Turnaround Candidates: 75% Club

Jan month of 2012 is almost over and to stock investors, this month is turning out to be a pretty good month. This also means that 2012 overall would be a good year to be in stocks (as per statistics over decades). The markets are becoming more and more "stock pickers" markets. Forget about index investing in 2012. It's all about picking up right trends and stocks. Keeping that in mind, here is one idea of screening potential picks. I called it as "75% Club". The criteria is simple:

• Identify stocks which are down by at least 75% in last 12 months (52 week high/low should be 4:1)
• Research why stock is down by 75%. There can be multiple reasons for stock to go down by that much -  fears of bankruptcy (EK), change in business conditions or competition (SHLD, solar sector), stupid mistakes by management (NFLX), regulatory environment (BAC), macro-economic conditions like housing downtrend (MTG)
• Find out if companies identified are going to run out of money and hence may have to declare bankruptcy (AMR, EK) - avoid these companies at all cost. Since they are going towards -99% 
• Wait till stocks reach equilibrium. Many stocks keep going down even if they are down by 75%. They need to form a base where daily movements become small. e.g. NFLX went down by nearly 80% when it dipped below $65
• Check out corrective steps taken by management, change in macro-factors, competitive landscape. When you believe that these are changing for better, start thinking of putting some money into these stocks. Start small quantifies
• Let stock appreciate by about 10-15% from it's 52 week low before making further investments. It's better to invest with rising tide than catching falling knife. While you may miss first 10-15% gains, if stock as really reversed the direction, there are at least 50% more gains to have. After all to recover lost 75%, stock has to climb 300%

So which stocks meet the criteria in 2012?

1. NFLX (Hi: $310, Lo:$65, CMV:$122). 20% upside (Target: $150)
2. RIMM (Hi: $75, Lo:$13, CMV:$16.80). 20% upside (Target: $21)
3. RDN (Hi: $8, Lo:$2, CMV: $2.6). 30% upside (Target: $3.50)
4. JASO (Hi:$8, Lo:$1.21, CMV: $1.8). 30% upside (Target: $2.50)
5. CECO (Hi: $27, Lo:$6.30, CMV: $10.60). 20% upside (Target: $13)
6. AMED (Hi: $38, Lo: $9, CMV:$10). 25% upside (Target: $12.50)

This should give you enough idea of "75% club" and potential turnaround candidates. Personally I do apply this in my investments. I wish I had applied this to single best investment of last decade (and still going strong) - Apple. It went down from over $25 to around $7 in summer of 2001. That would have been $900 (considering split in 2005).

Next week would be crucial week for Presidential election since most likely Florida would seal the GOP nomination. Mitt is going to win Florida primary and Gingrich has started seeing the writing on wall. maybe that's why he wants to have an American base on Moon so that he could help make Moon as state of America! What a joke - especially when it comes from someone who had 1/3rd chance of becoming US President as recently as last week. 

/Shyam

Time to sell and take a break!

Markets have been on tear for first 3 weeks of 2012. I decided to create a mock portfolio based on recommendations from my first post of 2012 by mock buying these picks in first 2 weeks at or below the prices mentioned. This portfolio is up by nearly 11% assuming all picks have equal amount of investment. Highest returns are BAC with 25% and then STX with 23%. So with yearly target of above 10% returns achieved in 3 weeks what should one do?
All indexes are heading towards highs of 2011 which were reached in May and July before European mess pulled the indexes down for a flat year. European mess is no where near resolution (see debt negotiations between Greece and bondholders). These worries are again going to come to front lines in Feb/Mar. So at this time best course of action to take some gains off the table by selling some of the winners and keeping some dry powder. There would be quite a few buying opportunities when DOW would go below 12000 sometime in next 3-4 months.
If one is for long-haul and does not want to time to market, one could use following strategy to generate some income and provide some downside protection:

• Enable your brokerage account with "call options" - this would need some paperwork and take 2-3 weeks to get it approved
• Identify your long-term picks (say BAC)
• Sell out-of-money "covered call" against your holdings for next month. e.g. BAC120218C00008000. Premium for this is around $9 for one contract representing 100 shares. So if you have 1000 shares, you can sell 10 contracts generating income of about $80 after commission.
• If stock goes above $8 by 2/18, you are forced to sell your holdings at $8. But that is ok since you would have generated 14% return in one month from current price of about $7
• If stock remains below $8, you keep your holdings as well as call premium you received
• If stock goes below current price of $7, do nothing. Since you are in long-haul, you should not be worried about short term paper losses
• One can repeat this strategy every month and generate income as well as downside protection

It is time to be careful and cautious about this stock market rally since we are not out of woods yet.

Now coming to politics, republican presidential nominee just became lot more interesting with Newt winning South Carolina. Would Gingrich become "Grinch" who stole nomination from Mitt? For that, we will have to wait for results from Florida and then Super Tuesday in March. Till then, enjoy the circus of debates and attacks on each other! I am sure President Obama's campaign is lot more excited with today's results since more it drags on, more fodder it would provide to President Obama for fall campaign.

/Shyam

Alvida 2011 and Happy New Year 2012!

Bye-bye/Alvida 2011. It was a gut-wrenching year with so many Geo-political events all across the board and associated stock market moves. What started as a promising year with DOW reaching yearly high by late Apr turned out to be whimper by end of year with S&P barely moving at all. Someone who had gone into hibernation may not even notice the dramatic stock market movements (like 250 points moves on so many days). Personally my stock market returns were dismal (basically all 2010 gains were wiped out in 2011). Unfortunately my weekly/bi-weekly picks also did not do very well.

So with that dismal track-record, I ought to change my stock picking/investing strategy. Let's start with some macro predictions. 2012 being election year, first some election predictions:

• Mitt Romney will wrap up Republication nomination by Mar 2012.
• Democrats would lose control of senate by margin of about 2-4. Republicans would lose seats in house reducing their majority to single-digits/teens. Most of the losses would come from their tea-party candidates.
• After lots of ups and downs in weekly polls leading to Nov elections, Obama would win Presidential election with slight margin.
• With loss of house, President Obama would have to change his strategy to deal with republican congress.
• In other major elections, Sarkozy and Putin would win elections to be Presidents of France and Russia respectively

With election predictions out of way, let's predict economic/stock market

• US GDP growth would be around 2-3% for 2012
• DOW would go above 13000 and S&P above 1350 sometime before summer 2012. 
• By year-end 2012 with elections out of way, DOW would end above 13000 and S&P close to 1350 for returns of about 6-8% for 2012
• 10-year treasury yield would be around 2.4% (currently it is around 1.87)

So here are 10 picks based on these macro-predictions with target buy prices in brackets. This portfolio should return about 10% in 2012 including dividend returns provided you invest equal amount in each security and hold till Dec 31, 2012.

1. AA ($8.64)
2. BAC ($5.5)
3. FCX ($36)
4. GE ($17.85)
5. KND ($11.77)
6. MET ($31)
7. PCX ($8.16)
8. RIG ($38.38)
9. STX ($16.16)
10. TMV ($66)

Please do your own due-diligence before investing since these are just my suggestions based on my risk profile.

Happy Holidays and Happy New Year!

/Shyam

2011: Arab Spring and European "Fall"!

Year 2011 is coming to an end. What started as promising year both on economic front as well as Geo-political front with Arab Spring is ending with recession clouds and European "Fall". What a mess our elected politicians have made in managing affairs of their countries. Everywhere you look, politicians are failing in delivering what they were supposed to deliver.

• Enough said about European circus - every few weeks they meet, make lot of promises after long meetings and then go their own ways without implementing these promises. Already 4 countries have changed their Prime Minister(s) (Ireland, Spain, Italy and Greece). Next round could be France
• US is in gridlock which is likely going to be intensified in election year 2012. So nothing would happen on economic front other than political posturing. Obama started as great promise but coming up way short than what his Presidency could have been.
• India is stuck in non-stop corruption/Lokpal/Anna's fast. This has started to take tool on economy with Rs touching all time low of 54 against $ and growth coming down to possibly below 5%
• Chinese are preparing for their leadership change in 2012 (it happens every decade) and trying to make sure that Arab spring does not land on their shores by increasing censorship on Internet

So anywhere you look, dark clouds are looming in 2012. So what should an average investor do? My recommendation is to stay in cash for next few weeks and invest in dividend paying blue-chips. I am short-listing few names which I will publish as we start 2012. Till then enjoy your Christmas shopping (US economy needs you to do more shopping:-) and holidays!

/Shyam

Italy: Too big to fail;Too big to bail!

Another week of European drama - only difference from last week that center stage moved from Athens to Rome. The economic crisis cost one more powerful prime minister his job (don't feel sorry for Silvio Berlusconi since he had 3 years to fix Italy's problems) 
With crisis finally moving from PIG (Portugal, Ireland, Greece) to PIIGS (with addition of Italy and Spain), Euro has reached cross-roads. Both Italy and Spain are "too big to fail and too big to bail". This means both these countries need to fix their problems on their own with some support from ECB. Germany/France cannot bail Italy/Spain otherwise they risk getting engulfed by crisis themselves. Already France is at brink of losing its prized AAA rating. European politicians are at least taking steps by installing technocrats like Mario Monti in Italy as prime minister. Since he is short-term prime minister, he has nothing to lose. He should convert crisis into opportunity and forcefully move in freeing up Italian economy from clutches of government into free enterprise. If Mario needs any guide, he should look at how India handled situation in 1991 when Indian Government had to keep gold reserves with IMF to get $$ to fund. Then Indian prime minister PV Narasimha Rao with help from then finance minister Manmohan Singh (current prime minister) converted the crisis into opportunity and freed Indian Economy. 
The outcome of experiment called Euro would be decided in 2012 and most of it would depend on how Italy and Spain handle their debt crisis.
For investors, these are exciting as well as dangerous times. So be careful navigating  your investments!
/Shyam

Democracy, Drama and Tragedy: Greek Origins!

Watching last weeks events in Greece, I was curious to find out origins of following three words and to my amusement all of these three words have Greek origins.

• Democracy - δημοκρατία – (dēmokratía) "rule of the people
• Drama - Classical Greek: δρᾶμα, drama
• Tragedy - (Ancient Greek: τραγῳδία, tragōidia, "the-goat-song"^[1]) is a form of art based on human suffering that offers its audience pleasure

No wonder these three words represent what is happening in Greece in particular and in Europe in larger context. It all started when Greece joined Eurozone in 2001 by falsifying its government debts and lost control of its financial destiny. While people of Greece benefited in last 10 years by joining the Euro club, they started living lavishly without paying proper dues which comes with this membership. Finally in started catching up with them in 2009 and continue to muddle thru one crisis after another. Eurozone being motley crew of 17 nations cannot and did not move fast to take control of situation and now Greece, Europe and world is paying for this in form of uncertain times. Most of the western world had one lost decade and if things don't come under control soon, we are looking at another lost decade.

So what should an average investor do in such uncertain times. One thing is for sure - forget buy-n-hold strategy. This did not work for last decade and it won't work for this decade unless you can find gem like Apple in 2001. Since there may be 1 Apple in 1000 or 2000 companies and most likely we won't be able to find that company, it's best to make new friend called volatility! With so much drama around (wait for Super committee recommendations and drama in US congress in next few weeks), markets are going to be volatile for next few weeks. In such times, best to monitor trends/momentum and make appropriate bets using ETFs. Best vehicles for such short-term bets are ERX/ERY, DRN/DRV, EDC/EDZ, FAS/FAZ, TNA/TZA. These are extremely volatile bets so be very very careful. 

If you want some steady 6-12 month horizon, check out some of the energy stocks like PCX ($12), ANR ($26), RIG ($48), ICO ($46), SD ($7). World is not falling into double-dip recession. This means world is going to need lot of energy and hence these stocks should be good best for 12 month horizon.

/Shyam

Happy Diwali! Its time to reap Dividends!

Finally Qaddafi is dead! In Arabian world, 2011 would go as historic year. What started as Arab Spring movement would most likely end rule of 4-5 dictators who have been ruling various countries from 30-40 years. On economic front, European mess continues and that keeps world stock markets on roller-coaster ride. Oct is turning out to be much better than Aug/Sept but wait till European leaders miss the opportunity on this weekend again. Markets are hopeful that finally Europe would put some credible plan to resolve its mess. But most likely people are going to be dis-appointed with the news coming out on Monday and markets would sea-saw again! So be very careful with your investments. Right now its better to be in cash or cash-generating investments. This is where I would recommend considering some high-yielding mREITs. These stocks are risky investments but due to their yields, they at least provide some kind of cushion against downside. Here are some names:

• AGNC: $27 Yield: 19%
• CIM: $2.90 Yield: 18%
• IVR: $14 Yield: 22%
• CYS:$12 Yield: 18%
• NCT: $4 Yield: 14%
• If you don't want to risk on individual stocks, check out ETF - REM: $12 Yield: 12%

You can increase yield further by selling "covered call" options on your positions. Since Fed has almost guaranteed no interest rate hike for next 2 years, it would be safe to assume that these stocks would relatively hold their values and yields for next 6 quarters. However be careful to consider selling as soon as first interest rate hike is considered by Fed since these stocks are extremely sensitive to interest rates. 

For all readers, Happy Diwali!

/Shyam