Weekly Hotline Update 11-28-06 #4
Welcome to the Patterson Relative Strength Report Weekly Hotline Update.
On Tuesday November 14 we launched our model portfolio. With Monday's sharp
decline our model portfolio value fell 1.7% over the past week. That compares
to a weekly decline of 1.5% for the S&P 500. Since the inception of the
portfolio, just two weeks ago, the S&P 500 is down 0.18% while we have a
return of -0.76% on invested funds and a total portfolio return of -0.47%.
Generally speaking these are relatively minor changes in value over the
portfolios very short life.
Our portfolio is about 62% invested. With Monday's sharp decline, a somewhat
expected pullback / consolidation has likely begun. We are progressing slowly
as we go through the process of building up our model portfolio. The goal is to
build up the Model Portfolio in a manner similar to how I would expect a new
subscriber to build a portfolio of strong stocks following our strategy.
The Market: With Monday's strong pullback, the prospects of a
near-term "pause to refresh," which I discussed last week, have risen
sharply. It would be nice if the market just went up every day, but we know
that is not the case. While pullbacks and or consolidations can seem
uncomfortable on a short-term basis, we should keep in mind that when stocks
pull back all stocks pullback, including the strongest stocks. A market
pullback means an opportunity for us to enter strong stocks at more attractive
price points.
Last week I showed the six month PRS Time Plane. The fact remains that on a
six month basis, stocks have plenty of room to run higher. Today I am showing
the 3-month PRS Time Plane. While on a longer-term basis it is clear there is
ample room for stocks to move higher, on a shorter 3-month basis, it is clear
we have seen a strong run higher that approached its recent maximum upside
potential.
Typically during a strong market move, the 3-month PRS metrics will move up
to a higher level and will sustain that level for a prolonged time period.
Until we see these metrics begin to fall off significantly from a high (ideally
higher) level, history suggests the market should remain fairly solid. However,
it is clear that some sort of minor pullback is well within reasonable expectations
at this time. I will have more regarding our near-term expectations in the
December Monthly report.
Over the holiday shortened week only three stocks reached our entry
criteria, all on Monday. Note: the Close on day Active price shown is Monday's close;
however, the price we use for becoming active is actually the closing price the
day following its actual Active day. That means Tuesday's closing prices will
ultimately be their Active prices.
ICLR (Icon PLC) is an Ireland based provider of contract
clinical research services to the pharmaceutical and biotechnology industries.
With an IBD EPS rank of 94 we know the company has strong earnings growth.
According to IBES earnings estimates 2006a $1.29, 2007e $1.66, 2007e $2.04,
2008e $2.55, we know strong earnings growth is expected to continue.
The stock peaked in mid November, along with a lot of other issues, and
has since pulled back to an attractive entry area. Since we can see a clear
short down trend on ICLR, you may want to hold off on buying until ICLR moves
above the shallow down trend line, above $37. Since the market is in a
corrective mode at this time, taking this step will help to avoid potentially
weaker situations.
NOVN (Noven Pharmaceuticals Inc) manufactures branded
prescription drugs used in menopausal hormone therapy administered through an
adhesive skin patch. It has an IBD EPS rank of 46, but it is a pharmaceutical
company. With Drug stocks it is not what has happened that is important. It is
what is going to happen. According to IBES earnings estimates, 2005a $0.53,
2006e $0.60, 2007e $1.09, 2008e $1.26. The bottom line is NOVN expects strong
earnings growth.
NOVN reached a price peak in late October and has been consolidating
since. On a 3-month basis the stock has weakened but as is the case with all
our new entries, it is maintaining its longer-term gains. NOVN is going through
a consolidation period and appears set to recover and push higher. Monday's
strength is notable in the face of a very weak market.
OMCL (Omnicell Inc) Develops solutions that enable
healthcare facilities to manage and administer medication and surgical
supplies. With an IBD EPS ranking of 76 we know their business is going well.
IBES earnings estimates are: 2005a $0.03, 2006e $0.57, 2007e $0.74, 2008e
$0.82. Again, OMCL is expecting strong earnings growth over the near-term.
The Stock peaked in late October with a sharp volume driven breakout like
price move. Since then OMCL has consolidated and is currently consolidating
just above the $18.00 breakout level. This is a strong looking stock that is
well positioned to recover. As always, waiting until the stock moves above the
most obvious down trend line will help to avoid those few stocks that never
recover from their pullback.
Over the short week as the market consolidated, several
stocks saw their 12-month Patterson Relative Strength fall below our cut off
level of 75. When that happens they are removed from the Open Active table,
which currently has 225 stocks on it. FORM and ELP reached on Monday and their
prices will be updated as of Tuesday's close.
The Table below shows Current Open Actives that are Green,
meaning they have once again reached our entry criteria window. The red stocks
are Open Active Positions whose PRS12 has fallen below 80. Our exit criteria is
below 75, so the red stocks are "under review" so to speak.
They are in danger of being removed from the Open active list.
Today we are not making
any changes to our model Portfolio.
The December Monthly Report will be published and sent out on Friday.
Jim Patterson
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