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Weekly hotline Update #24 – 05-15-07

Last week the FOMC left rates unchanged and Bernanke repeated the fact he is more concerned about inflation than economic conditions and or the sub-prime mess. Since then rates have drifted a bit higher so the bond market might be catching onto the idea the Fed really is concerned about inflation. But with the PPI and CPI numbers coming out showing a marginal waning of price pressures, suddenly it seems all is well. But then look at gas prices, which are now higher than ever been before. While the government says price pressures are abating a little, just ask Wal-Mart how consumers are reacting to higher gas prices. Last week Wal-Mart reported a surprising dip in retail sales, and the reason is tied directly to gas prices, but the impact there has been muted at best. 

Despite the turbulent economic backdrop, the Dow continues setting records on an almost daily basis. But, over the past two weeks its becoming clear the current bull move not a rising tide lifting all boats. The current move is centered on the biggest companies and stocks, plus a select few story stocks having made impressive jumps related to earnings or buyout / take over talk. When it comes to the broader market, since mid to late April, many stocks have been consolidating.

A month ago we were looking for some corrective action over the balance of April and into May. The expectation was for a consolidation to setup a powerful buying opportunity going into the summer. We have seen a lot of stocks behaving in line with the expectation, but the perception of the market has been skewed by the Dow’s series of new highs clogging up the headlines virtually every day. By looking at the PRS Composite performance line vs. the S&P 500 you can see the strongest stocks have been consolidating since mid-April.

The PRS Composite is up 12.8% vs. the S&P 500 up 8.9% since November 06, but the S&P has been gaining ground over the past month. This happens from time to time, but it’s uncommon for the S&P to move higher without the strongest and most dynamic stocks performing remarkably well. The current action is a precursor to the next great buying opportunity, and we are likely to see the Dow and S&P 500 go through a consolidation period before the stocks we focus on gain significant upside traction.

Looking ahead, money will begin shifting away from the largest stocks with limited upside potential and back into the dynamic companies and stocks that have proven their ability to grow and have tremendous upside potential. As the money flows shift we will see many of our preferred strong stocks resume their overall out performance in a more visible fashion.

The 3-month price performance of the top 90% of stocks is represented by the PRS_3-90 (blue) line in the chart below. Leading up to the late February high there was a strong divergence relative to the S&P 500. The S&P moved higher while the PRS_3-90 line drifted lower. Over the past two weeks a sharp divergence has developed.

The best buying periods develop when the PRS_3-90 line falls to 15% (green horizontal line) or below, with several examples from the past two years highlighted. With the Dow and S&P 500 sitting on top of extended runs higher they are positioned to consolidate over the balance of May. If that happens there is a very good chance we will see the PRS_3-90 metric fall to the 15% mark, which historically has indicated a very attractive time to buy stocks. Ideally I would like to see a healthy correction over the balance of May. This will setup a great buying opportunity looking forward in to the summer. With the broader market having already consolidated for close to four weeks, the stocks we follow are already positioned to turn higher for the expected strong run higher into the summer months.

New Stocks

Whether the market is grinding higher or churning sideways, stocks always swing around, reaching our entry criteria. Over the past week five stocks have reached our entry criteria: TPX (Tempur-Pedic int’l Inc); GLDN (Golden Telecom Inc); CALM (Cal Main Foods Inc); LORL (Loral Space and Communications); and ININ (Interactive Intelligence Inc.)

TPX (Tempur-Pedic int’l Inc) makes bedding products including beds and pillows and other cushion products. You may have seen one of their commercials on TV. I hear their beds sleep great. With an IBD EPS ranking of 93 the company has done well to establish its self and a leader. IBES earnings estimates: 2006a $1.32; 2007e $1.55; 2008e $1.80. With strong earnings estimates and solid products TPX is well positioned to continue growing.

The stock has a lot of support between $23 and $25. Ideally the stock will hold at the support area and then continue pushing higher. In April TPX reported solid quarterly earnings of 35¢ vs. consensus of 34¢ and guided numbers higher. Since reporting on the 19 the stock has been consolidating. This is a case where the company is doing everything right but the stock price is correcting and setting up an excellent buying opportunity. With strong growth and a PE of 18, there is ample room for the stock to continue higher.

GLDN (Golden Telecom Inc) is a provider of integrated telecommunications and internet services in major population centers throughout Russia and other countries of the Commonwealth of independent states. Its IBD EPS rank is 45. IBES earnings: 2006a $2.33; 2007e $2.93; 20083 $3.64; 2009e $4.70. With earnings expected to more than double over the next three years, GLDN forward looking prospects are solid.

From a chart stand point, GLDN is in a correction than began around mid-April. It has solid support around the $50 level and ideally should hold above $50 if it is going to follow the winning pattern. GLDN is in a very healthy consolidation, but it may be a bit early to jump in right now. We will keep a close eye on GLDN looking for it to hold above support and turn solidly higher.

CALM (Cal Main Foods Inc) produces eggs, about 16% of the shell eggs consumed in the US. CALM continues to acquire other producers and expand. The two factors for CALM are costs and prices. They continue to experience increased feed costs due to the demand for corn for ethanol production. However, they continue to see robust demand for eggs and have been able to pass increased costs along to their customers. Let’s face it, to make food; you have to break a few eggs. Key support is just below $12 while a move above $13.25 will give the all clear signal.

LORL (Loral Space and Communications) is a satellite communications company that owns and operates a fleet of telecommunications satellites used to broadcast video entertainment programming, distribute broadband data and internet services and other value-added communications services. They also design and develop satellites for commercials and government applications. LORL made an aggressive move higher over the winder and has been consolidating between $46 and $52 for the past few months. Note: LORL has average volume less than 100K shares which may cause liquidity concerns for some traders.

ININ (Interactive Intelligence Inc.) is a provider of software applications for contact centers. The company also provides VoIP applications to enterprises. Sells into four distinct markets: contact centers; enterprise IP telephony; Unified communications and self-service automations. They have a software solution based on Windows. Their software is pre-integrated with business applications such as CRM and EPR software, thereby automating and tracking business transactions.

ININ blew numbers away on May 1 reporting 9¢ vs. consensus of 6¢. That led to a powerful price jump and an upgrade. The stock is on a growth track, but from a price stand point has resistance at the $19 level and support around $17. Having broken its obvious near-term down trend, the stock is a buy as long as it remains above the $16-17 area.

Stocks Removed from the Open Active Table

Stocks with an * will record an exit price as of Tuesday’s close.

There are 12 exits shown in the table above. Most of them were shown last week and are shown this week to reflect their recorded exit prices, of last Tuesday’s close.

Over the past week only two stocks reached our exit criteria, KSS and NIHD. KSS reached our entry criteria in February and push about 5 points higher before succumbing to minor weakness. NIHD first reached our entry criteria in July 2004 and continued pushing higher for 148 weeks. That worked out to a 355% gain, or about 2.4% per week for 148 weeks. While NIHD reached our exit criteria, it looks like it has additional upside potential and could easily reach our entry criteria again later this year.

Open Actives of Interest

The table below shows the top section of the Open Active table, which currently has 123 stocks on it. (See May Monthly report for the full list.) Stocks shown are within our entry criteria.

Stocks shown in green of interest: CHINA (CDC Corporation); SYX (System Max, Inc) coming back after a major correction; AOB (American Oriental Bioengineering Inc) showing a strong recovery; ICE (Intercontinental Exchange) working higher; ASIA (Asiainfo Holdings Inc) will look good going above $8; GSOL (Global sources Ltd.); IWOV (Interwoven inc).
Open Actives not shown that look attractive: OMNI, CLB, NETC, OMG, PSMT, LHCG, BLUD, TSS
Cautious on: BID, USAP, CCOI, CTCI, BONT, and HRT.

Stocks expected to drop from the Open Active table in the next few weeks: CAL, MVL, AMIE, and WRLD.

Model Portfolios

Last week we added BRLC. They ok earnings and guided numbers higher. However, they also announced a secondary stock offering, which hurt the stock. Once the deal is done BRLC should recover. The current market is about companies buying back stock rather than issuing new stock to raise funds to further expand a business.  

In the conservative Portfolio: we are making no changes this week:

Our second portfolio is a more aggressive portfolio, which will hold 35 to 45 positions once it is time to get really aggressive. It is based on a $500,000 initial account value and was launched on February 13, just two weeks before the market peaked.

• In the Aggressive Portfolio we are making several changes:
• TSS Buying 500 @ 31.29
• OMNI Buying 1,300 @ 10.16

Our aggressive portfolio was launched on February 13, 2007, two weeks before the late February market meltdown. Though this is the aggressive portfolio, we have maintained a conservative stance with only 53% total market exposure. This is due to the configuration of the PRS Time plane, which suggests a better buying opportunity lies ahead. Provided a correction lasting about two weeks or so does develop, I expect to quickly fill the aggressive portfolio during the opportunistic time. This will set the stage for significant improvement going through the summer.

As I type, the Dow is up another 100 points while the broader market is struggling to move only slightly higher. Since late April the market has been in a stealth consolidation masked by the Dow’s remarkable performance. I do not expect the broader market to regain strength until after the Dow goes through a noticeable consolidation, which should re-set the cycles for overall improvement. Once that takes place the big money runners will re-focus their attention on the powerful companies that tend to lead the market higher, the ones that tend to show up on our buy list.

Sail the main course
In a simple sturdy craft
Keep her well stocked
With short stories and long laughs
Go fast enough to get there
But slow enough to see
Moderation seems to be the key

Jim Patterson