Friday, November 23, 2012

McAlvany Weekly Commentary

The Transformation of War

A Look at This Week’s Show: 
-The rise of un-conventional conflict
-The weapons of economic war
-An Iron (gold) Dome for the Dollar?
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All Signals Point to a 'Buy' in This Stock

On Thursday, Nov. 15, FactSet Research Systems (NYSE: FDS), a provider of financial information and analytics to the investment community, declared a regular dividend, and the stock rallied 3.85% on big volume. While the $0.31 quarterly dividend, which currently yields 1.4% annually, may not seem like a big deal, it may have been good enough to place a medium-term bottom in the stock price.
The longer-term FDS chart shows a massive rally to the tune of 260% from its 2008 lows to the 2011 highs. Ever since the 2011 highs, however, the stock has traded in a wide but narrowing trading range, which for now looks like a healthy consolidation.
On the weekly chart below, note how the stock fell slightly below this consolidation phase two weeks ago, but with last week's strong intraweek reversal, has indicated that the slide may have come to a halt.
FDS Weekly Chart
With the weekly chart looking supportive, let's delve deeper into the signs on the daily chart.
On Nov. 15, the stock traded roughly 940,000 shares. When compared with average daily volume for the past 15 days of around 340,000 shares, that is a significant increase and adds further support to the day's rally.
In terms of price, the stock left a major outside day, or engulfing candle, on the chart, with the daily candle fully engulfing the previous six candles/days. Further, it was good to see that the intraday bid on Friday, Nov. 16, kept the stock from giving up much of Thursday's gains. While we have not yet seen follow-through buying on the back of Thursday's rally, the fact that the stock managed to hold its own on Friday is good news for bulls.
FDS Candle Chart
Looking at the stock's momentum, we find significant positive divergence between the stock price and its stochastics indicator. Stochastics bottomed in mid-October, while the stock kept moving lower until Wednesday, indicating that downside momentum had slowed and the stock was due for at least a snapback rally.
FDS Stochastics Chart
The fact that FDS developed a strong engulfing candle at a point where momentum was positively diverging from price sets the stock up for a high-probability long-side trade in my book. While we have yet to see follow-through buying, and thus, final confirmation that a long-side trade has set up, to me the aforementioned points make a strong enough case that the trade is valid.
So what is the first potential upside target?
One way in which I use the 50-day, 100-day and 200-day simple moving averages is to gauge how far a stock has veered from its medium-term mean. In the case of FDS, the stock has moved far enough from these moving averages that a mean-reversion move may be in order. As such, a first target could be a move back to near the 50-day and 200-day simple moving averages, currently around the $94.50 to $96 area by year-end.
FDS Moving Averages Chart
Beyond that, the next two upside targets would be $98, which is the 61.8% Fibonacci retracement level of the swing from the Sept. 14 high to Nov. 16 low, and above that, the $100 mark.
The combination of buy signals described above now creates a compelling trade to the long side in FDS. Major engulfing candles forming at oversold levels are a strong sign that, at least for a short- to medium-term trade, the trend has changed. In addition, when the dividend is paid on Dec. 18, it may act as further support for the stock.
Recommended Trade Setup:
-- Buy FDS at $91.50 or less
-- Set stop-loss at $87, the clearly defined low from Thursday, Nov. 15
-- Set price target at $96 for a potential 5% gain by year-end

A Penny Stock with Five Consecutive Quarters of Double-Digit Revenue Growth and Ongoing Momentum

While it may still be too soon to say whether or not the housing market has fully recovered, things are looking up. On November 19, 2012, it was announced that existing home sales increased 2.1% in October from the previous month. Homebuilder confidence also rose to its highest level since 2006. (Source: Puzzanghera, J., “Existing-home sales and builder confidence rise,” Los Angeles Times, November 19, 2012.)

On November 20, 2012, government data showed that construction on new homes rose 3.6% in October, the highest rate since July 2008. Starts are also up 42% from last year. (Source: Mantell, R., “Housing Starts Highest in More Than Four Years.” The Wall Street Journal/MarketWatch, November 20, 2012.)

While the new home starts are a boon to new homebuilders, it’s also good news for those companies that supply the industry.

Builders FirstSource, Inc. (NASDAQ/BLDR) is a penny stock that manufactures and supplies structural and related building products (lumber, windows, trusses, doors, etc.) for residential new construction, primarily in the southern and eastern United States. Customers have included D.R. Horton and Hovnanian Enterprises. Builders FirstSource has grown through acquisitions to operate about 52 distribution centers and 47 manufacturing plants in nearly 10 states.

On October 18, 2012, the penny stock announced that revenue for the third quarter ended September 30 was up 34.3% at $291.8 million. Builders FirstSource’s third-quarter loss from continuing operations widened to $12.3 million, or $0.13 per share, from $11.5 million, or $0.12 per share, in the same quarter a year earlier. Year-to-date revenue was up 33.5% at $783.0 million. The penny stock’s year-to-date loss from continuing operations narrowed to $43.3 million, or $0.46 per share, from a loss of $47.9 million, or $0.51 per share, in 2011. (Source: Press release, “Builders FirstSource Reports Third Quarter 2012 Results,” Globe Newswire, October 18, 2012.)

Company CEO, Floyd Sherman, noted, “For the second consecutive quarter, we reported positive Adjusted EBITDA [earnings before interest, taxes, depreciation, and amortization], finishing with $3.0 million for the current quarter, as compared to an Adjusted EBITDA loss of $0.7 million in the third quarter of 2011, and on a year-to-date basis, our Adjusted EBITDA has improved from a loss of $11.7 million in 2011 to positive $3.0 million in 2012.” (Source: Press release, “Builders FirstSource Reports Third Quarter 2012 Results,” Globe Newswire, October 18, 2012.)
Builders FirstSource Chart
Chart courtesy of
Builders FirstSource’s share price has been trending higher since November 2011 on strong back-to-back double-digit revenue growth, and speculation that a housing market recovery is in bloom. The penny stock’s 50-day moving average crossed over the 200-day moving average in late January; a bullish sentiment. During the same period, volume has also increased.

Builders FirstSource is a financially solid company, with growing revenues and expanding operations. Over the past five quarters, the penny stock has reported double-digit year-over-year percentage revenue growth. First-quarter 2012 revenue was up 34% at $219.4 million, while second-quarter revenue was up 31.7% at $271.9 million. Third-quarter revenue was up 34.3% at $291.8 million. And, for the second consecutive quarter, Builders FirstSource reported positive adjusted EBITDA.

Going forward, Sherman added, “We expect the momentum we’ve achieved from the improvement in the housing industry and our recent market share gains to continue to positively impact our operating results. We remain focused on growing market share and improving our margins in order to drive profitability as the market continues to recover.” (Source: Press release, “Builders FirstSource Reports Third Quarter 2012 Results,” Globe Newswire, October 18, 2012.)

While Builders FirstSource’s share price is still susceptible to fluctuations in new home build and existing home sales, the penny stock could experience a boost in the second and third quarter of 2013, when demand for construction supplies is expected to materialize with the rebuilding efforts related to Hurricane Sandy.

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