2010 is likely to be one of those years in which traders who participate on both sides of the tape (both long and short) will have a better chance of succeeding.  Investors in the Sound Counsel Investment Advisers absolute return model are currently weighted with significant short exposure due to the high market valuation and the potential for a second bear market in equities.  One of my highest conviction short positions is Salesforce.com (CRM) which reported earnings earlier this week.

Salesforce.com is one of the leaders in cloud computing technology which helps IT administrators make more efficient use of their resources.  In the past, companies would need to own a server for every major function or individual operating system.  The result was often a room full of dozens of servers which were all running at 20% to 30% capacity.  The situation was an incredible waste until cloud computing technology allowed servers to run multiple systems and efficiently allocated resources between the servers.

It’s easy to see how this exciting technology could lead to growing sales.  After all, large and small corporations could save on IT costs by using the technology.  And that’s why Salesforce.com has been able to grow revenues at a steady clip for several years.  Most recently, the fourth quarter revenue was up 22% to 354 million and for the full year the company collected $1.306 billion in revenue which is up 21% year over year.  Earnings were strong with the company posting GAAP earnings per share of 63 cents for the year – an 80% increase over 2008.  But while these figures appear very favorable, it looks like investors have bid the price of shares too high and may be ignoring some of the dramatic risks in the stock.

One of the biggest red flags that I saw when reading the quarterly report was the deferred revenue item.  For companies like CRM which receives 92% of its revenue from subscription and support, much of the revenue is received well ahead of time because of long-term contracts which are paid in advance.  Due to accounting rules, the company is not allowed to record the revenue until service has been rendered – so revenue for future quarters gets allocated to an account called “deferred revenue.”

At the end of the quarter, CRM had deferred revenues of $704 million – which was only up 19% year-over-year.  While positive movement is certainly a good thing, the company will need to attract a significant amount of new business in order to keep up with its recent sales growth.  The company has 73,500 paying customers which is up 4,600 during the quarter and that performance will have to continue to justify the share price.

For 2010, the company is guiding GAAP earnings between 58 and 60 cents per share.  I found it a little disturbing that CRM offered “non-GAAP” guidance of $1.25 to $1.27 in earnings when it appears that this figure simply does not account for stock-based compensation (there are a few smaller items as well).  To the non-suspecting investor, it might look like the company is really generating $1.25 to $1.27 in additional value for shareholders but stock based compensation truly is an expense and should be treated as such.  Although the company does not have to pay cash for this compensation, the additional shares issued has the very real effect of diluting current shareholders.

Finally, if you look at the current price of the stock ($66.75 as I write), and compare it to the earnings expected for this year, you can easily see that investors are paying 111 times earnings to own the company.  Despite the fact that CRM is growing, the multiple is ridiculous and will almost certainly lead to a sharp decline in the stock sometime in the next year.  I am completely astounded at the valuation and hope to profit when the stock trades back to a more reasonable level.

Thursday’s trade offered some mixed signals for short-term traders.  Initially, the stock gapped down well below the 50 day average as investors digested the earnings report.  But by the end of the day, CRM followed the market back higher to recover much of its losses.  Still, the stock was down on the day on volume that was well above average.  My suggestion would be to buy some out of the money puts on this stock (which are actually relatively expensive) or watch for a clear break lower on volume to set up a short position.  Keep your stop levels tight and don’t be afraid to stop out and then try another short trade when the stock breaks down again.

My sense is that eventually this stock will run significantly lower and while the price action will be sharp, it may take several weeks to a few months before CRM finds any significant support.  Damage control remains an important part of investing, but wise and careful shorting of this high-flying Wall Street darling could turn out to be very profitable.

FD: Author has a short position in Sound Counsel Investment Advisers accounts

Enjoy this article? Sign up for the ZachStocks Newsletter,
Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies

Yesterday, the market dealt a disturbing blow to frustrated bulls who were riding the recent rebound in equities.  Before the market opened, futures were a bit weak after a report showed German business sentiment was not as strong as expected.  (Remember, Germany is one of the primary countries which is expected to be responsible for bailing out Greece).  But while the pre-market futures were relatively tame, the market quickly turned lower after the US consumer confidence numbers were released at 10:00 AM EST.

Economists were surprised to see the confidence index drop to 46 which is the lowest reading since 2009.  At issue was the continued absence of employment recovery and a frustratingly lower reading in the “future expectations” category.  It seems that while the market has been pricing in a robust recovery, the average American is not quite assured.  Since consumer spending is a major part of our economy, weakness in consumer confidence is particularly troubling.

Fed laid groundwork for tightening last week

Weak confidence calls into question the stealth rate increase which the Fed undertook late last week.  The Fed is walking a delicate tightrope between loose policy which could quickly lead to excessive inflation, and tight policy which could cut off growth in our fragile economy.  Raising the discount rate last week signaled that the Fed was ready to begin tightening, which could have widespread implications on the economy.  One of the more disturbing results could be an increase in mortgage rates charged by refinance companies which would increase the difficulty of home refinancing for many borrowers.

As adjustable rate mortgages reset (at potentially much higher levels) this could not only reduce the amount of discretionary spending available to many consumers, but it could also cause another wave of losses for banks and mortgage lenders.  Such a crisis could have ripple effects including continued restraint in lending to small businesses which in turn could be unable (or unwilling) to increase hiring in the face of uncertainty.  Not to sound like a broken record, but it appears the dominoes are stacked and the consumer confidence report may have been one of the first to fall – setting off a chain reaction and leading to lower market prices.

Lower prices and a difficult economy does not mean that we as investors need to be resigned to suffer losses.  There are plenty of opportunities to use this scenario to our advantage including purchases of companies that will thrive in this environment as well as owning ETFs that trade inversely to market trends.  One example of an industry that should do well in a poor consumer environment is the payday loan / pawn shop industry.  ZachStocks has discussed a potential investment in First Cash Financial which should see its business pick up as consumers look for non-traditional financing options.

Inverse ETFs are also a helpful tool to offset losses in more traditional growth investments.  New products are quickly being rolled out that allow investors to bet against individual sectors, commodities, or geographic regions.  If you have significant exposure to energy companies, you might consider taking a position in the ProShares Ultrashort Oil and Gas (DUG) which will increase as this sector declines.  The beauty of these instruments is that they can usually be traded in an IRA (which typically would not be able to short securities) and offer an excellent hedging opportunity.

Before investing in any vehicle, make sure you understand the risks and potential rewards.  This is true for both traditional growth stock positions as well as less traditional positions that allow you to hedge your exposure.  If you are worried about potential losses associated with declining consumer confidence and the potential for more economic and market volatility, then please visit Sound Counsel Investment Advisers and allow us to help you navigate the turbulence.  Potential for market losses are significant, but sound investors should be able to use discipline and many available tools to keep their capital intact and even benefit from what may very well be a sustained downtrend.

FD: Author does not have a position in any stocks mentioned in this article.

Enjoy this article? Sign up for the ZachStocks Newsletter,
Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies

Investors in Portfolio Recovery Assoc. (PRAA) have to be pretty pleased with the way 2010 has treated them.  The stock is up nearly 20% so far this year despite the fact that the market has been sluggish.  At issue has been both a positive earnings announcement for the fourth quarter, and a successful stock offering last week.  The stock offering allowed the company to raise capital to pay down its debt level and gives the company more flexibility for future strategic purchases.

Portfolio Recovery operates in an industry that doesn’t have too many friends.  The company purchases receivables from financial institutions and other corporations and then attempts to collect enough of these receivables to cover its purchase price and generate a profit.  That’s a nice way of saying the company is a glorified debt collector.  This business has been profitable for quite some time, but in the last decade many market participants have faced competitive challenges.

As you can imagine, the name of the game is to buy these receivables at a steep discount to face value.  PRAA actually focuses on portfolios of defaulted consumer receivables – so they know up front that collecting on these debts will be challenging.  During the fourth quarter, PRAA bought $2 billion worth of loans (measured by the face value of debt owed by consumers).  The pricetag was a mere $75.1 million – or 3.755 cents for every dollar owed.  So with this low price, PRAA could theoretically see 90% of its face value remain in default and still make a nice profit.  There are administrative costs to consider of course, but the low purchase price goes a long way towards creating a strong business model.

A few years ago, there was much more competition for these loans.  Many financial institutions were holding on to debt longer or launching their own collection agencies.  Hedge funds were getting into the game too, buying the portfolios and hiring hourly workers to call and collect the debts.  Prices for these portfolios rose to a place where they were increasingly difficult to generate profits.  But during the financial crisis, many of these competitors went out of business or lost access to capital.  Today, the industry is much healthier and participants are able to generate strong profits.  According to the CFO of PRAA, the future also looks bright and should result in earnings growth:

Looking forward, we believe our strong financial position and continued access to capital will help position us well to take advantage of opportunities for continued portfolio acquisitions as we move further into 2010.” ~Kevin P. Stevenson, CFO

On February 11, PRAA announced strong earnings of 80 cents per share, and finishing the entire year with $2.87 in profits for every share.  Investors celebrated, pushing the stock up 18.3% in a single day.  A week later, the company priced a secondary offering, generating $71.6 million in new capital for the firm.  Before the offering, the stock had closed at $54.03.  The shares were offered at a discount with deal participants paying $52.50.  But during market trading the stock quickly rallied above the deal price and has maintained a stable price.  That’s a good sign considering the dilution effect of the deal.

Raising the capital gives PRAA more flexibility for growth in 2010.  At the end of the fourth quarter, the company had cash of $20.3 million and $319.3 million in borrowings.  With $45.7 million available for new borrowing, PRAA was getting low on options.  But now that an additional $71.6 million has been raised, PRAA has more than $100 million to work with if opportunities for purchases arise.  With continued concern over unemployment and weak consumer balance sheets, it is likely that PRAA will be actively buying debt at distressed prices.

Analysts are estimating 2010 earnings at $3.55 and those assumptions are likely conservative, based on the company’s current assets.  If PRAA makes a strong acquisition or two, these estimates could turn out to be low.  But even if the estimates are right, PRAA is only trading at a multiple of 15 which appears attractive considering the company’s growth.  While I believe caution is the most important trading strategy for the current environment, PRAA could turn out to be one of the better opportunities we have this year.

FD: Author does not have a position in PRAA

Enjoy this article? Sign up for the ZachStocks Newsletter,
Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies

Need quick cash? Instant Payday Loans from MyPaydayLoanCash.com can get you up to $1500 directly into your checking account in just 1 hour.

A decade ago, investors were willing to pay any price for a company associated with the internet.  It didn’t matter whether the company made money or not – or even whether they had projections for eventually turning a profit.  Instead of earnings, investors looked at eyeballs, unique users, revenue growth, and plenty of other less important variables.  Analysts who believed that stock prices were too high were ridiculed as a “new age of investing” made old ratios and metrics obsolete.

But as is usually the case, fundamental valuations eventually became important and many of the high-flying internet darlings came crashing back to earth.  Some of the companies that were hit particularly hard (many of which had to declare bankruptcy), were the fiber companies which invested in the infrastructure which carried information across short or long distances.  The investment in these networks was huge and unfortunately, the companies couldn’t stick around long enough to reap profits from their ballooning costs associated with the network buildout.

Today, the picture is a bit different.  ”Dot com” investors who got burned at the turn of the century are leery of making the same mistake twice.  And so legitimate bandwidth companies who are turning a healthy profit are largely snubbed by the investment community as the industry has fallen out of favor.  Such is the case with Abovenet Inc. (ABVT) which provides bandwidth and fiber optic infrastructure to telecom carriers as well as individual corporations.  The stock only trades about 110,000 shares each day so it is widely overlooked by Wall Street, but the company carries a market cap of $1.5 billion and has posted profits for the last 13 consecutive quarters.

ABVT has had a strong run since the panic days of early 2009.  In fact, after trading below $15, the stock is now as high as $62 – more than a 300% return in just over a year’s time.  But despite the strong run the stock has experienced, it looks as if there is a good bit more room for investors to realize a profit.  When the company reports fourth quarter earnings in the coming weeks, it is expected that Abovenet will have generated $3.84 per share in earnings per share.  That’s a gain of 122% over the last year.  And the company’s growth should continue into 2010 although the rate will likely be much slower.  Given the stock price of about $62 and 2010 expectations for $4.12, ABVT is trading at an attractive multiple of just 15 times forward earnings.

Looking at the business, I’m impressed with the wide variety of customers Abovenet deals with.  In a February presentation, the company noted that 28% of its customers were telecom carriers while 72% of its customers were other enterprises.  The broad range of clients include major brokerages and insurance companies, media firms, and other businesses which have high bandwidth needs.  And since ABVT typically engages in long-term contracts, its visibility for revenues and earnings is very appealing.

Five Reasons Why Gold Will Not...

An issue that typically plagues infrastructure companies is capital spending.  In order to provide quality service and expand its network, the costs of laying fiber and developing a worldwide network can be prohibitive.  But Abovenet has been disciplined with its roll-out and as of the third quarter 2009, the company had realized earnings that exceeded the capital expenditures for the year.  With these statistics and a low debt level, investors can be confident that ABVT is handling capital decisions responsibly and shareholder value is being protected.

The broad market picture is unclear right now.  Macro issues such as Europe debt, China tensions, and high domestic unemployment continue to hamper recovery.  In 2010, equity markets have been weak, and yet the charts are becoming difficult to read as rebounds cast some doubt on the bearish thesis.  Investors must work through uncertainty and will likely do best with a long/short approach where capital is committed both to solid growth stories such as ABVT as well as to short opportunities where stocks are over-valued and sentiment is likely to fall.

ABVT should be an attractive candidate for the long portion of a growth oriented investment strategy.  A recent pullback offers an attractive entry point and technical traders could set a stop just below $55 where the stock found support earlier this month.  Risk control remains an important skill to develop, but if traded properly ABVT could offer significant profits.

FD: Author does not have a position in ABVT

Enjoy this article? Sign up for the ZachStocks Newsletter,
Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies

As equity markets continue to gyrate and investors fear another financial meltdown, companies with stable earnings and low sensitivity to economic conditions are becoming more attractive.  Healthcare companies may be particularly attractive in the coming year as demand should remain stable and the healthcare reform initiatives from Washington are not likely to be as anti-business as originally feared.  Healthspring Inc. (HS) is one company that offers quality care for Medicare recipients and is making a stable profit in the process.

Healthspring offers health care programs primarily through Medicare in the states of Alabama, Florida, Illinois, Mississippi, Tennessee and Texas.  The company has grown since coming public in 2006 with earnings increasing consistently each year.  However, the stock has not performed very well during the period as the earnings multiple has declined significantly.  Currently the stock is trading at just 7.8 times expected earnings for 2010 – quite a bargain if the company continues to see such consistency in earnings growth.

Part of the reason the stock trades at such a low multiple is the fear that health care reform will reduce the profits available to the firm.  Since Healthspring works closely with Medicare patients, there is a reasonable fear that the company could see its margins squeezed as a result of the anti-business agenda of the current administration.  However, with recent changes in political sentiment and some very clear backlash from voters, it is unlikely that health care reform will have the teeth to curb competitive business.  My personal opinion is that a more competitive environment will result in higher quality care at lower prices.  But regardless of your political view, the news is good for Healthspring and should bolster the company’s stock price in coming months.

On February 8, the company announced strong earnings for the fourth quarter, earning 68 cents per share compared to 51 cents in the fourth quarter of 2008.  For the full year the company grew earnings by 13.7% to $2.41 per share.  Revenue grew at a 25% clip over the quarter and management issued positive guidance for 2010.  According to the CEO, Healthspring should earn $2.25 to $2.50 in 2010 and we should keep in mind that management typically “sandbags” earnings expectations promising low numbers so that they can beat expectations throughout the year.  Analysts weren’t all that impressed as the consensus estimates for 2010 earnings has the company earning $2.27, but the good news for investors is that these estimates are likely to be beaten.

Shortly after the earnings announcement, the company issued another press release stating that Healthspring had been able to refinance its debt with much more attractive terms.  Healthspring entered a $350 million dollar senior secured credit facility which is divided into a $175 million dollar 5 year loan, and a $175 million dollar revolving credit facility.  The company used the proceeds from the loan and cash on hand to pay off its entire existing debt which had been scheduled to mature in October of 2012.  This gives the company more flexibility time-wise, and still leaves Healthspring with a large war-chest of cash.

We believe that we are well positioned to capitalize on potential strategic opportunities created by both the current Medicare Advantage rate environment and healthcare reform. This new facility provides us with greater financial flexibility to, among other things, take advantage of such opportunities. ~Karey L. Witty, CFO

The “strategic opportunities” that Witty speaks about could easily be an acquisition of another provider in a different state.  This would allow the company to increase its footprint and significantly grow its business.  Since many firms are trading at a discounted value (both public companies and private providers), Healthspring would likely be able to make an acquisition that would be immediately accretive to earnings.  So the $2.25 to $2.50 in expectations for 2010 could very well be a conservative number.

So despite a strong run in the stock since the March low from last year, Healthspring is still a very attractive investment trading at a low multiple with significant potential for growth.  I believe investors could see the price more than double over the next 12 months if investor sentiment becomes more amenable to owning health care companies.  With a strong balance sheet, impressive opportunities and a low multiple, this stock appears to have a very attractive risk to reward ratio.

FD: Author does not have a position in HS

Enjoy this article? Sign up for the ZachStocks Newsletter,
Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies

The last two days have been difficult for Chimera Investment Corp. (CIM).  After announcing earnings post market close on February 8, the stock spent the next 2 days trading lower, closing Wednesday down 10% from it’s close before the announcement.  Investors are worried that the company will experience significant losses in the coming year due to turbulence in the residential mortgage market.

Chimera’s business is classified as a REIT (Real Estate Investment Trust) which means that the company does not have to pay taxes at the corporate level.  As part of this designation, Chimera must pay at least 90% of its earnings to shareholders on a quarterly basis.  Chimera is in the business of purchasing residential mortgages and other Residential Mortgage Backed Securities (RMBS) with the goal of collecting interest payments and eventually selling these securities at a profit.  The company is able to borrow significant amounts of capital and use the proceeds to buy a larger pool of assets – thus leveraging their investment and theoretically providing greater returns for  investors.

The leveraging strategy didn’t work out so well over the past several years as the value of mortgage securities dropped significantly.  The bursting of the housing bubble along with the financial credit crisis had a profound negative effect on Chimera.  The company’s liabilities did not change with the crisis, but the value of its assets plummeted sending the stock from a high near $20 in early 2008 to a low near $1.50 at the height of the panic.  Since that time, Chimera appears to have learned its lesson and is now operating with significantly less leverage.

The mortgage investment market is a unique environment which is not typically available to individual investors.  Similar to many credit card loan originators, personal loans are originated by various financial institutions and then often securitized and sold to market participants.  But unlike a credit card processing service, many of these securitized loans are guaranteed in some way by the government in what is typically considered “Agency Mortgage-Backed Securities.”  For these loans, investors don’t have to worry about whether they will receive their principal back.  Instead, the risks are weighted toward prepayment (mortgage holders refinancing), and interest rate risk (if the cost of funds exceeds the return for the mortgage investments).

Chimera currently holds 25% of their portfolio in agency MBS positions with the remainder in non-agency mortgages which carry more risk.  But where there is risk, returns are usually higher.  For instance, Chimera’s average cost for non-agency mortgages is 58 cents on the dollar which leaves the company with significant potential for gains on these purchases.  And the company has begun to operate very conservatively with a current leverage ratio at 1.1 to 1.  In addition, the company has set aside $1.7 million in the last quarter to guard against loan losses in the coming months.

In our markets, demand for securities has improved from the depths of the financial crisis as investors take into account realistic performance expectations, new capital comes into the market and the securitization market continues to recover. While new non-government-backed mortgage originations remain well below prior levels, as we look ahead to the new year, we continue to see opportunities in the securities market and we look forward to the new opportunities that will arise when the primary mortgage securitization model becomes operational. ~Matthew J. Lambiase, CEO

Based on the last three dividend payments (CIM skipped a dividend during the March 2009 quarter) and the current stock price, Chimera sports a 12% dividend yield.  This measure will likely only go up as the company is expected to pay  a dividend during the first quarter which will offset the skip from Q1 2009.  The strong dividend should help to support the stock price and give investors some valuable income.

At the same time, I expect the mortgage portfolio to remain relatively stable and potentially increase.  As non-agency mortgages pre-pay or refinance to get better rates, Chimera will be able to mark some mortgages higher and realize a profit on investment.  The low cost of funds may also allow the company to pick up additional investments at an attractive price while paying a low rate on debt.  I wouldn’t like to see the company become heavily leveraged, but a ratio of 1.5 to 1 or even 2.0 to 1 might be reasonable and add to investor profits.

The bottom line is that Chimera is a risky investment with significant exposure to mortgage backed securities.  But with these investments marked down to reasonable levels, and with the potential for opportunistic purchases, investors could be rewarded with strong profits.  The recent lower trade in the stock may offer significant opportunity to pick up shares at a discount and I expect a healthy dividend yield to benefit investors while they wait for capital appreciation.

FD: Author has a long position in Sound Counsel Investment Advisers portfolios

Enjoy this article? Sign up for the ZachStocks Newsletter,
Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies

My recent trip to the hospital put me in touch with a company which I had not reviewed in quite some time.  Kinetic Concepts (KCI) made its public market debut in February of 2004 and by the end of the year investors were rewarded with a triple digit gain.  The company has a proprietary wound care treatment which has proven to be effective at both reducing the amount of time it takes for wounds to heal, and at the same time reducing the risk of infection.

Without going into too much detail (I’ve unfortunately become intimately familiar with the process), KCI has developed a process by which a vacuum (or low pressure pump) is attached to the wound and continually sucks excess fluid and drainage out of the wound.  While it’s a bit disturbing to have tubes attached and watch the drainage be sucked out of one’s body, the process is amazing in that it truly does allow wounds to heal more quickly and efficiently.

KCI protects its patents and intellectual properties vigorously.  In a discussion with the doctor, I learned that KCI usually rents out many of its pumps instead of selling them outright in order to keep close tabs on the product use.  In fact, out of the several different versions of the wound vacuum pump, some are licensed for hospital use and some are licensed for home use.  When I was discharged from the hospital, they actually had to switch my pump in order to comply with KCI’s term’s of service.

Similar to Gillette or Hewlett Packard, KCI has adopted a business model where it makes a large portion of its revenue on consumable products while the margins on the actual pumps are often a bit lower.  The Negative Pressure Wound Therapy can only be applied with KCI brand dressings, tubing and other peripherals.  Since the wound dressing and tubing need to be changed several times a week, this is a stable and predictable source of revenue.

You might think that with these restrictions, healthcare providers would be hesitant to work with KCI, but at this point there are no other providers who are able to reproduce the Negative Pressure Wound Therapy system.  I spoke with my insurance company who had expressed reservations about paying for the KCI treatment but when they were informed that no other providers existed it appeared that they became willing to accept the claim.  Still, KCI works hard to keep close relationships with physicians, insurance companies and Medicare providers in order to maintain a healthy business.

And business does appear to be good.  A few weeks ago the company announced fourth quarter earnings with revenue up 7% to $526.8 million and non-GAAP earnings of $1.10 (up 12%).  For the full year, KCI earned $3.82 and is expected to report 2010 earnings near $4.40 which represents 15% growth.  KCI continues to expand its geographic footprint and will be focusing on growing its Japanese business in 2010.  While the global economy may offer investors plenty of surprises in the year to come, innovative and efficient health care technology like the Negative Pressure Wound Therapy system should lead to continued growth in profits.

For 2010, we look forward to several new product launches, the launch of V.A.C. Therapy in Japan, continued expansion of our LifeCell business domestically and in Europe, and stabilization of our TSS business. ~Catherine M. Burzik, CEO

KCI is currently trading below $40 and given the expectation for $4.40 in profits in the coming year I believe that the multiple is exceptionally low.  With an expected growth rate of 15%, it seems logical that the stock would trade for at least 12 times 2010 expectations which would represent a stock price of $52.80 – an increase of 37% from the current price.  Any positive surprises could not only increase the expected earnings for 2010, but could also lead to multiple expansion.  From this perspective it’s not difficult to imagine a scenario where KCI doubles from its current level.

One concern investors may have is that the company is saddled with $1.174 billion in long-term debt.  While this number is certainly no small matter, one should note that KCI actually reduced its debt y $242 million over the past year so it looks like they are on track to reduce leverage.  At the same time, the current cash flow is robust and should have no trouble covering interest payments for the foreseeable future.

Wound care is a need that does not ebb and flow with the economic cycle.  And since KCI can actually help to reduce the time a patient spends in the hospital, and expedite the healing process, the company should receive favorable treatment from insurance providers as well as government healthcare plans.  The future looks bright for KCI and I will be watching for attractive opportunities to get involved with the stock.

FD: Author does not have a position in CLI

Enjoy this article? Sign up for the ZachStocks Newsletter,
Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies

The last few weeks have been challenging for the markets as trend lines are being broken, and many speculative issues are reversing to give up recent gains.  After falling 3.7% in January, the S&P 500 has begun February with plenty of volatility and is currently showing losses for a second straight month.  Both domestic and international forces are combining to leave investors unsettled, and it is unlikely there will be any quick solutions to the issues the market is beginning to discount.

On a personal level, the last few weeks have also been challenging as I was admitted to the hospital with an infection in mid January and ended up spending 17 days recovering before I was released to go home.  Unfortunately, it will likely still be another 6 to 8 weeks until I am fully recovered, but I am thankful to be out of the hospital and slowly getting back to work.  Thanks to many of you who have checked in on me and I look forward to being back to a normal work schedule in the weeks to come.

From an investment standpoint, caution continues to be a theme as the recent declines in the market are more likely to be the beginning of a new trend than an isolated event.  Investors who are positioned conservatively risk missing some opportunities to capture profits, but should find their account to be more stable than more speculative investors.  At this point I would rather miss an opportunity or two, than allow my clients to shoulder too much risk and potentially sustain major losses. There are three issues which are particularly concerning to me and seem to encapsulate the risk investors are dealing with today:

1. China Hits the Brakes While China continues to be one of the fastest growing economies, many (including the Chinese government itself) are concerned that a speculative bubble could potentially be on the rise.  In a proactive move, the Chinese regulatory officials have raised the reserve requirements for bank lending, effectively reducing the amount of capital available to lend to businesses and individuals.  While this move is likely a wise decision to curtail speculative lending and borrowing practices, it could begin to weigh down Chinese growth which would in turn become constricting for many other nations as well.  If China is not able to carry the growth torch, there are very few countries which have the resources to step in and take their place.
2. European Debt Concerns Greece has become a ticking time bomb as the country struggles to meet heavy debt obligations.  Unlike the US, Greece cannot simply print its way out of a debt crisis as the country does not have the authority to manufacture Euros.  The global recession has sent tax revenues lower, and a weak financial position means that borrowing costs are prohibitively high (or simply not available).  While many economists say that Greece isn’t large enough to cause a major problem, investors fear contagion where problems spread to other vulnerable countries such as Portugal, Ireland and Spain.  A major disruption in Europe could be a very disturbing catalyst for global markets.
   
3. US Economy Continues to Struggle Despite the fact that headline unemployment dropped during January, the employment picture is actually quite bleak.  Many workers have been unemployed for so long that they have given up looking for work (and consequently dropped off the unemployment tally).  There are a rising number of workers who have exhausted their unemployment benefits, and plenty of part-time workers who are “under-employed” and simply doing their best to make ends meet.  Some estimate that 20% of the US workforce is either unemployed or significantly under-employed and this dislocation is causing economic growth to stall.  Statistics are easily manipulated to look good, but in reality our economic expansion is quite weak and vulnerable to a double dip recession.

So with these concerns on the horizon (or directly overhead) it makes sense for investors to employ risk management techniques to guard against investment losses.  These techniques could include raising cash by selling portions of existing positions, adding short exposure through purchasing inverse ETF positions or shorting individual stocks, or possibly using option strategies to lower account volatility.  If you would like more information about how to implement a defensive investment strategy please fill out an information form for Sound Counsel Investment Advisers and I will personally get in touch with you to discuss how we can protect your account. As always, stay nimble and make sure you have an appropriate plan in place for the current market environment.

Enjoy this article? Sign up for the ZachStocks Newsletter, Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies