Growth Report : Graham Corp.

Tech Spending and Stop Losses

Ian Wyatt — Thu, 18 Dec 2008 23:12:00 GMT

Your Daily Profit

December 18, 2008

*****Tech Spending

*****Stop Losses

***** Stock Summit 2008: Profits After the Fall

Dear Investor,

Up 359 on Tuesday, down 99 on Wednesday. I can live with that. But I still have to wonder how long the relative optimism for stocks will last. General Electric (NYSE:GE) was downgraded and received a rare “sell” rating by Sterne Agee & Leach, and, as we saw with Honda yesterday, companies are starting lower 4^th quarter earnings estimates.

We’ve been expecting earnings estimates to come down for some time. But it remains to be seen how much is already priced in. For the financials, it could be argued that the worst is priced.

Consider Morgan Stanley (NYSE:MS). That company posted a $2.37 billion dollar loss during its 4^th quarter, which ended November 30. That worked out to a loss of $2.34 a share. A poll from Reuter’s showed analysts were expecting a loss of just $0.34 a share. A month ago, analysts were expecting a $0.30 profit.

The analysts missed by a mile. They were totally unprepared for such a weak quarter from Morgan Stanley. Sounds like a recipe for disaster, right? Well, after a somewhat rough start to the day, Morgan Stanley shares finished with a 2% gain.

The same thing happened over at Goldman Sachs (NYSE:GS). Goldman lost $2.1 billion, which was roughly in inline with expectations even though there were some wacky calls for losses as high as $6 a share. The stock jumped 14% Tuesday and added another 3.6% yesterday.

*****The Fed’s rate cut helped Goldman and Morgan Stanley out, for sure. But there’s also the mark to market accounting that each company has to use. That means the companies must price all assets every quarter. In the case of mortgage related assets, where the prices are effectively nil, they are forced to take steep write-downs.

Morgan Stanley took around $2.2 billion in write-downs as it re-priced damaged assets. At present, these are paper losses. But it goes to demonstrate the difficulty of earnings estimates. So what looks like a staggering surprise loss may not be quite as bad as it first appears.

Of course, there’s also the flipside, which would be that the assets could be subject to more write-downs in the future. But for now, the companies are getting the benefit of the doubt.

*****We’ve seen the bottom fall out of homes sales, commodity prices, retail sales and lending. Technology spending has remained fairly strong. You may recall I discussed IBM (NYSE:IBM)’s 3Q earnings in Daily Profit as a strong point of the earnings season when it reaffirmed its 2008 full year earnings back in October.

That was then. Now analysts are expecting tech spending to be the next domino to fall. A Citigroup analyst says the first quarter could be the worst ever for software companies. A Gartner analyst is saying “There’s going to be a period of reckoning that’s not going to be pretty…”

IBM and Sun Microsystems (Nasdaq:JAVA) are two companies that could suffer.

IBM sold off sharply in the Fall, dropping from 52-week highs around $130 to as low as $70 a share. A casual look at one- or two-year chart might make it look as though a downturn is priced in. But a look at a longer term chart gives a different perspective.

In late 1999, at the height of the technology bubble, IBM traded as high as $140 a share. Between 2003 and 2007, IBM was range-bound between $75 and $100. In 2007, the stock took off again and rallied to the $130 area in spring and summer of 2008.

Now, IBM is back in that $75-$100 zone. For us to start talking about IBM hitting 10-year lows, like we have with so many other stocks, we’d have to see prices drop to the $50-$60 range.

Sun Microsystems looks even more vulnerable than IBM. Sun was already in a downtrend when IBM was hitting highs in mid-2008. The stock currently trades just above $4 a share.

*****One stock that may be an attractive alternative to the high-end server and software companies like IBM and Sun is VMware (NYSE:VMW). VMware makes “virtualization” software that allows companies to get more bang for their buck from their networks.

The stock has been whacked pretty good this year (what hasn’t?) but may actually benefit from cuts in corporate IT budgets.

*****Finally, I want to address some of the stocks we’ve talked about here in Daily Profit. We’ve managed to get in some positions that are doing well. Both Graham Corp (NYSE:GHM) and Emergent Biosciences (NYSE:EBS) are up nicely since they were first discussed here. It’s time to protect those gains.

Shortly after I recommended a stop-loss on Questcor Pharmaceuticals (Nasdaq:QCOR), the stock started selling off. That stop loss should have taken you out of the position at $8.80, preserving your gains and keeping from suffering as the stock continued to fall.

Now is the time to put in stops on Emergent and Graham. Graham’s got support at $10, so a stop at $9.75 should keep you in on a routine sell-off but take you out if the stock is going to head back to its lows.

A stop-loss at $22 will do the same for Emergent.

Chesapeake Energy (NYSE:CHK) is far more volatile and I also consider it more of a long-term holding. For that reason, I’m content to let it go, for now.

*****Monday’s landmark video investment conference, Stock Summit 2008: Profits After the Fall, was a huge hit. The turnout was phenomenal…thousands tuned in to watch TradeMaster Chief Trading Strategist Benson George give his blueprint for profits in 2009…and his top “breakout” stocks are already showing gains…

Well, it’s not too late for you to share the wealth

I’ve seen this happen more times than I can count. Benson uncovers an absolute gem of a stock with his TradeMaster system, and the profits start rolling in the very next day.

It’s like clockwork. But the thing is, those profits don’t stop after a day. That’s the key to the TradeMaster system. One-day gains turn into two-day gains…and then three-day gains…and pretty soon you’ve got a big winner on your hands.

Now, I want to show you how you start profiting with Benson and the TradeMaster system.

It’s quick. It’s easy. And it won’t cost you a single dime…

Here’s what you do – go to www.TradeMaster.tv to check out the replay of Stock Summit 2008: Profits After the Fall. You’ll discover the secrets to Benson’s amazing trading strategy that’s consistently putting up double-digit gains while the markets collapse around us.

Then accept my invitation to try Benson’s TradeMaster service and get you immediate access to the Special Report TradeMaster’s Top 5 Breakout Stocks. Take some time and watch the video then try the service with no commitment or obligation on your part to continue.

That’s it. That’s all you need to be well-armed to start making some money as soon as the opening bell rings on the New York Stock Exchange tomorrow morning.

Best regards,

Ian Wyatt

Founder and Publisher

TradeMaster Daily Stock Alerts

PS – After you view the video from the comfort of your home or office and sign up to try TradeMaster, don’t forget to grab your two Bonus Special Reports – The Beginners Guide to Shorting Stocks and Technical Analysis: Top 4 Indicators for Profits. Along with TradeMaster’s Top 5 Breakout Stocks, you’ll be armed for profits tomorrow!

In Search of a Bull Market

Ian Wyatt — Wed, 23 Jul 2008 15:40:00 GMT

In Search of a Bull Market

It’s an old stock-market saw – there’s always a bull market somewhere. Even though the S&P 500 is down some 16% year to date, it’s easy to point to commodity and oil stocks and say, “See? There’s your bull market.”

Now, I’ve been warning my readers away from Big Oil stocks for over 6 months. But my recommendations of stocks like oil services company like Graham Corp. (NYSE:GHM) have proved that the ever-present bull market hasn’t completely become a cliché.

However, I have something else in mind. Biotechs. Believe it or not, in the midst of the bank meltdown, runaway inflation, and U.S. recession, the Biotech HOLDRs (BBH) is at a 52-week high. Over the last year, the BBH

has established solid support at $160, has broken a strong resistance point at $175, and is currently working on a secondary resistance point at $180.

With an important sector benchmark like the BBH showing strength, it gives the impression that biotechs are breaking out all over. Well, yes and no.

78.9% of the BBH is dominated by three biotech heavyweights – Affymetrix (Nasdaq:AFFX), Genentech (NYSE:DNA), and Gilead Sciences (Nasdaq:GILD).

That’s really not enough of a sample to draw any firm conclusions about the overall strength of the biotech sector. Still, where there’s smoke, there’s often fire…

Follow the Money

About six months ago, my stock research analysts put the finishing touches on a stock-picking machine for my advisory letter, Growth Report. Without going into too much mind-numbing detail, this machine ranks 3,500 small cap stocks on based on 88 criteria every day.

The stocks at the top of the list have received the highest ranking based on relative sector strength, relative valuation within the sector, profitability, growth prospects and several other fundamental metrics, with some technical metrics like momentum and expanding volume thrown in to identify stocks that, in addition to being attractively valued, are actually being accumulated.

As you might expect, the top rankings have been dominated by oil services and exploration companies for months. But there have been a few surprises. We had great success with a few solar stocks back in March. Canadian Solar (Nasdaq:CSIQ) jumps to mind. And there have been a few tech stocks like Netezza (NYSE:NZ). We even caught a 20% run on Green Mountain Coffee Roasters (Nasdaq:GMCR) back in May.

Like I said, there have been some surprises.

About two weeks ago, we started getting a new surprise. You guessed it: biotechs. And since the machine only ranks small cap stocks, it wasn’t picking up on the strength of BBH stocks. Something else is going on. And it could be the fire to the Biotech HOLDR’s smoke.

Why Biotech?

Pharmaceutical stocks are often considered to be recession-beaters because diseases aren’t economically sensitive. But again, there’s something else going on. Biotechs with products in the pipeline are moving higher.

If you’re looking for a sector that has the potential to change our very standard of living at a most fundamental level, there aren’t many sectors to choose from.

Alternative energy is one. There will be some huge winners in this space. But valuations can be extremely rich. And there’s still not much consensus about which technologies will have staying power.

Two years ago, as President Bush was throwing his weight behind ethanol, some of those stocks might have looked like slam-dunks. A quick look at those ethanol stock charts today would give even the most intrepid investor the heebie-jeebies.

Yeah, sure, I suppose there are a few tech stocks out there with life-changing potential. But somehow, I just don’t get fired up by iPhones and NetFlix set top boxes. I guess I’m just a dotcom cynic now.

Oil exploration won’t change our lives dramatically, though there are still some interesting profit opportunities in Canada’s oil sands and in America’s own Bakken oil shale regions.

Follow the Light

Perhaps in these dark economic times, investors are turning a hopeful eye to the one sector that can still fire the imagination that better times lie ahead – biotech.

It seems every day, scientists isolate the genetic cause for another disease. Recently, scientists announced that they’ve discovered a genetic cause for the processing quirks that result in autism.

If you didn’t know, autism now affects 1 out of every 162 kids in this country. It’s a virtual epidemic. Trust me on this one, parents of kids on the autism spectrum will pay dearly to get their children back.

Just today, scientists say they may have isolated a gene associated with a predisposition toward violent crime.

Scientists have already managed to turn ordinary cells into stem cells. So I may not have to rely on a Democratic Administration to push stem cell research forward. And for aging Americans, that’s probably a more pressing issue than hydrogen fuel cells.

Two Biotech Movers

There’s plenty of money on the sidelines, just waiting to be put to work in the stock market. And you won’t find many medium-term investment stories more compelling than biotech.

Don’t worry. I’m not going to leave you hanging. Here are two of the stocks my stock-picking machine has turned up.

The first is Emergent BioSolutions (NYSE:EBS). Emergent BioSolutions has the only FDA-approved vaccine for anthrax. The company is about one-quarter of the way through a $448 million contract with the U.S. government, so cash-flow shouldn’t be a problem anytime soon.

EBS rounded out its anthrax suite with the acquisition of a couple other Phase II drugs. It has a typhoid vaccine in Phase II trials. Plus, it’s a acquiring a recombinant flu vaccine called FluBlok that’s in Phase III trials.

Biotechs always carry risk that trials won’t demonstrate the efficacy of a future product. But with a forward P/E of 13, investors seem to be giving EBS the benefit of the doubt at the present time.

The second stock is Somanetics (Nadsaq:SMTS), a medical device maker. Somanetics makes the INVOS System which monitors blood oxygen levels in at risk patients. It also makes the CorRestore system which is used in cardiac repair and restoration.

I won’t pretend to understand exactly what that means. Quarterly revenue grew at a 39% clip last quarter and earnings grew 26%. The company is doing $42 million in sales and has a strong cash position of $51 million and no debt.

The forward P/E is a manageable 25. And the company has been aggressively buying back stock. Perhaps best of all, analyst earnings estimates for this year and next have been revised higher twice in the last two months.

Maybe it’s a little early to start talking about a bull market for biotechs. But if my stock-picking machine keeps turning up biotechs, Growth Report readers will be among the first investors to get on board.

Ian Wyatt

Chief Investment Strategist

Growth Report