Trade the Bounce With These 3 Stocks
Given the stock market’s erratic behavior over the past six months, “trading the bounce” is enjoying renewed popularity. In simplest terms, trading the bounce is a short-term trading strategy that relies on excess volatility to produce quick profits.
As I mentioned in this week’s Personal Finance Update (“Hitting the Bulls Eye”), three months ago I noted that retailers Target (NYSE: TGT) and Best Buy (NYSE: BBY) had become oversold and were likely to recover quickly in 2019. Since the stock market bottomed out on December 24, TGT is up 26% and BBY has jumped 42% while the S&P 500 ETF (SPY) has gained 19%.
I believe the overall stock market will not make much headway over the next several months. If so, index investors won’t make much money. But I also think many stocks will gyrate wildly as TGT and BBY have done. In those cases, a lot of money can be made in a short period of time.
Let’s take a look at three beaten-down stocks that could move strongly in the weeks to come.
Shares of business development company (BDC) Hercules Capital (NYSE: HTGC) took a dive this week after the company’s CEO and Chairman, Manual Henriquez, was indicted in the college admissions scandal. Henriquez immediately resigned from the company, but not before shares of HTGC suffered a quick 10% hit.
Although the immorality of this sordid event reflects poorly on everyone involved, I see no reason why it should shave $100 million off HTGC’s value. Yes, Henriquez is the founder of Hercules and has been the driving force behind its impressive growth. Since its initial public offering (IPO) in 2005 through the end of last month, HTGC returned over 300% to its shareholders. That is nearly 50% greater than the return of the S&P 500 Index over the same span.
At this point, the company has amassed an impressive portfolio that no longer requires the personal touch of Henriquez to generate solid returns. As a BDC, by law Hercules must pay out at least 90% of its net income to avoid paying corporate income taxes. HTGC has nearly quadrupled its dividend since it began trading 14 years ago, from an annual payout of $0.33 in 2005 to $1.24 in each of the past five years, which works out to a 9.3% current dividend yield.
I don’t see why that would change under a new CEO. In fact, Hercules could increase its dividend later this year if interest rates rise, since most of the loans it makes are variable-rate while its corporate debt is fixed-rate.
I think the stock market has overreacted to this story and has unfairly punished the company for the sins of its founder. If so, shares of HTGC should recovery quickly once it becomes apparent that the company will be able to continue to pay huge dividends to its shareholders without Henriquez at the helm.
Shares of telecom company CenturyLink (NYSE: CTL) have gotten hammered lately, and for good reason. On February 13, the company announced that it is slashing its annual cash dividend from $2.16 to $1.00 per share. As you might expect, the stock market did not take kindly to that news. Its share price has dropped nearly 20% since then and is almost half of its peak price near $24 last August.
CenturyLink’s recent financial performance has been bogged down by the recent acquisition of Level 3 Communications. Some of the costs associated with closing that transaction were realized last year when the company allowed some unprofitable contracts to expire. That depressed top-line revenue, but should be additive to bottom-line earnings going forward.
The company expects at least $800 million in annual savings over the next three years. Combined with the savings from the dividend cut, CenturyLink intends to aggressively pay down debt to reclaim an investment-grade debt rating.
As a result of the Level 3 acquisition, CenturyLink is reorganizing its financial reporting structure to facilitate reducing costs by eliminating duplicate operating functions. However, it had to delay filing its annual report for last year in order to do so. That has investors running scared and has invited a spate of class-action lawsuits.
At this point, the news can’t get much worse for CenturyLink. However, it could get considerably better if the restated results for 2018 come in within the guidelines provided when the deal was consummated. The company’s next set of quarterly results are due to be released during the second week of May, which could also boost the stock if the expected cost savings start showing up in the bottom line.
Nobody likes paying taxes, but everyone has to do it. And with more Americans employed now than ever before, a lot of people will be filing income tax returns this year. That bodes well for tax preparation company H&R Block (NYSE: HRB), which dominates the assisted-return market.
Over the past two years, HRB has displayed remarkably consistent positive seasonality during the second quarter which includes the annual tax filing deadline of April 15. In 2016, HRB jumped nearly 50% from March 1 to July 1. Last year the effect was less dramatic, but HRB still racked up a gain of 20% over the same period.
As you can see, seasonality is a powerful force that can generate outsized gains, especially if you’ve developed a trading system to take advantage of it. One person who has done that with great success is my colleague, Jim Fink.
Jim Fink is the chief investment strategist of Velocity Trader. Jim is currently making this bold promise:
“If I don’t deliver 24 triple-digit winners over the next 12 months…I’ll give up $1,950.”
Jim first launched his top-tier trading service Velocity Trader by making that audacious assertion. He already has followed through with hugely profitable trades. Want market-crushing gains? Get onboard with Jim. Click here now for details.