocks with increasing Dividends. The value criteria are also included on the page along with market cap and price data and you can download the list into Excel.

Disclosure: no positions in any of the stocks listed

Thursday, November 11, 2010

For-profit education stocks -- throwing Lincoln Educational Services out with the bathwater?

You may be a aware of some of the controversy surrounding for-profit schools like Apollo Group's University of Phoenix. The U.S. Department of Education intends to review financial-aid practices at the school.

Many for-profit education companies face federal scrutiny because almost 90 percent of the companies’ revenues derive from funds from the Title IV federal aid program. Many of these funds are disbursed to the schools as government-guaranteed student loans. Essentially, the schools can't lose if students fail to finish their degree programs or default on the loans. The schools have been accused of marketing too aggressively to sign up students and get their hands on the Federal student loan money with little regard for the students or their potential to actually benefit from the programs being offered. The difficulties many students have in obtaining the jobs the schools led them to expect has also led critics to contend that the for-profit schools are simply in business to obtain Federal loan dollars.

On today's Alert HQ Premium Value and Growth Report, however, there is a for-profit school that may be worth your consideration. Lincoln Educational Services (LINC) recently announced earnings and exceeded expectations. The following chart from Google Finance shows the improvement on both top-line and bottom-line:

 By virtue of being on the Growth and Value Report, the company needed to register year-over-year growth in earnings and revenue as well as sequential quarter-over-quarter growth. Lincoln was able to deliver that kind of performance.

Valuation --

As a result of the sell-off in the whole for-profit education sector, Lincoln's valuation has been driven deeply into value stock territory. At this point, the PE is less than 6, PEG is less than 0.6, Price-to-Sales is merely 0.61 and Enterprise Value/EBITDA is a paltry 2.73. These numbers are characteristic of very deep value.

Not only is the valuation attractive, but other financial measures are notably good. With the combination of Return on Assets over 20% and Return on Equity over 31% management effectiveness appears to be solid. Net Profit Margin of nearly 11% is almost twice that of the sector. Price to Cash Flow is roughly three times better than that of the sector.

Momentum --

In terms of momentum, the stock has appeared on the Alert HQ Trend Leaders list which means that three trending measures are all currently positive. In the following chart, you can see that Wilder's DMI, MACD and Aroon are all bullish:


The outlook --

As alluded to above, enrollment counselors have in some cases been accused of over-promising the benefits of attending these for-profit schools and also of enrolling less than qualified students who have little chance of do well. With the jobs students expect failing to materialize, the student is left owing money on their student loans and facing serious difficulties in making the payments. Ultimately, the taxpayer is left holding the bag if the students default. The schools, however, are left relatively unscathed though a school may lose its eligibility to receive federal financial aid under certain Title IV programs if its Cohort Default Rates (CDRs) exceed specified percentages in the 25% to 30% range.

The question is, should Lincoln Educational Services be considered one of the major offenders in this game of roping in students just to harvest the student loans?

The company says its 2-year CDRs range from 8.69% to 13.42%. Unfortunately, regulations have changed and now 3-year CDRs are being used. The company's CDRs are not so good for this extended evaluation range; however, the company has said that the new regulations will mean that they will stay more involved with the students for a longer time. Lincoln intends to actively work with former students in danger of defaulting during the 3-year measurement period in order to help them manage their outstanding loan commitments and to counsel them on alternatives to meet their financial obligations.

Also, Lincoln is different from University of Phoenix, for example, in that Lincoln tends to focus on training for fairly down-to-earth professions rather than offering degrees like liberal arts or communications. This should tend to make graduates more employable as they enter the job market with more specific skills.

So have investors thrown the baby out with the bathwater? Lincoln Educational Services is clearly cheap at current levels, their earnings and revenues are growing and, after seeing the stock plunge, positive momentum is now building. That momentum suggests that the fear of government scrutiny may be over-done with respect to Lincoln Educational Services. Which all implies this stock is a buy.

Disclosure: no positions

Monday, November 8, 2010

Coal and dividends make a good mix

This weekend's report on reasonable value stocks that increased dividends in the last week included two stocks. The one I'd like to focus on is Alliance Resource Partners, L.P. The symbol is ARLP.

The company just raised its dividend from $3.24 to $3.32 which works out to a forward annual dividend rate of 5.5% which, in these days of zero interest rate policy, is not too shabby.

As the title of this post suggests, the company is engaged in the production and marketing of coal for utilities and industrial users. They also provide systems and services for the mining and transportation of coal.

I alluded to the fact that the company qualifies as one of my "reasonable value" stocks. With a PE of 8, a PEG less than 1, Enterprise Value/EBITDA less than 6, Price-to-Sales less than the average for both the sector and the S&P 500, the stock certainly can't be considered particularly over-priced.

In terms of growth, y-o-y revenues increased by 37% and y-o-y earnings doubled. On a sequential basis, however, the most recent quarter saw a dip in earnings compared to the previous quarter as shown in the chart below from Google Finance:


The moderation in sequential quarterly top-line and bottom-line growth seems to be putting some pressure on the stock price. The chart below shows that the stock has run into some resistance:

 
You can see the mixed signals on this chart. While the stock consolidates, MACD has been in decline. Slow Stochastics also seem to trending lower though there has been a recent spike upward. The most promising technical feature is that the 50-DMA seems to be providing good support. Note as well that the stock has roughly tripled over the last two years so it is not unreasonable for it to take a breather at this point.

The outlook --

The fundamentals for coal are primarily driven by economic activity. As a result, the growth in the U.S. economy, painful as it may be, is leading to increased demand for electricity. This should support pricing as demand from utilities should remain firm. Furthermore, foreign markets are also showing demand for coal for both steel making and utilities.

Another positive factor is that there is now a perception that, with Republicans in the ascendancy, regulations may be easing on coal-fired utilities. The assumption then is that coal will remain a primary fuel for power generation and that alternate energy sources may see less of a push from the government.

So as Alliance Resources flirts with its 50-day moving average, the stock may actually be providing a decent entry point. Keeping in mind that the company is still fairly cheap, a failure to break below the 50-DMA would be reassuring, indeed.

Disclosure: no position at time of writing

Tips for Trade-Radar users - correcting weekly and monthly data

Just a couple of days ago I wrote a post about the newest release of the Trade-Radar Stock Inspector software (read: Trade-Radar Stock Inspector update -- especially important for those who track weekly and monthly data). As the title suggests, that post focused on improvements in the processing for weekly and monthly data.

This post is a follow-on to explain how to correct old price data that may contain errors from back before the latest release. Note that stocks with weekly data in the database have the suffix "-W" tacked onto the symbol in the "Stock Symbol" dropdown. Similarly, stocks with monthly data in the database have the suffix "-M" tacked onto the symbol.

Even if you are not sure if you have erroneous data, it is easy to just get rid of it and get fresh data. Here are the steps to take:
  1. Select the stock or ETF you wish to fix and click the "Search Database" button
  2. If the chart is displayed, click the Exit button at the top right corner of the chart
  3. Click the garbage can icon on the toolbar. This is the one where the tool-tip says "Delete bulk data"
  4. In the form that pops up, click the checkbox titled "Delete all Price data for this symbol"
  5. When the form disappears, just click the "Load Data from Yahoo!" button.
Following this process will allow you to discard old data and refresh it with the latest, most correct data. After that, you can display charts again.

By the way, you may not know that moving averages are handled somewhat differently for daily versus weekly versus monthly data. Here is a breakdown:
  • For daily data, we plot 20-day and 50-day moving averages
  • For weekly data, we plot 10-week and 40-week moving averages
  • For monthly data, we plot 6-month and 12-month moving averages
I hope this post helps you with any concerns you may have with the software.

To get the software --

As always, anyone who already has a registered copy installed on their PC is welcome to get the update for free. Anyone else who is interested in starting or continuing their 45-day evaluation is also welcome to download it at our Download page. Just click one of the "Download Now" buttons and it will take you to the page where you can download the full install package.

If you already have a recent version installed, you can download just the program executable by clicking [ this special Download link ]. Just be sure to copy the downloaded EXE file into the folder where the Trade-Radar Stock Inspector is installed. That would typically be C:\Program Files\Trade-Radar\Trade-Radar Stock Inspector

Sunday, November 7, 2010

Bulls get a reprieve -- market breadth positive again as stocks move higher

It has sort of been an event driven week. The mid-term elections were held Tuesday and the Republican surge occurred as expected. Since this was not exactly a surprise, market reaction was just modestly positive. On Wednesday, the Federal Open Market Committee finally announced QE2 and provided the details of how it would be implemented - carefully and with restraint. Markets barely budged until Thursday, when stocks finally put on a strong follow-through rally. Friday, the Non-Farm Payroll report was published and surprised everyone with a relatively strong gain in private employment. Perversely, the market reaction was a big "ho hum".

So Thursday provided a big gain and every other day in the week provided just small gains which in total, though, added up to a pretty strong week for the stock market with the S&P 500 up 3.6% and the Russell 2000 up 4.7%. Does that mean we no longer have to worry about the deteriorating breadth that we were seeing for the last two weeks?

The view from Alert HQ --

For those readers who are new to TradeRadar, the data for the following charts is generated from our weekly Alert HQ process. We scan roughly 6200 stocks and ETFs each weekend and gather the statistics presented below.

In this first chart below we count the number of stocks above various moving averages and count the number of moving average crossovers, as well. We then plot the results against a chart of the SPDR S&P 500 ETF (SPY).

You can see that two weeks of deterioration has been wiped out in a flash. Now, the number of stocks above their 50-DMA has managed to just sneak above the number of stocks whose 20-DMA is above their 50-DMA (yellow line crossed above magenta line). We saw similar behavior in the spring of this year and it presaged an extension of the rally that was underway at that time. It now suggests we should have a couple more decent weeks before facing the prospect of a pull-back again.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.

Here, too, we a reversal in the indicators. Now, the number of stocks in strong up-trends is once again surging though the number of stocks in strong down-trends only decreased slightly (not so surprising since it is already at a very low level).

Conclusion --

As some pundits suggested, the election was already priced into the market. Investors apparently had a "don't fight the Fed" moment on Thursday that resulted in the week's one day of big gains. Friday's excellent employment report didn't light a fire under stocks but did serve to support current levels in the market. This suggests investor sentiment is positive but still cautious, a good backdrop for stocks to climb the infamous  "wall of worry".

With breadth improving again, the Fed supplying liquidity and holiday hiring starting in earnest, conditions are looking better for stocks. In the short term, a few more weeks of strength followed by the pull-back everyone has been expecting for a while now should set us up for the next move higher.

Disclosure: none

Trade-Radar Stock Inspector update -- especially important for those who track weekly and monthly data

This is a quick post to let all of you know that a new version of Trade-Radar Stock Inspector is available.  We are up to version 6.0.10 now.

What has changed --

I received an email from a trial user the other day who said that he was encountering an error when he tried to enter a symbol for a stock on the Bombay stock exchange. It seemed to work fine for daily data but the program blew up when trying to get weekly or monthly data.

In solving this problem (the field that contains the symbol had to be made larger in the database), it got me started looking at how the program processes weekly and monthly data. And this led me to fix a few other things.

You may not have noticed that the program attempts to pull in intra-day data when the markets are open and you are retrieving daily data. It does a similar thing when looking at weekly data and monthly data. Where the problem occurred is that a new record was created for mid-week or mid-month data, leading to extra data points that shouldn't have been there.

The new version simply looks at the current day's data and determines whether any changes are needed to the data point for the current week or month. For example, increasing the weekly high might be required or adding the day's volume to the weekly volume accumulated thus far.  No more strange looking records are left in the database.

In addition to the changes listed above, we have also corrected a few other issues including the display of an incorrect number on the TradeRadar Technical Analysis tab on the Dashboard screen. The evaluation of the data was done correctly so the LED lit up as it should; however, the Latest Price data value displayed was not right. I'm sure that led to some confusion.

How to get it --

As always, anyone who already has a registered copy installed on their PC is welcome to get the update for free. Anyone else who is interested in starting or continuing their 45-day evaluation is also welcome to download it at our Download page. Just click one of the "Download Now" buttons and it will take you to the page where you can download the full install package.

If you already have a recent version installed, you can download just the program executable by clicking [ this special Download link ]. Just be sure to copy the downloaded EXE file into the folder where the Trade-Radar Stock Inspector is installed. That would typically be C:\Program Files\Trade-Radar\Trade-Radar Stock Inspector

I encourage you to give version 6.0.10 of Trade-Radar Stock Inspector a try. And be sure to report any errors that you encounter. I am always happy to fix problems and make the software better for everyone.

Tuesday, November 2, 2010

Q3 Earnings Aristocrats -- 30 stocks that delivered the goods

Consistency is tough to achieve.

The following table of stocks comes from a list of those companies that reported during the month or so that comprised earnings seasons in Q1, Q2 and Q3 of this year. The screen uses the following criteria:
  • The company beat earnings estimates each quarter
  • There was an increase in year-over-year earnings each quarter
  • There was an increase in year-over-year revenues each quarter
  • The company offered upside guidance in Q1 and Q2

Symbol Name Sector
ALTR Altera Technology
ANAD Anadigics Technology
APH Amphenol Capital Goods
APKT Acme Packet Technology
BWA Borg Warner Capital Goods
EMN Eastman Chem Basic Industries
ETN Eaton Technology
FFIV F5 Networks Technology
HITT Hittite Microwave Technology
INTC Intel Technology
IPGP IPG Photonics Technology
LXK Lexmark Technology
LZ Lubrizol Basic Industries
OFIX Orthofix Health Care
PII Polaris Inds Capital Goods
PRGO Perrigo Consumer Durables
RADS Radiant Systems Technology
RCL Royal Caribbean Consumer Services
RVBD Riverbed Technology Technology
SHOO Steven Madden Consumer Non-Durables
STJ St. Jude Medical Health Care
STRA Strayer Education Consumer Services
SYNA Synaptics Technology
TKR Timken Capital Goods
TLAB Tellabs Public Utilities
UNH UnitedHealth Health Care
VECO Veeco Instruments Technology
VMW VMware Technology
VSEA Varian Semi Technology
WBC WABCO Holdings Capital Goods

Not only did these companies deliver continuously improving results, they delivered the results promised in their upside guidance.To put things into perspective, this screen identified 30 companies out of almost 1400 stocks that have reported so far during this Q3 earnings season.

Loosening the criteria a bit by removing the requirement for upside guidance and the list increases in size from only 30 companies to 250 companies. This now pulls in companies like Apple, Microsoft and Coca-Cola among many others. Many of these companies simply offered no guidance at all. This was especially the case in Q1 where perhaps many companies became cautious as fears of a double-dip recession became more of a concern for the markets.

One thing that is noticeable is that the tech sector is especially well-represented on both lists. Though a few tech large-caps are present, like Intel, many of these companies are small-caps or mid-caps. Tech often leads the way during the first stages of recovery. This, to me, implies that the recovery, though sluggish in terms of employment, is solid in terms of company profits across the market cap spectrum. I think that is reassuring for those who are looking for the economy to continue to strengthen.

Disclosure: no positions

Power Integrations -- ready to power to new highs?

Do two data points make a trend? Breakouts by power semiconductor companies are starting to establish a pattern. A couple of weeks ago I wrote about ON Semiconductor (ONNN) in a post titled "ON Semiconductor -- on a roll as it breaks out". Today we have a breakout by Power Integrations (POWI) that is worthy of notice.

The stock has appeared on our Trend Busters list based on weekly data. Here is the weekly chart:


Note the breakout above the bearish trend line. If you look at a chart based on daily data, you will see that the stock is challenging its 200-day moving average. A little nudge and a bullish trend could be confirmed.

Background -- 

Power Integrations, Inc. designs, develops, manufactures, and markets proprietary, high-voltage, and analog integrated circuits for use in high-voltage power conversion. Their ICs are used in TV set-top boxes, DVD players, desktop computers, liquid crystal display monitors, and power adapters for notebook computers as well as power supplies for home entertainment equipment, appliances, light emitting diode (LED) light fixtures, and desktop PCs. The list of applications goes on and on; suffice it to say that the company's products are designed into a wide array of consumer electronics.

The fundamentals --

Power Integrations is necessarily a cheap stock but growth stocks never are. The following shows the Fundamental Analysis screen from Trade-Radar Stock Inspector:

[ Click to see larger image. ]

You will see that almost every LED is green. This indicates that the stock offers reasonable value, is exhibiting good growth, has very manageable debt and the dividend is secure. Management effectiveness, as measured by Return on Equity and Return on Assets is OK but should be a bit better for a growth stock.

The following chart is from Google Finance and shows year-over-year growth is solid while sequential growth is less impressive:

Last week the company announced Q3 earnings: revenue of $75.5 million with non-GAAP profits of 53 cents a share. This beat analyst expectations of $74.1 million and 49 cents.

In keeping with the caution and reined in projections that many semiconductor companies have expressed lately, Power Integrations has guided downward for Q4: revenue falling back to a range of $67 million to $73 million; the Street had been expecting $73.5 million.

The outlook --

The near term seems to be somewhat challenging for POWI but the company does have a couple of things going for it.

The company's chips are used in such a widely diversified array of products that the risk of problems in one sector of the electronics industry are unlikely to create to major headwinds. Every electronics products requires power - whether to charge batteries or to directly provide the juice to run the product. Power Integrations has ICs for both major categories.

As is increasingly the style these days, Power Integrations is trumpeting their clean tech credentials. The companies products are designed to ensure that power is not wasted. The company's energy-efficiency technology could be a positive differentiator.

Though the company's near-term forward guidance has been lackluster, investors seem to be overlooking the weakness. The stock has been strong for two months now, having bounced off a bottom established in early September. Investors must be focusing on the value aspects of the stock and betting on the a resurgence in the semiconductor sector. We'll have to see if the move is strong enough to surge above the 200-DMA and confirm the bullish reversal.

Disclosure: no position at time of writing

Saturday, October 30, 2010

Weekly Market Update -- things get shakier still

Last week I wrote a post titled "Weekly Market Update - cracks in the foundation?". It was the first time in quite a while that I had written one of these posts that presented TradeRadar statistics and reviewed what those statistics might be saying about the state of the market.

Last week I voiced my worry that breadth was was deteriorating and that, sooner or later, this would have a negative impact on the progress of the current rally. Though stocks managed to eke out another gain this past week, the underlying situation has not improved. If anything, it has gotten worse.

The view from Alert HQ --

For those readers who are new to TradeRadar, the data for the following charts is generated from our weekly Alert HQ process. We scan roughly 6200 stocks and ETFs each weekend and gather the statistics presented below.

In this first chart below we count the number of stocks above various moving averages and count the number of moving average crossovers, as well. We then plot the results against a chart of the SPDR S&P 500 ETF (SPY).
SPY vs the market - Moving Average Analysis, 10-29-2010

The negative cross-over on this chart, where the number of stocks above their 50-DMA has declined below the number of stocks whose 20-DMA is above their 50-DMA (yellow line crosses below magenta line), has continued for the second week in a row.This confirms the fact that the majority of stocks are in the process of slowing down or slipping. It also confirms my worried disposition in last week's post.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.
SPY vs the market - Trend Analysis, 10-29-2010

In this chart too, we see the previous week's deterioration continue to get worse. The number of stocks in strong up-trends is still declining and the number of stocks in strong down-trends is continuing to increase.

Conclusion -- 

Even as major averages continued to show week-over-week gains, the statistics we track show the foundations of this rally getting shakier and shakier. Moving averages are weakening and trends are loosing their vigor.

Last week I said that you should feel no pressure to buy stocks right now in fear of being left behind by the market. It now looks even more likely that a pullback is beginning to unfold. This feels like a time when the best course to minimize risk is to just stand back, keep your powder dry and populate your watch list. And of course I invite you to find those watch list candidates at Alert HQ and the new Alert HQ Premium.

Disclosure: none

Thursday, October 28, 2010

Riverbed Technology -- great company but too extended?

Glancing through the Over-Valued Over-Bought Report at the Alert HQ Premium site I noticed that Riverbed Technology (RVBD) was on the list.

The following chart gives you an idea about the over-bought aspect:


In terms of over-valued, consider some of the measures by which we generally evaluate stocks at Trade-Radar:
  • PE is 242, roughly 8 to 10 times higher than most growth stocks
  • Price to Sales is 7.33 close to triple what we see in many tech stocks with good growth characteristics
  • PEG is 1.75, high even for a growth stock
  • Enterprise Value to EBITDA is over 67 which is 10 times what you might see in a value stock and at least 6 times what you might see in other good growth stocks
Granted, the company is executing extremely well. Riverbed just reported Q3 earnings of $0.34 versus $0.27 estimates. Revenue increased 17% sequentially to $148M vs $135M estimates. Nevertheless, it's hard to see how that justifies the valuation measures described above.

After today's drop of 3.35% perhaps investors are coming to the same conclusion.

Disclosure: no positions at time of writing

Tuesday, October 26, 2010

3Q Earnings Scorecard -- which sectors are outperforming and which ones are most optimistic

We're pretty well along into earnings season and this is a good time to take stock of how the numbers are stacking up.

Below is a table that lists each sector shows the results as of Tuesday's earnings reports:

Sector Earnings Beats Y-o-Y Earnings Increases Y-o-Y Revenue Increases Upside Guidance Total Providing Guidance Total Number of Stocks Reporting
Basic Industries 24 26 35 5 13 40
Capital Goods 51 51 51 15 34 59
Consumer Durables 36 34 38 9 28 46
Consumer Non-Durables 26 28 29 6 14 34
Consumer Services 44 47 49 6 35 69
Energy 23 18 22
6 31
Finance 80 70 36 4 9 106
Health Care 25 25 36 8 25 43
Miscellaneous 13 10 11 1 10 15
n/a 1 1 1
1 1
Public Utilities 20 18 20 4 13 26
Technology 95 94 106 19 72 121
Transportation 17 27 25 1 3 27
Grand Total 455 449 459 78 263 618

A cursory glance gives the impression this earnings season has been pretty decent. The next table makes things a lot clearer.

This following table converts the numbers above into percentages:

Sector % Upside Guidance % Earnings Beats % Y-o-Y Earnings Increases % Y-o-Y Revenue Increases
Basic Industries 38% 60% 65% 88%
Capital Goods 44% 86% 86% 86%
Consumer Durables 32% 78% 74% 83%
Consumer Non-Durables 43% 76% 82% 85%
Consumer Services 17% 64% 68% 71%
Energy 0% 74% 58% 71%
Finance 44% 75% 66% 34%
Health Care 32% 58% 58% 84%
Miscellaneous 10% 87% 67% 73%
n/a 0% 100% 100% 100%
Public Utilities 31% 77% 69% 77%
Technology 26% 79% 78% 88%
Transportation 33% 63% 100% 93%
Grand Total 30% 74% 73% 74%

In percentage terms, this earnings season looks quite strong. Looking at the Grand Total line, aggregate numbers are definitely good.

Looking at the individual sectors (and leaving out Miscellaneous and n/a), Capital Goods has had the most earnings beats followed by a group of sectors in the high 70% range including Tech, Consumer Durable, Consumer Non-Durables and Utilities.

Similarly to last quarter, the high percentage of revenue increases shows that the earnings increases are not primarily due to cost cutting.

Another interesting fact is related to Upside Guidance. Where we had Tech providing so much upside guidance last quarter, this quarter the Tech number is merely 26%. Most surprising to me is that one of the highest percentages is in Finance sector. While the banks bellyache about the new Dodd-Frank financial regulation laws, many are predicting better times ahead. Looking further across the Financial line, it jumps out that almost twice as many companies had earnings increases than had revenue increases. I suspect that in many cases this is the result of simply reducing bad loan reserves, not any increase in profitable business.

So looking back on the 3rd quarter, the majority of companies seem fairly healthy. Looking ahead based on forward guidance, things look a little anemic. The optimism of the Financials stands in contrast to the conservative outlook of Tech, for example. Time will tell which sector outperforms next quarter.

Disclosure: none

Monday, October 25, 2010

Good news for dividend investors!

I thought this was a pretty good week for those who like stocks with dividends. According to our Dividend Growers report, there were 50 stocks that increased dividends last week. Unfortunately, there were also 32 stocks that cut their dividends.

It's worth looking at the composition of each list. One thing that jumps out is that of the 50 that increased dividends, 22 were funds, not actual companies. Many of the companies that are on the list, though, were in the energy, financial or REIT sectors.

Similarly, of the 32 stocks that reduced dividends last week, 22 are funds. Interestingly, seven of these dividend cutters are municipal bond funds. With interest rates on government and corporate bonds at historical lows, it is no wonder that bond funds of all types are reducing their payouts rather than chasing yield by going further out on the risk continuum.

What dividend lovers might like, however, is the list of value stocks with increasing dividends, what I call Reasonable Value Dividend Growers. A week ago the list was empty. This week we have the following three stocks:

SymbolNameNew YieldNew DividendOld Dividend
WSH Willis Group Holdings Limited 3.28% 1.04 N/A
NEU NewMarket Corporation 1.47% 1.76 1.5
MATW Matthews International Corporation 0.94% 0.32 0.28

Given that all three are Reasonable Value stocks, our standard measures of PE, Price to Sales, Price to Book, PEG, Debt to Equity and EV to EBITDA are all at pretty modest levels while all are free cash flow positive.

Here is a very quick look at each company:

Willis Group Holdings Limited ($WSH) -- Willis Group provides a range of insurance and reinsurance broking, and risk management consulting services to clients in various industries, including aerospace, marine, construction, and energy. After several consecutive strong earnings reports, the company's last quarter showed a sequential decline in both revenue and earnings. Nevertheless, the company was profitable enough to raise its dividend. The company reports most recent quarter earnings on October 27 so we shall see if they get back on track. From the chart below, it looks like expectations are for the company to return to form.


NewMarket Corporation ($NEU) -- NewMarket Corporation engages in the petroleum additives and real estate development businesses. The company offers lubricant additives and fuel additives that are used in various vehicle and industrial applications. In addition, the company owns approximately 64 acres of real estate property in downtown Richmond, Virginia. It has operations in the United States, Europe, Asia, Latin America, Australia, India, the Middle East, and Canada.The company has been around since 1887. From the chart below you can see that investors have been pretty positive on the stock.


Matthews International Corporation ($MATW) -- Matthews Int'l designs, manufactures, and markets memorialization products and brand solutions for the cemetery and funeral home industries in the United States, Mexico, Canada, Europe, Australia, and Asia.This company was founded in 1850 and, ahem, operates in an industry that will always have solid demand.


In summation, all three of these stocks exhibit increasing dividends, value stock characteristics and pretty attractive stocks charts. These stocks should be good news for dividend investors, indeed!

Note: all dividend lists and reports are available at the Alert HQ Premium Free Preview

Disclosure: no positions at time of writing

Sunday, October 24, 2010

Weekly Market Update - cracks in the foundation?

It's been over a month since I posted a weekly market update. During that time markets have been moving steadily higher. As of this weekend, however, I am seeing a bit of a turn in our market statistics.

The view from Alert HQ --

The data for the following charts is generated from our weekly Alert HQ process. We scan roughly 6200 stocks and ETFs each weekend and gather the statistics presented below.

In this first chart below we count the number of stocks above various moving averages and count the number of moving average crossovers, as well. We then plot the results against a chart of the SPDR S&P 500 ETF (SPY).

This chart shows that roughly 5 out of 6 stocks closed above their 50-day moving average two weeks ago but that number decreased over the course of this last week. In addition, there has been a negative cross-over where the number of stocks above their 50-DMA has declined below the number of stocks whose 20-DMA is above their 50-DMA. This always happens when things get a little shaky or when stocks get a bit too extended. Looking at how the market proceeded in other instances, we can see that it is unlikely stocks will immediately plunge. Indeed, it is quite possible that the S&P 500 will continue to make new highs for a time while our statistics as presented above continue to show a weakening in breadth. This, to me, implies the market has reached an uncomfortable level of risk.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.

In this chart also we see the beginnings of deterioration. The number of stocks in strong up-trends has begun to decline and the number of stocks in strong down-trends is starting to increase. Both measures are beginning their reversals from what can be considered peak levels. This situation also implies a weakening in market breadth.

Conclusion --

A weakening of breadth as described above does not necessarily mean you should rush out and sell all your stocks. The two most likely outcomes are as follows:
  • Within a few weeks time we see a modest pull back. I think earnings have been good enough that any move to the downside will be limited. This might actually provide some nice entry points.
  • We are at the beginning of a consolidation phase where stocks stop trending so strongly and move sideways for a while. This is not a terribly bad thing either as it sets us up for further gains (hopefully) after the market has digested the current run-up.
So the main take away here is that you should feel no pressure to buy stocks right now in fear of being left behind by the market.  This is a good time to populate your watch list of investment candidates. Like I always do, I'll recommend that you keep an eye on Alert HQ and the new Alert HQ Premium for good ideas.

Thursday, October 21, 2010

Synnex jumps and keeps on running

Today I'd like to feature a stock that appeared in one of the screens at Alert HQ Premium. The screen is titled "Value and Growth Report" and, as the name implies, we look for stocks that embody the best of both worlds: value and growth.

How the screen works --

Using daily and weekly data, we look for stocks that are in up trends or have broken out above their trend lines. Trend lines are constructed using the daily high prices. A stock must rise 5% above the trend line to trigger a BUY signal.

Out of this group of stocks on the move we identify those that have "reasonable value" characteristics according to the following criteria:
  • PE between 0 and16
  • PEG between 0 and 1.2
  • Price-to-Sales less than 2
  • Debt-to-Equity less than 1
  • EV to EBITDA less than 10
We then filter for those stocks with earnings and revenues that have shown improvement both year-over-year and sequentially and whose EBITDA is the same or greater compared to the previous quarter.

Only one stock last week --

Only one stock was identified last week: Synnex Corporation (SNX). This company, which has a billion dollar market cap, provides services in information technology distribution, supply chain management, contract assembly and business process outsourcing in North America, Asia and the U.K. it also owns the largest video game distribution company in the U.S. At the time it was selected for the "Value and Growth Report" (based on the data as October 15), it had the following characteristics:
  • PE : 8.32
  • PEG : 0.91
  • Price-to-Sales : 0.12
  • Debt-to-Equity : 0.15
  • EV to EBITDA : 6.32
  • Y-O-Y Earnings Growth : 40%
  • Y-O-Y Revenue Growth : 9%
  • Sequential Earnings Growth : 24%
  • Sequential Revenue Growth : 7%
It's clear this is a solid company, still in the value stock category, that has been overlooked thus far by investors; however, it looks like at least a few investors are starting to catch on. Here's how the chart looks:


Back in September the stock managed to move above the trend line and also above the 50-day moving average. Soon after, the price spiked based on a good earnings report.

Not only was the earnings report good, the forward guidance was much better than expected. Whereas a number of tech companies were predicting some weakness in Q4, Synnex indicated revenues would be stable and that expected EPS would be in the $0.94 to $0.97 range, much higher than the $0.88 that analysts were expecting.

There are a couple of caveats.Value investors typically look for consistency in the financials of the companies in which they are interested. A cash flow analysis of the last four quarters shows the numbers bounce all over the place. Here the chart from Google Finance:

The other issue that might be a warning to value investors is that Return on Assets and Return on Equity are decent but not great. Same situation with Net Profit Margin.

Conclusion --

Despite a few shaky numbers in the financials, Synnex is still an interesting value stock with strong growth characteristics. And given that Tuesday and Thursday's "Value and Growth Report" were completely empty, it makes the selection of Synnex all that much more notable.

Disclosure: no positions

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