What’s Old is New Again

I spent the past five days in Orlando attending the World MoneyShow, during which time I had an opportunity to make a presentation on our concept of “innogration” and how that shapes our view of technology stocks. Generally speaking the audience for this event is primarily retirees, many of whom appear to be well into their 70s and 80s. So, I wasn’t expecting much enthusiasm for my material since it in some ways is contrary to conventional wisdom.

Boy, was I wrong. When I discussed the analogies between the current macroeconomic long wave to the prior wave, I saw eyes light up and nostalgic smiles on many faces. Afterwards, several people took the time to share with me their personal memories of what it was like to drive an automobile on the first interstate highway system, and how they were reminded of that the first time they ventured out onto the internet – or information superhighway.

It occurred to me while having these discussions that their generation has lived through the second half of a long wave, so it really shouldn’t be surprising that they are so comfortable with the idea of doing so again. The people who seem to have the most difficult adjusting to the idea are younger folks who have only known the secular bull market that began thirty years ago as the first half of the current wave picked up steam.

Recently I adapted the stock rating system we use for STI for our flagship publication, Personal Finance. It is not exactly the same since it does include the strategy score component of the BiQ, but it does possess the other three elements: dividend yield, change in net operating cash flow, and relative value based on forward 12-month P/E ratios.

The reason I am using it to evaluate every stock in the S&P 500 Index is that I believe I know what is in store for the stock market over the next several years now that Quantitative Easing is over (at least, here in the U.S.), and it will be critical to know how to identify stocks that are mispriced relative to their peer group.

As is always the case, the tech sector is at the front of the curve in this regard, as that is where innogration occurs during the first half of a long wave before fanning out in all directions during the second half. In short, the stock market will become even more Darwinian, as publicly traded companies compete for the finite amount of investor capital that is searching for the highest returns.

To that end, I am updating our Equity Trades Portfolio for 2015 as described in the article below.

NASDAQ Composite Index:                                                                        

Friday, February 6 = 4,744.40                                                 

Trailing 12 months = + 15.6%                                        

Trailing 7 Days = + 2.6%                                      

Trailing 4 Weeks = + 2.7%

Equity Trades Portfolio Update

By Jim Pearce

We haven’t spent much time talking about our Equity Trades Portfolio, so let’s take a look at how it’s faring thus far in 2015.

When batting .750 isn’t good enough

You may recall in late December we issued an Alert with a set of new short sell recommendations for Autodesk (ADSK), LinkedIn (LNKD), salesforce.com (CRM) and Adobe Systems (ADBE) due to their very low STR scores.

Stock                     12/29/2014 Price              02/06/2015 Price              Change in Value

ADSK                               $60.76                                   $57.07                                – 6.1%

CRM                                $60.35                               $59.17                            – 1.9%

ADBE                               $74.13                               $72.54                                    – 2.1%

LNKD                              $233.34                                 $263.40                              + 12.7%

So, the good news is we were right on three out of four of them, but the bad news is the one we were wrong on – LinkedIn – is the one that moved the most in price. In fact, our stop-loss price for LNKD – $255 – was breached on Thursday so that position should be closed. We still think it is overvalued, but it has momentum behind it at the moment so we are changing it to a ‘HOLD’ until it starts to cool down. The other three short sell positions remain open until further notice.

The Silicon swap

Just last week we advised swapping out Silicon Image (SIMG) for Lattice Semiconductor (LSCC) due to the buyout offer made by Lattice for SIMG. Nearly simultaneous to that, Lattice released its quarterly earnings report which fell short of analysts’ expectations. So, the gain we booked in SIMG has been temporarily offset by the decline in Lattice, but we still like the company and believe the SIMG acquisition, when consummated, will contribute significantly to earnings in the future.  In the meantime it remains a buy up to $7.50, with a stop-loss price of $5.25.

Trick or Treat?

On October 30th we made two additions to the Equity Trades Portfolio, adding Kongzhong Corp (KZ) and OmniComm Systems (OMCM) the day before Halloween. Since then we have been tricked and treated, as KZ initially looked like a big winner – rising 23% one week after it was added to our portfolio – only to watch it drift back down in the months since then. On Friday it broke through out stop-loss price of $5.25, so we are removing KZ from our recommended list.

OmniComm, on the other hand, has climbed steadily since we first recommended it, from $0.19 to a closing price of $0.31 on Friday for a gain of 63%. However, since it is a penny stock its price can fluctuate substantially so our buy limit price of $0.25 is still in play.

Time’s Up

Since our Equity Trades Portfolio is short-term in nature, we don’t leave positions open indefinitely. Therefore, we are closing out the only remaining stock from our original portfolio recommendation made in December of 2013, Riverbed Technology (RVBD). On that date it closed at $16.71, and since then has risen steadily to a closing price of $20.80 last week. That works out to a nifty little gain of 24% in fourteen months, but the stock has plateaued so it’s time to let it go.

Although Symantec (SYMC) was not an original portfolio recommendation, it is the second oldest position in our portfolio and has also hit a wall recently. It was added to our portfolio last March at a price of $19.91, and peaked above $26 last month before pulling back a bit last week after releasing its quarterly results. However, we will gladly lock in a 24% gain in only eleven months and look elsewhere for more value.