Note: This is a recap of performance for the stocks picked at the beginning of 2009.  Picks for 2010 will be posted January first.

To paraphrase a hedge fund manager that I follow closely, “Nothing has happened this year the way I expected it to.”  While this statement does little to instill confidence in this money manager, William posted returns north of 20% for the year in his long-short fund which remains fairly neutral as far as market exposure is concerned.  The point is that although 2009 was a year of major shifts in market direction, policy decisions, and investment risk; it was still possible to adjust trading style along the way to account for the changes and book significant profits.

My four picks for 2009 did not turn out to be very profitable despite a significant market rally from March through December.  Thankfully, portfolios managed for Sound Counsel Investment Advisers were able to trade actively throughout the year and performed much better than the 2009 recommendations.  As I choose growth opportunities for the portfolios I manage, I am careful to use stop points in order to exit losing trades, while letting winners continue to compound gains.  Often we use covered calls to manage some of the risk, and the advent of inverse ETFs has also been helpful in managing downside risks for entire markets as well as individual sectors.

So without further adieu, here is some commentary on the four picks for 2009.  Stay tuned for the 2010 picks which will be posted January 1.

1. JA Solar Holdings (JASO)
   While Alternative certainly received its fair share of headlines this year, the solar industry was plagued with rising inventory levels and falling prices for solar products.  On top of the supply dynamics, many countries which had implemented strong solar energy tax incentives had to pull back on the stimulus measures due to financial strain.  As a result, many solar companies experienced a difficult period and those with excessive leverage were especially hard hit.  At the time of writing, it looks like JASO will finish the year with a gain of 30.5% which is certainly healthy, but the majority of the gains came in the last few weeks of the year.  JASO could continue to post additional gains in the coming year, but there are still significant uncertainties surrounding the alternative energy market.
2. AECOM Technology Corp (ACM)
   AECOM is an international construction management company which is expected to benefit from global stimulus projects aimed at improving infrastructure projects such as bridges, roads, power plants and other developments.  Since AECOM has a well diversified client base, it was expected that the company would grow earnings (which occurred quite nicely) and see its stock price rise as a result (which unfortunately did not occur).  Much of the stimulus spending took longer than expected to reach the market, and investors have placed a lower multiple (paying a smaller price for every dollar that the company earns).  The lower multiple is likely due to a perception that the company will not continue to grow quickly after the stimulus projects are completed.  At this point AECOM still looks like a great investment with little debt and a low earnings multiple, but it has taken longer than expected for the stock to bounce.  Currently it looks like ACM will finish 2009 with a loss of 1.2% – not a very healthy showing considering the strength of the market.
3. TBS International (TBSI)
   At the end of 2008, it looked like shipping companies were primed for a significant rebound.  The financial crisis had sent many of the more leveraged players into the abyss, but companies with longer-term charters and reasonable debt levels were showing signs of improvement.  The wildcard in this industry was whether the day rates for dry bulk shipping would improve over the coming year.  Unfortunately, shipping has continued to be a challenging area for the economy, and since TBSI does not pay a dividend, it has been especially unattractive to investors.  The stock is down 27.2% for the year which is extremely disappointing.  Looking into the coming year, there is little evidence that this company will offer investors much hope of improving profits so I would not recommend an investment in this stock and have kept clients out of this name for some time.
4. China Medical Technologies (CMED)
   China Medical is another disappointing story as the stock is now down 30.2% for the year.  Midway through 2009, CMED had traded higher as the company’s rapid growth caught investor’s attention and the diagnostic company was expanding its base of customers.  However, a management change along with significant debt has caused investors to lose confidence.  At the current price, CMED is looking like a very solid value, but I am not invested right now because I want to know for sure that the business metrics are solid.  If management were to issue healthy guidance for the coming year (ending March 2011), I would consider working back into the stock, but for now it appears to hold excessive risk.

We have many risks and many opportunities in front of us as we enter this new decade.  Flexibility and damage control will be important skills to employ as the markets face the risk of inflation, mounting sovereign debt, and significant fluctuations in currency rates.  I would welcome the chance to help you develop a comprehensive plan for your investments in the coming year.  Please email me if you would like more information on Sound Counsel’s investment strategies.

Wishing you a happy New Year!

Other Bloggers 2009 Results

Intelligent Speculator

The Financial Blogger

My Trader’s Journal

The Wild Investor

Four Pillars

Where Does All My Money Go

Million Dollar Journey

Suntech Power Holdings (STP) is trading sharply higher this morning after the company announced that they would be opening a manufacturing facility in Arizona.  The China-based solar panel maker has managed to remain profitable this year despite a difficult environment for solar manufacturers.  The expansion move instilled investor confidence as positive news flow out of the solar sector has begun to spark buying.

Late last week, Yingli Green Energy (YGE) also saw its stock lift after announcing a positive quarter and raising estimates for the coming year.  Management cited an expected improvement in profit margins for 2010 which is a significant change in trend for the company and for the industry as a whole.

In 2007, solar manufacturers bucked the topping trend in the overall market by rallying sharply as demand for solar power began to expand.  Rising oil prices and potential shortages of traditional fossil fuel sources had investors anxious to own a piece of the coming solar power boom.  However, as financial markets collapsed, the entire world entered a significant recession, and traditional energy prices dropped; the allure of solar energy began to decline.

At the same time that demand was declining, advances in technology caused supply to increase exponentially.  The manufacturing process to create and use polysilicon became more cost effective and efficient, leading to an inventory glut and sharply lower end prices.  This caused many solar players who had used excessive leverage to increase manufacturing capacity to struggle.  With profit margins dropping and the cost of capital remaining stubbornly high, many players in the industry had to capitulate.  Stock prices sank, and investors quickly saw significant losses.

Today, the picture is once again beginning to change.  As stimulus programs are in place with a bent towards decreasing our dependence on foreign oil and increasing the portion of renewable energy used, the consumption of solar energy is on the rise.  There are still significant financial, political, and infrastructure issues to be resolved, but the picture is brightening for this industry.

Investors need to carefully weigh their positions in the solar industry because not all solar opportunities are created equal.  Some of the major pitfalls which should be considered include the debt levels of individual companies, long-term contracts with customers or suppliers, and the specific technology used in the manufacturing process.  Nearly every major player in the industry has significant debt.  What varies is the assets backing up that debt and the level of cash flow available to serve that debt.

Yingli has a published debt to equity ratio of 40% which is fairly attractive for the industry.  While the company is expected to post a loss of 22 cents per share this year, analysts expect the increased profit margins to yield 76 cents in profit next year which puts the stock at a multiple of 18 times next year’s earnings.  That multiple looks relatively attractive given the company’s increasing fundamental prospects and the traction we are seeing in the industry.

Suntech has a much higher debt load, listed at 92%, but should manage to post a small profit this year.  The company will need to arrange financing for its Arizona plant which may increase the risk for the company to a small extent.  However, the market appears more confident in STP’s ability to generate profit growth as the stock is trading at 27 times 2010 expectations.

The solar industry could offer significant gains for 2010 but volatility will likely be high.  Aggressive investors may choose to ride out the swings and look for long-term gains.  Another more conservative approach would be to buy positions in individual solar names and then sell calls against those positions.  The calls will cap total gains available to investors, but will also serve to generate a “synthetic dividend” offering cash flow and a reduction in risk.  The premium on these options are relatively attractive depending on which issue you are considering.  Risk control is still the most important consideration, but there remains some attractive opportunities in play.

FD: Author has a long YGE position in the ZachStocks Growth Model

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

American Superconductor (AMSC) is in the process of reengineering its business.  Once a money losing electrical equipment firm, the company made a strategic investment in 2007 which transformed the company’s focus and lead to a profitable business in providing components to the alternative energy market.

Investment Commentary You Can’t Afford to Miss

Sign up for the ZachStocks Newsletter: Email:

The process has been turbulent for investors who saw their investment grow by more than 300% in less than two years, only to give the entire gain back as the market reacted to the global financial crisis.  But continued successful execution by management was quickly reflected in the stock as buyers stepped in to gain exposure to the wind turbine market.  AMSC is one of the only publicly traded companies which offers a near pure play on wind energy as many other players such as General Electric (GE) have so much exposure to other markets that the wind business is simply drowned out.

American Superconductor operates with a fiscal year end of March 31.  So they are currently in the second quarter of fiscal 2010.  The most recent quarterly results drove the stock up sharply as investors were impressed with the positive statements given by management.  During the quarter the company earned $0.04 per share on revenues of $73 million (this was an 83% increase over the same quarter last year).  AMSC’s largest customer, Sinovel, essentially asked the company to speed up an existing contract in order to get more units in the field quickly.  This means that a contract which was expected to last until December of 2011 will now be crammed into a time period ending April of 2011.  So not only did the total value of the contract expand, but AMSC will be able to recognize the revenue and earnings much more quickly.

At the same time, management stated that additional customers who have small contracts with the firm will begin to roll out larger products which should lead to an uptick in revenue and earnings over the next 12 to 18 months.

A solid mix of wind power and power grid business fueled another record quarter at American Superconductor… With Sinovel continuing to gain market share, many of our other wind turbine manufacturers set to commence production over the next 12 months, and power grid demand on the rise worldwide, AMSC’s outlook is stronger than ever.  ~Gregory J. Yurek, Chairman & CEO

The future certainly looks bright for the company which is sitting on no debt and has a cash and marketable securities balance north of $95 million.  It’s no wonder investors are bidding the shares significantly higher and seem willing to pay nearly any price to get exposure to this growth company.

Unfortunately, even strong growth companies like AMSC can see their stock values plummet – especially when investors begin to trade with too much confidence.  Currently the stock price is hovering around $33 compared to earnings this year which are estimated at $0.46 per share.  This means that investors are willing to pay more than $71 for every dollar the company earns this year.

The bullish analysts will tell you that the numbers look much better when compared to future earnings.  But even considering the consensus numbers for 2011 of $0.94, the stock is still trading at a multiple of 35 – and a lot can happen between now and March of 2011.  Not only will the company have to compete with a growing number of businesses flocking to the profitable sector, but the demand side could also see a significant contraction if a double dip recession begins to add pressure to our slowly recovering economy.  In short, the risk at this price is simply to high to justify owning this stock.  It is hard to imagine what additional good news could be offered at this point to push the stock significantly higher.

If a client walked in my door today with a concentrated position in AMSC, I would urge him to slowly work his way down to a smaller position or possibly exit it entirely.  We might start out by selling calls so that he could gain some premium and hold some protection against a possible decline.  Often momentum can carry a stock significantly beyond what appears fundamentally possible.

But if the stock broke and closed below $30 I would become much more aggressive.  At this point holding the stock is no longer an option, and I would even consider initiating a short position.  We could quickly see the stock trade down to a multiple of 15 times next year’s earnings and even that could be cut if analysts became skeptical on the future profits.  Bottom line – the danger in AMSC is not worth the risk.  There may be a more attractive spot to own this company but for today I would steer clear.

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

Bullish investors were bailed out today by an unexpected decline in oil inventories.  Stocks had spent the opening hour trading lower after a lackluster Tuesday rebound from sharp equity losses.  But the news that inventories fell by 8 million barrels sparked hopes that demand was picking up and would be a solid indicator of economic strength.

Investment Commentary You Can’t Afford to Miss

Sign up for the ZachStocks Newsletter: Email:

Not to throw cold water on the fire, but the decline actually had fairly little to do with actual pent up demand for energy.   In fact, oil demand is still down from last year and inventories appear to be lower as a function of refiners using crude which was stored instead of buying new production.  So it will be interesting to see whether crude oil prices which is currently trading near $72.20 will be able to maintain its strength.

The strength in oil coupled with a rise in gold today may actually point more towards inflation than towards economic recovery.  In late trading, the CRB index which is comprised of a broad assortment of commodities was up more than 1.5%.  This is quite a strong showing after significant weakness during the majority of the month.

As energy prices begin to rise, the natural outcry from many consumers may be to cry “foul.”  After all, there has been extreme public opinion against oil companies, the Wall Street firms who profit from trading energy, and in many cases the public forgets that the majority of IRA’s and 401(k) plans have exposure to these companies and these profits in their own retirement accounts.  Instead of debating on whether Congress should control prices (it’s my heartfelt belief that the free market does a much better job of setting price points), let’s look at some opportunities for investors to capture gains in energy (and alternative energy) names.

• Chesapeake Energy (CHK) – This natural gas producer has one of the most disciplined and yet still opportunistic management teams in the business.  The stock is trading at a single digit multiple which could see expansion quite quickly if drilling programs are increased.  Any upward movement in natural gas pricing should push management one step closer to pulling the trigger on new projects as the economics suddenly become advantageous.  The company has made some strategic moves in regards to their debt which should give more flexibility and financial stability.
• SunPower Corporation (SPWRA) – After gaping higher on a strong earnings report, the stock has settled back into a trading range.  The company has been able to tweak its business mix to include more sales of its high margin modules.  This means profitability levels are rising and there is some indication that a glut of oversupply in solar products is beginning to abate.
• ReneSola Ltd. (SOL) – It’s been a couple of months since we have touched on this name, but the company has made good progress on reducing its debt load and should return to profitability in the coming year.  If analysts are correct and the company earns $0.66 per share in 2010, then the stock is currently at a single digit multiple while growth is right around the corner.  Granted, this is a more aggressive trade, but the potential for a double or triple in the next several months is in play.

So as we begin to see a trend emerge in energy markets and to a broader degree, commodity markets, wise investors will likely allocate an appropriate portion of capital into situations which will benefit from higher hard asset prices.

FD: Author does not have a position in stocks mentioned

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

Chesapeake Energy (CHK) knows the value of a dollar today.  On Wednesday the company announced it had ammended a joint venture agreement with Plains Exploration & Production Company (PXP) in order to receive an up front payment that had previously been scheduled to last over a three year period.  According to the deal, PXP will pay $1.1 billion to Chesapeake on September 29, which represents a 12% reduction in the total drilling obligations, but gives Chesapeake access to the capital right away.

Investment Commentary You Can’t Afford to Miss

Sign up for the ZachStocks Newsletter: Email:

The announcement came just three days after Chesapeake announced earnings for the second quarter.  Adjusted EPS came in at $0.62 per share as natural gas production ticked up slightly over first quarter production.  More importantly, the company was able to increase their “proved reserves” and show progress in drilling programs during the first half of the year.  The company’s heding program also turned out to be beneficial with a realized gain of $597 million.  But despite the positive operational results, the balance sheet and cash liquidity certainly pose risk to current investors.

At the end of the second quarter, Chesapeake had a cash balance of $554 million which was down from $1.75 billion at the end of 2008.  Whiel the magnitude of the numbers is astounding, $500 million can quickly evaporate with aggressive drilling programs, current liabilities of $2.97 billion, and long-term debt of $13.6 billion – especially considering the volatility in natural gas prices over the past 18 months.  While the company has some very impressive properties it could liquidate in the event they faced a cash crisis, a forced sale never yields attractive valuation, so the proactive step of collecting cash from PXP looks very wise.

This agreement modification provides substantial upfront capital to Chesapeake, reduces PXP’s total investment in the Haynesville and further aligns the incentives between the partners. The Haynesville joint venture has been highly successful to date and we look forward to generating strong reserve and production growth as well as very attractive financial returns for both companies in the years ahead. ~Aubrey K. McClendon, CEO

Chesapeake has done an excellent job of growing its reserve base through organic exploration and development, as well as through strategic acquisitions and joint ventures.  At the end of June, Chesapeake was sitting on 12.5 TCFE (Trillion Cubic Feet Equivalent) and expects to grow this to 14.0 TCFE by the end of the year.  At the end of 2010, the company expects this metric to hit 16.0 which should provide investors with an attractive asset base from which to grow long-term earnings.

There are many different approaches a natural gas producer can take.  While Chesapeake holds a well diversified selection of properties, the company has been careful to invest in locations where production falls within the company’s skill set.  All of its properties are onshore US based properties which allows the company to avoid political turmoil, and miss most of the carnage that has hit off-shore producers in the path of recent hurricanes.  Cutting out these risks may keep the company from pursuing some good opportunities, but the security of its natural resources appears to be working to shareholders’ advantage.

ZachStocks has avoided traditional energy plays for some time as the prices for oil and natural gas offered investors very little return considering the risk being taken.  At this point it now looks like the tables are turning, and some traditional energy names could be in play along with alternative energy names we have been trading.  Commodity prices are likely to catch a bid in coming months – especially if the “recovering economy” story continues to hold.  Limits on position sizes for commodities will not likely have a long-term effect on holding prices lower as supply and demand forces are much stronger.  So adding exposure to traditional energy producers appears to make sense in the coming months and Chesapeake is certainly a leader in the space.

FD: Author does not have a position in CHK

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

Home Inns & Hotels Management (HMIN) is scheduled to report earnings this evening after the market closes.  Typically you would see excessive volatility after an earnings announcement, but on Tuesday the stock rallied more than 12% with no company specific news.  The move was apparently in sync with an earnings report from Ctrip, the China equivalent of Expedia or Travelocity, which noted strong air travel and hotel bookings.

Investment Commentary You Can’t Afford to Miss

Sign up for the ZachStocks Newsletter: Email:

HMIN is a leading China lodging economy hotel chain spread throughout the Chinese mainland.  Most of the hotels bearing the HMIN name are leased properties where the company develops and manages each location.  Currently there are 326 hotels in operation under this arrangement with another 54 in development (although I expect these numbers to be updated with the earnings announcement).  A second strategy is for the company to franchise its brand to existing hotel owners and collect royalty fees.  There are currently 145 locations operating under this arrangement and another 60 in development.

It seems that today every stock with the name “China” is being bought hand over fist.  Recent economic reports have shown China as outperforming in what has otherwise been a worldwide recessionary environment.  While China growth has been under pressure, the growing population and some political moves toward a more free economy have certainly stoked the growth.  But unfortunately “growth at any price” can be a dangerous approach when investing.

Looking at the fundamentals for HMIN, the company is expected to earn $0.39 per share this year which represents 11% growth over 2008.  Any growth at all is impressive given a difficult market environment.  In 2010, analysts are expecting a sharp 46% increase to an annual earnings level of $0.57.  Currently the stock is trading near $19 which represents a multiple of 48 times this year’s estimates, and 33 times next year’s numbers.  The price seems a bit dangerous to me – especially considering the long-term prospects for earnings growth.

One of the primary drivers of the optimistic expectations for 2010 is the Shanghai World’s Fair which is expected to draw as many as 70 million visitors.  The surge in travel will certainly bring significant revenue and earnings for 2010, but my concern is that investors are extrapolating the expected 46% increase as a sustainable growth trajectory.  In actuality, it will be very difficult for HMIN to see any growth in 2011 after the one time boost from the world fair.  If investors find themselves holding a stock valued at 33 times earnings next year – and the growth estimates for 2011 and beyond come in flat – we could quickly see shares drop.  In fact, as investors work through this logic in the second half of 2009, I expect a decline in the earnings multiple on the stock.

Shorting stocks during a market rally can be a difficult and dangerous strategy.  But as this advance becomes more overbought, short opportunities are looking more and more attractive.  HMIN is one of those opportunities as I think the stock could quickly trade down to the low teens, offering a significant percentage gain to traders willing to step in.  There are several ways to play this opportunity – some with more risk than others:

• Shorting the stock outright today – This approach is a bit risky as a positive report by management could propel the stock into the $20’s.  Recent history has shown that investors will still buy a good story even at extended prices.  So while shorting the stock today would get you in front of a potential decline, there is risk of getting stopped out quickly
• Buying puts outright today – Currently you can buy the August $20 puts at about $1.90 per share and these puts already have $1.00 of intrinsic value built in.  While your total exposure is capped at the $1.90 price of the puts, the disadvantage is that you have to make up the roughly 90 cents as the stock drops in order to recognize a profit.  That may be difficult in the next two weeks.
• Covered Short Position – If you’re familiar with covered calls, this strategy should be relatively familiar.  Essentially, you could short the stock and then possibly sell the September $20 puts for $2.15 or so.  This strategy caps your potential gain, but also gives you a bit of protection if the stock were to rally and hover a bit above $20.
• Set a “sell stop” entry order – While tyically we consider a “stop” order to be an exit strategy, we can also use stops as an entry point.  The idea is to set up a short that is automatically triggered if the stock drops below a certain point.  This way if the stock begins to give up its recent gains you are quickly involved in the situation and able to participate on the way down.

There are many ways to initiate short exposure on stocks, but the important thing is understanding what your potential returns look like, and what you have at risk.  If you’re new to trading and have questions on how to execute any of these strategies, please send me an email or leave a comment and we can discuss this and similar opportunities.  In summary – HMIN appears to be overpriced and could decline sharply as investors realize that long-term growth is still in question.  Traders can initiate short positions at current levels or after the earnings announcement.  Please use risk control and expect to cover shorts in the low teens.

FD: Author does not have a position in HMIN

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

Solar stocks were up in unison Friday after an earnings announcement from SunPower Corporation (SPWRA).  The company not only beat estimates for its second quarter, but also gave encouraging guidance for the rest of the year.  Revenue came in at $298 million which is up roughly 40% from the first quarter, but still well below the level seen last year when solar stocks were in vogue.  Analysts had been expecting revenue of $263 million so the report was certainly a positive surprise

Investment Commentary You Can’t Afford to Miss

Sign up for the ZachStocks Newsletter: Email:

Earnings were also much higher than expected, coming in at $0.24 per share versus the $0.14 expectation.  Part of the strength was due to the mix of business as the company saw a 76% increase in module sales (as opposed to full solar systems).  During the quarter, SPWRA was able to significantly reduce its inventory levels which had been a major concern for investors.  The inventory days (number of days it would take to sell all current inventory) was cut nearly in half which puts SunPower in a much more flexible financial state.  It is expensive to be carrying so much product, and usually results in lower pricing power which has plagued the industry in recent quarters.

While many solar investors concentrate on companies serving China, SunPower operates primarily in the United States and is much more active in the rooftop segment as opposed to more extensive ground based installations.  At this point, SPWRA appears to be in the sweet spot as the larger installations are still taking time to plan and build.  However, funding appears to be in place to provide incentives for rooftop installations which have been picking up in sunny parts of the US.  If this particular portion of solar energy continues to shine (pardon the pun) we could not only see more units sold, but more importantly, the sharp slide in pricing could be muted which would lead to better profitability.

According to Thomson Reuters, the average analyst forecast for earnings in 2009 and 2010 are set at $0.95 per share, and then $1.74 next year.  While these numbers are relatively impressive (given the difficult market and continued concern over excessive industry inventory), some analysts are beginning to raise their expectations.  Ramesh Misra at Brigantine Advisors recently upped his 2009 estimate to $1.25 and expects 2010 earnings of $2.42.

If this estimate is close to being correct, and the market  places a relatively reasonable multiple of 20 on this dynamic growth stock, investors could quickly see the stock close to $50.  While that price is a far cry from the euphoric $150 we saw at the height of what can only be described as a solar bubble, a price of $50 would still represent a 60% gain from current levels.

Looking at the financial strength of the company, it appears that SunPower has its act together.  During the second quarter, the company was able to raise $450 million by selling equity and convertible debt.  This is an excellent demonstration of the liquidity and capital which is once again available to functioning and profitable solar companies.  While the convertible debt will certainly carry its price tag of interest expense, the flexibility which allows SPWRA to invest in its business and maintain healthy capital ratios will pay off for shareholders.

Within the industry, many solar stocks have responded positively to the news.  The ZachStocks Growth Model has positions in First Solar (FSLR), LDK Solar (LDK) and Yingli Green Energy (YGE) – which are showing unrealized gains of 36%, 75% and 123% respectively.  While all three of these names have yet to report second quarter earnings, the positive news out of SunPower has the entire sector trading higher as investors expect similar results from competitors.  A word of caution is in order because there could certainly be differences in how each individual company is operating.  Political, geographical, and operational differences will cause each stock to behave a bit differently so investors would do well to avoid lumping them all together in the same broad category.

Still, the picture for solar producers is getting clearer and as the industry works through excess capacity and demand begins to pick back up there could be opportunities for significant further gains.

FD: Author has a long position in FSLR, LDK, and YGE in the ZachStocks Growth Model

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

There was an interesting pice in Barrons this past week entitled “Expect a Rally as Waders Dive In.”  The basic assumption was that investors who have been sitting on the sidelines over the past three months (or have been participating but with the majority of capital in “safe” investments) may now be forced to throw in the towell and buy despite the difficult economic environment.

Investment Commentary You Can’t Afford to Miss

Sign up for the ZachStocks Newsletter: Email:

Relying on both technical assumptions as well as a healthy dose of investor psychology, the article does a great job explaining why investors who are skeptical of the economy may commit a hefty amount of capital despite their reservations.  The buying spree could quickly drive markets higher and feed on itself…  at least for a period of time…

In the stock market, the waders might soon be getting in, setting up a new — if only temporary — leg up for stock prices. The jumpers got in first, during the spring, when the water was the coldest and the doom greatest. So far, they’ve been having fun as the waders watched.

At ZachStocks, we could definitely fit the category of jumpers.  Many of our long picks from this spring turned out triple digit gains for investors within months (or even weeks in some cases).  A couple examples include LDK Solar (which we recommended on March 13th), and Verso Paper (from March 25th).

But while fitting the category of “jumpers” at the beginning of the rally, we are also guilty as charged in the “waders” term as our exposure has been paired back in recent weeks.  Our assumption was that employment numbers would continue to be a drag on the economy and weigh down stock prices (particularly retail shares).  It now appears that we could be vulnerable to missing a larger move due to our risk aversion during a tough economic time.

“Deeply oversold, worsening sentiment and positive internal divergences almost always provide the foundation to stock-market recovery,” notes Douglas Kass, a general partner of Seabreeze Partners, an oft-noted bear. Kass, who correctly called the bottom in March and even the June-July pullback, expects some sideways summer action before a liftoff in the early fall — as the waders finally get in — with the Standard & Poor’s 500 index rising to 1025-1050, a double-digit jump.

It is always a bit concerning to find ones self squarely in the middle of popular sentiment.  Investing has a natural bent which favors contrarians, but at the same time being contrary with no logical backup is suicidal.  At the beginning of a large stock move, it is actually beneficial to position yourself in line with the herd so that as more and more people decide to catch the trend, they are buying what you already own.

But the key is offering a contrarian opinion at the end of a trend in order to get out with your winnings before the entire house of cards comes crashing down.  It was our intention to get out of vulnerable equities in late June and early July in order to exit the euphoric trend which appeared to have little economic data backing it up.  But as earnings season has sparked more interest in equities, it now appears we may be vulnerable to missing the second significant move higher.  While I would much rather miss an opportunity to make money, than get stuck in a losing series of trades, there may be some attractive opportunities from a risk/reward standpoint for us to capture a good portion of this next move.

In coming months, Kass says the fear of being out will overcome fear of being in. Kass believes the March low of 666 on the S&P 500 might mark a generational low, but please don’t mistake Kass — or us — for bulls. Huge bull rallies inside bear markets are hardly unusual. The long-term market headwinds haven’t gone away, he notes. In addition to the macro concerns Roque cited, Kass lists an elevated savings rate, which lowers consumption; spreading wage deflation; the devastation of the construction and real-estate industries, once big job creators; and a reduced securitization market, a former growth engine, as factors that will weigh on stocks for years.

So if the next leg up really is in force, there will be opportunities, but they will most likely be outside of retail stocks which are affected by consumer spending / savings rates, employment statistics, and other sentiment gauges.  Investments in commodity and trading sensitive stocks may give us the best bang for our buck, including sotcks like Potash Corp, Blackstone Group, and ReneSola.  Retail stocks may still make for good short positions, but the opportunity may have to wait for a few weeks or months as investor sentiment continues to evolve.  In the end, investors who are willing to be flexible and open minded will likely collect the largest portion of available gains in this volatile year.

FD: Author has a long position in BX, and LDK in the ZachStocks Growth Model

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

After more than three months of sharply higher stock prices, it appears the market is now consolidating those gains.  As a best case scenario, we could be in for a short “gut check” move which simply tests the resolve of recent buyers.  But the more likely scenario appears to be significantly lower prices as the economic recovery is not as close as many investors had believed.

As markets begin to trade lower, investors are quickly looking for a defensive investment strategy to protect gains from the last few months and to avoid the devastating losses many suffered during the fourth quarter of 2008 and first quarter of 2009.  One of the strategies we have used in our hedge funds and individual client accounts is “covered call writing.”  This strategy essentially sells the rights to a certain amount of potential stock appreciation while at the same time receiving cash to offset potential losses in the stock.  Here’s how the scenario works.

• Joseph holds 1,000 shares of LDK Solar which is currently at $9.75 per share for a total value of $9,740.00
• Joseph now sells 10 LDK September $10 calls (each call represents 100 shares) for $1.35 per share and receives $1,350 less commissions
• If between now and September 18, the stock remains at the current level, Joseph will get to keep the $1,350 for a 14% gain over just 2.5 months.
• If between now and September 18, the stock drops to $8.40 (or declines by 14%) Joseph’s cash he received from selling the calls will completely offset the loss in the stock.
  • Any drop below $8.40 will result in further losses, but the first $1.35 is protected against
• If LDK trades up to $11.00 (up 13%) Joseph will likely be forced to sell his stock at $10 per the option agreement.  But since Joseph received $1.35 for selling the option, his gain is actually higher than if he had sold the stock at $11.
• If LDK trades higher than $11.35, then Joseph will forfeit his potential large gain, settling for a simple 16% gain over 2.5 months time.

So you can see that this strategy can become very beneficial in a difficult market because it helps insulate investors from significant losses.  At the same time, investors are not receiving anything for free, because selling calls actually caps the potential gain (still at a healthy return for the time period.)

The lower markets trade, premium paid for these option contracts typically expands.  This is good news for investors who have not sold calls yet, because the price is higher and therefore includes more protection.

There are many dynamics to consider when selling calls against existing stock positions.  One can usually choose from a myriad of different contracts with different dates (typically options expire on the third Friday of each month) as well as different strike prices (in the example we could have used a $7.50, $10, $12.50 or other strike prices).  Each different contract changes the risk and reward dynamics which allows you to customize an approach to very closely monitor the capital you have at risk and the potential return you are targeting.

If you are interested in setting up this strategy for your own portfolio and need just a bit of help getting started, please contact me.  Through my company Sound Counsel Investment Advisors I can offer hourly consultation, place the individual trades for you, or simply direct you to some resources to help you get started.  Please feel free to send me an email or call my direct line: 678-467-7064.

During these turbulent times it is important to have a flexible approach to markets and to protect your capital from significant losses.  There will be plenty of time for making money as stocks rise, but the first rule is to maintain your capital until a time when the situation is more favorable.

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

note: This post is a follow up the the New Year post: Four Stocks for the New Year as well as the first quarter review

We’re halfway through 2009 and the markets continue to be very dynamic.  After a full fledged rout in the first quarter, equity markets have rebounded sharply in the second quarter posting the best market return since the bullish days of the late 90’s.  Despite the strong performance off the March lows, equity markets still appear to have a significant amount of risk.  Unemployment numbers continue to be weak, consumer spending is contracting even with upticks in income levels, and governments around the world are piling on excessive debt.

A true dynamic investment program needs to be able to adapt to market changes in order to protect against new risks, and capitalize on evolving opportunities.  However, picking four stocks at the beginning of the year is a great exercise in long-term planning and evaluating what broad sustainable trends are in place.  This quarter our four stocks have increased sharply from the weak Q1 levels but still leave much to be desired.  By contrast, the ZachStocks Growth Model which is continually adjusted to account for risks and opportunities has outperformed the market by quite a large margin this year.

So here are the four positions we chose at the beginning of the year:

1. JA Solar Holdings (JASO)

Solar energy has rebounded in the past few months as stimulus dollars finally hit the market and are beginning to drive demand for solar power and the components necessary to produce that power.  JASO has traded higher and currently shows a slight profit for the year.  As traditional energy prices increase, the relative competitiveness of alternative energy is boosted.  JA Solar has had trouble keeping up with many of its peers as management has issued relatively weak revenue guidance.  By comparison, our position in Yingli Green Energy in the same sector has yielded triple digit gains.  JASO will likely continue to ride the solar trend higher but it now appears competitors int he sector make for better investments.

2. AECOM Technology Corporation (ACM)

AECOM has rebounded impressively as our second theme for 2009 (infrastructure) finally takes hold.  Over the past weekend, the stock was upgraded by Stearne Agee and the price target was increased to $40.  It appears that this target could prove conservative over the next 12 months as AECOM is quickly proving its ability to convert its backlog of potential projects in to real-for-sure revenue paying contracts.  Througout the recession, ACM has continued to post growth in both revenue and earnings on a quarterly basis.  Analysts are targeting $2.04 as expected earnings for 2010 (fiscal year ends Sept 30) but that estimate may be increased due to strong execution.  Aecom continues to be a strong component of the ZachStocks Growth Model.

3. TBS International (TBSI)

Shipping stocks have been an incredible disappointment this year.  The recessionary environment has cut down on international trade and the corresponding weakness in day rates has caused difficulty even for shipping companies with long-term contracts.  Shippers have also had to deal with the frustrating issue of customer defaults.  So while long-term contracts may have been in place, once the global crisis hit the customers were unable to keep up with their obligations and the contracts were no longer viable.  TBSI is now down more than 20% for the year and we have not held the stock for some time.  A rebounding economic climate could push these stocks higher, but currently there appears to be more risk than potential reward in shpping stocks generally and TBSI specifically.

4. China Medical Technologies (CMED)

ChinaMed is relatively flat on the year despite some difficult and proactive decisions made by management.  The company decided to divest its tumor therapy division and instead concentrate on its diagnosis business.  The strategic move should drive profitability in coming months as the diagnostic business has a recurring revenue stream which is very reliable and has strong margins.  The stock continues to sport a single digit multiple despite expected and historical growth trends.  It is unclear exactly what catalyst will propel the stock higher, but for the time being valuation is very compelling.

The second half will no doubt bring new issues to ponder, trends to follow, as well as risks and opportunities.  Inflation has the potential to eat away at savings and non-performing assets, the current administration appears to be somewhat hostile to free markets, and global economic weakness could spark civil unrest in unexpected places.  So continue to be flexible and alert with your trading and make sure you manage risk appropriately.

Below are links to the other participants in this contest (will be updated as more articles become available)

The Financial Blogger

The Wild Investor

My Traders Journal

Intelligent Speculator

Where Does All My Money Go?

Dividend Growth Investor

Million Dollar Journey

Four Pillars

FD: The ZachStocks Growth Model has positions in ACM, YGE and CMED

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