Tuesday, August 28, 2012

Gold Stocks Are in an Absolute Sweet Spot

Three weeks ago I wrote that the short-term outlook in precious metals was bullish. Quoting the conclusion:

The bottom line is this sector is very close to a breakout which would likely confirm the May bottom. The price action has started to improve and the sector has not been deterred by the aforementioned bad news which, in normal conditions would have caused a sell-off. In the meantime, the public has been bearish the entire year and the dumb money has started to exit the market. It is this combination of factors that lead us to a firm bullish posture over the rest of the summer.

In terms of weekly closing prices, Market Vectors Gold Miners ETF (GDX) and Global X Silver Miners ETF (SIL) closed last week at a four-month high, while Market Vectors Junior Gold Miners ETF (GDXJ) closed last week at a three-month high. Silver closed at a four-month high while gold closed at a five-month high. From that it would seem that these markets are overbought.

However, a quick study of the long-term charts, sentiment, and valuations confirms that we are in an absolute sweet spot. Markets have bottomed, a new cyclical bull has begun, and there is substantial room to move over the coming months and year.

We begin with a chart of the bull market in the HUI and we highlight the cyclical bear markets. The 2011-2012 bear lasted about as long as the 2004-2005 bear but was a bit deeper (42% versus 36%). The fact that this bear corrected the recovery from the 2008 crash could be why various valuation and sentiment indicators are at such compelling levels (as annotated in the chart).

Next we chart my firm's proprietary silver index, which is comprised of 10 “growth oriented producers.” (The ETF SIL only has a few years of history). This index corrected 60% in 2004, 90% in 2007-2008 and 50% from 2011-2012. The current bear market was the almost the longest (short of the 2007-2008 bear) but the smallest with only a 50% correction. Yes, to say only 50% is ironic but in looking at the chart one can see that the correction appears to be quite routine. This chart has potential to be a cup and handle pattern which could have massive bullish implications for the next few years. (more)

Looking for Small Companies That Could Return Tenfold or Greater Multiples to Investors

The Life Sciences Report: Are your investors exclusively Canadians?

Hugh Cleland: Yes. Our funds currently are registered for Canadian investors only. That will likely change with our next fund, however.

TLSR: Are the holdings exclusively Canadian?

HC: No, they are not, and they don't have to be. But I do restrict myself to companies domiciled in North America.

TLSR: In a video interview you did with Biotechnology Focus in June, you said that you learned some important lessons while running a traditional long-short hedge fund in the past. What were those lessons? What is the weakness of this traditional money management model?

HC: I think 2008–2009 taught all money managers important lessons. Obviously, many fund managers were put out of business through redemptions. That is particularly true of managers focusing on small-cap and micro-cap stocks, since liquidity went almost to zero during that time. Many managers responded by abandoning the micro-cap and small-cap asset class.

But I enjoy that asset class. And the long-term returns to that asset class are so high (as demonstrated by the 2010 Ibbotson study on the returns to illiquidity) that we decided to come up with a structure that would allow me to manage micro- and small-cap stocks while avoiding the risk of being redeemed into oblivion in bad markets. We decided that a private equity/venture capital structure and approach was the best way to go. Using that structure, we launched the BluMont Innovation PE Strategy Fund LP (BIPES) on Jan. 31, 2011. (more)

Buy This 4% Yielder While It's Still a Bargain

As different as they are, stocks and bonds often share a key feature -- yield, the annual dividend or interest payment divided by the price of the security, expressed as a percentage. It's a simple concept, but it's one of most importance in investing.

This is because, as most investors quickly learn, yields fall when security prices rise. In other words, you're not getting as good a deal on the interest or dividend and could even be overpaying, depending on what the security's yield has been historically.

It's the type of thing I'm afraid might happen with an excellent small-cap stock I'd like to tell you about. The stock is yielding 4%, based on the current dividend of 66 cents a share, and recent stock price around $16.20, but this may not last long. The stock is set for quick growth in the price but not the dividend, so the yield could plummet -- soon.

The table below summarizes projected earnings, stock prices and yields for the next five years:

Earnings Table

I'm referring to Ingles Markets Inc. (Nasdaq: IMKTA), a leading food retailer that operates 203 large (65,000 - 80,000 square-foot) supermarkets in suburban and rural areas of the southeast United States. A big reason why I like Ingles is because it's one of those rare small-cap stocks (the market capitalization is only $393 million) that seems much bigger. It has been around for nearly five decades, has a great reputation and solid financial statements and pays a nice dividend. Additionally, the stock is typically 13% less volatile than the overall market.

The quick stock growth I'm predicting is related mainly to the company's ongoing effort to achieve outstanding customer service by providing modern, convenient, one-stop shops for everything from perishables, packaged foods and baked goods to pharmaceuticals and fueling stations. During the past five years, Ingles has plowed nearly $710 million into renovations, expansions and new store openings. Management plans to spend about $160 million more on upgrades during the next 12 months.

A large portion of future spending will be on enhancing warehousing/distribution, including upgrades to a centrally-located, 919,000 square-foot facility near Asheville, N.C. The facility, which typically stores about 40,000 pallets of products at any given time, enables the company-owned trailer truck fleet to efficiently resupply Ingles stores since it's within 250 miles of every location. What's more, another 830,000 square-foot warehouse and distribution facility is under construction nearby, and management expects operations there to be in full swing by early 2013.

Ingles also has small but substantial real estate holdings and milk production activities. For instance, it owns 71 shopping centers, 58 of which have an Ingles supermarket. The company also holds 13 parcels of undeveloped real estate suitable for new Ingles locations, and it owns and operates a milk processing and packaging plant that supplies the majority of the milk sold at Ingles stores. Most of the milk produced, however, -- about two-thirds -- is sold to other retailers, warehouses and food service distributors.

Of the $3.6 billion in sales the company is on track to generate in 2012, about $3.5 billion (96%) should be from the sale of food and nonfood grocery items. Milk production and sales will probably account for around $126 million (3.5%). Shopping center rental income should total about $18 million (0.5%).

Analysts project revenue will grow at a 5% rate to about $4.6 billion a year by mid-2017. During that time, they see earnings per share (EPS) rising at a 10% pace from $1.69 to $2.72. Both of these estimates look reasonable to me.

So do their expectations for no dividend growth during the next three to five years, since Ingles has $101 million of debt coming due during that time and plans to keep putting excess cash into upgrades and renovations for at least another year. But the price-to-earnings (P/E) ratio of 10 is a good value relative to the historic P/E ratio of 12 and the P/E ratio of 15 for the overall market.

Risks to Consider: While Ingles Markets is a defensive stock, due to the focus on selling groceries and other necessities, it is by no means immune to economic weakness. A significant downturn could easily make revenue and earnings growth estimates unobtainable and jeopardize the dividend.

Action to Take --> If you're interested in Ingles Markets for the dividend, then buy the stock now while shares are cheap and the yield is high. Since dividends probably won't grow for years, the yield could quickly erode because the stock is set to climb.

Indeed, if the P/E ratio keeps to the historic average of 12 and EPS climbs 10% to $1.86 in a year as projected, then the stock price could hit $22.32 at that point (12 x $1.86 = $22.32). The yield, in turn, would fall to 3% [[66 cents/$22.32) x 100 = 3%]. After another year of 10% EPS growth, the yield would shrink to 2.7% if the dividend remains the same. By 2017, it would be hovering around 2%, as you can see in the table above.

Of course, the table also illustrates the stock's growth potential, which is outstanding. Again, assuming the P/E ratio stayed at historic levels, the price would reach nearly $33 a share by 2017 (12 x projected EPS of $2.72 = $32.64), about double the current price.

The Precious Metals MAJOR Breakout Part II

It has been a year since the price of gold bullion topped out and even longer for silver. Many traders and investors have been patiently waiting for this long term consolidation pattern to breakout and trigger the rally for precious metals and miner stocks. Most of gold bullion is used for investment purposes. As a result, it rises when there is economic weakness and investors lose confidence in the fiat currency of a country.

With continuing economic weakness in the United States it will almost certainly lead the Federal Reserve to act in way that is more powerful than Operation Twist which is the selling of short term securities to buy those with a longer term. Based on the most recent data, economic growth in the United States is falling as the unemployment rate rises. A recent statement by the Federal Reserve was unusually clear in calling for greater action in the future.

Gold, Silver and Dollar Weekly Price Chart:

Take a look at the weekly charts below which compare gold and silver to the US Dollar index. You will notice how major resistance for metals lines up with major support for the dollar. As this time metals are still in consolidation mode (down trend) and the dollar is in an uptrend.

Weekly Metals Outlook

Weekly Metals Outlook

Gold Miners ETF Weekly Chart:

Gold miners have been under pressure for a long time and while they make money they have refused to boost dividends. That being said I feel the time is coming where gold miner companies breakout and rally then start to raise dividends in shortly after to really get share prices higher.

GDX - Gold Miner Stock ETF

GDX - Gold Miner Stock ETF

On August 13th I talked about the characteristic’s and how to trade the next precious metals breakout and where your money should be for the first half of the rally and where it should rotate into for the second half. Doing this could double you’re returns. Read Part I: http://www.thegoldandoilguy.com/articles/gold-mining-stocks-continue-to-disappoint-but-not-for-long/

Overall I feel a rally is nearing in metals that will lead to major gains. It may start this week or it still could be a couple months down the road. But when it happens there should be some solid profits to be had. I continue to keep my eye on this sector for when they technically breakout and start an uptrend.

Deckers Outdoor Corp. (NASDAQ: DECK)

Deckers Outdoor Corporation engages in the design, manufacture, and marketing of footwear and accessories for outdoor activities and casual lifestyle use for men, women, and children. The company offers luxury footwear, handbags, apparel, and cold weather accessories under the UGG brand name; open and closed-toe outdoor lifestyle footwear, multi-sport shoes, light hiking shoes, amphibious footwear, and rugged outdoor travel shoes under the Teva brand name; action sport footwear under the Sanuk brand name; high-end casual footwear for men and women under the TSUBO brand name; outdoor performance and lifestyle footwear under the Ahnu brand name; and work footwear under the MOZO brand name. The company sells its products primarily to specialty retailers, department stores, outdoor retailers, sporting goods retailers, shoe stores, and online retailers. Deckers Outdoor Corporation also sells its products directly to end-user consumers through its Websites, call centers, retail concept stores, and retail outlet stores, as well as through retailers in the United States. In addition, the company distributes its products through independent distributors and retailers in Europe, Canada, Australia, Asia, and Latin America.

To review VF Corp's stock, please take a look at the 1-year chart of DECK (Deckers Outdoor Corporation) below with my added notations:

1-year chart of DECK (Deckers Outdoor Corporation)

DECK has continued to trend lower throughout most of the year, which is in contrast to most other stocks that have moved higher. As you can see from the chart, the stock has usually demonstrated important price levels at each increment of $10 (blue). Most recently, DECK has its main level at $50 (navy). Yesterday the stock broke below $50 and should be on its way down to the $40 level.

The Tale of the Tape: DECK has formed common areas of support and/or resistance at each increment of $10, most recently at $40 and $50. DECK's break of $50 should provide a short opportunity on any rallies back up to $50. A fall to $40 or a break back above $50 would present a long trade.

Chart of the Day - Sherwin-Williams Company (SHW)

The "Chart of the Day" is Sherwin-Williams Company (SHW), which showed up on Friday's Barchart "All-Time High" list. Sherwin-Williams posted an all-time high Friday at $143.38 and closed up +2.02%. TrendSpotter has been long Sherwin-Williams since July 26 at $133.17. In recent news on the stock, Jim Cramer on his "Mad Money" show on Aug 14 said it was "time to go shopping for home-related stocks" due to improvement in the housing market and that Sherwin-Williams was a "Buy." On Aug 7, Sherwin-Williams reported Q2 earnings of $2.17 per share, beating analysts' estimates of $2.13 and that its first-half 2012 sales were $4.71 billion, up +11.9% y/y from $4.21 billion in the first-half of 2011. Sherwin-Williams, with a market cap of $14.445 billion, is a manufacturer, distributor and retailer of paint, coatings and related products. It is the one of largest paint companies in the United States and in the world. Well known brands include Sherwin-Williams, Dutch Boy, Pratt & Lambert, Martin-Senour, Thompson's, Minwax and Krylon.


A "Terrible" Stock with 100%-Plus Upside Potential

At first glance, this might seem like a terrible stock to own.

In 2011, shares of this small-cap software company plunged 75%, dropping from a January high of $23.35, to an October low near $5.75. If you held during that time, you likely lost your shirt.

So, why would I tell you about a terrible performing stock now?

Because it looks like a potentially highly profitable turn-around story is in the making. Shares have bounced off major support and have moved steadily higher for the past few months.

The name of this potential turn-around play is Avid Technology (Nasdaq: AVID). The company makes specialized audio and video editing software for film and music producers.

Its industry-standard software, such as Media Composer, ProTools and Sibelius, have been used to create some of the greatest music hits, TV commercials and blockbuster films, from Van Halen to Spiderman.

Management has recently undertaken several strategic steps to improve future operating performance. For starters, in 2011, it sold off a number of audio-based products where the end-market was individual consumers, rather than media giants.

By divesting these assets, the company shifted its customer focus to a more well-healed customer base.

This July, the company reduced its workforce 20% and slashed overhead. Both measures are expected to generate cost savings of around $80 million.

With rumors of the upcoming Apple (Nasdaq: AAPL) TV, Avid may also benefit from increased demand for innovative software development tools, aimed at broadcast and entertainment producers.

Traders seem convinced of the company's potential.

After recovering from the October 2011 $5.76 low, shares climbed to a high of $12.64 in late January 2012. This high marks resistance. (more)