When a bottom in equities is formed, no one comes out and rings a bell signaling the “all clear” sign to start buying again. In fact, it's the total opposite. Bottoms are formed when there is pure panic in the air and when investors are puking up all of their stocks at the bottom. We saw this with banks such as National City (NCC) and Fifth Third Bancorp (FITB) as well as with Freddie Mac (FRE) and Fannie Mae (FNM) a few weeks ago.
In the System Trades of the Day section of Stockpickr.com, one of the systems we have is called the Panic 101 system. Basically, the theory is to buy any stock that is 10% lower than the prior day’s close and to sell it at the end of the day. Backtesting shows this system to be 60% profitable, with an average profit per trade of 1.4%.
This week’s Rocket Stocks portfolio includes some ideas for panic and earnings trading, which offer compelling risk-reward scenarios for investors.
Here are some names you want to keep an eye on next week.
U.S. Steel (X) is set to report earnings during the middle of this week. Despite the massive pullback in steel stocks, steel demand is extremely tight. Goldman Sachs raised its second-half 2008 earnings-per-share estimate, and it boosted its 2008 EPS estimate to $17.30 from $16.30. It is also raising 2009 and 2010 estimates as well as normalized EPS estimates to $28.25, $25 and $17.25, respectively, from $25, $22 and $16.
Chinese demand, coupled with the position of the U.S. now as a net-importer of steel, makes U.S. Steel a good earnings play.
Caraustar (CSAR) was punished last week after closing down its paperboard mill. The company has $250 million in debt, which becomes current this June and due one year from then. The company will essentially be forced to sell segments of itself to pay off the debt and avoid a going-concern notice from its auditors in early August.
The perception by the market is that Caraustar is close to going broke or will have to raise money at unfavorable terms. The reality is that the sum of the parts is worth a multiple of the current valuation. Sum of parts analyses shows that Caraustar is worth $3.
Play Caraustar for a snapback rally.
Gulfmark Offshore (GLF) reports this week as well, and there is opportunity to play this ahead of earnings. Analyst estimates on the company are ridiculously low. For starters, Gulfmark has exceeded analyst estimates the past seven quarters in a row by an average margin of 38.5%. The first quarter, which has historically been the weakest for the company (due to weather issues in the North Sea markets), was a huge upside surprise for the company. Analysts were looking for $1.10 a share for the quarter, and Gulfmark reported $1.40 a share. That's a 27% earnings beat in what is historically the weakest period for the company.
Estimates for the second quarter are for $1.44, which is also ridiculously low. I am looking for $1.95 per share. I took analyst estimates of $1.44, and I added a 35% premium to those earnings. Why 35%? As previously stated, the company has historically exceeded analyst estimates by 38.5%, the second quarter is always strong, and the recent parabolic move in oil can only help the company.
This stock has been unduly punished and is poised to snapback.
For more ideas, including Huntsman (HUN), NYSE Euronext (NYX), Gardner Denver (GDI) and Oil States International (OIS), make sure to check out this week’s Rocket Stocks portfolio.
To find the snapbacks and potential breakouts on a regular basis, check out these Stockpickr portfolios, which I use in my own research each week:
Always check the Biggest Percentage Losers, a list of stocks that lost big the day before, because they can snap back hard.
When you check this list on Stockpickr, you can see which stocks are owned by the quality hedge funds and mutual funds. Pay attention to those. The funds will be buying at the lower prices and likely supporting the stock.
Ditto for the 52-week-low list. You must check the above two lists every day if you hope to find volatile stocks that can snap back.
Biotech Short Squeezes: Dendreon and others can often be found in this category.Stocks Rising on Unusual Volume: These are potential breakout plays.
Stockpickr's System Trades of the Day: These are trades triggering that day in various back-tested trading systems we've developed.
Stocks With Unusual Options Activity: Perhaps someone knows something?
Latest Activist Situations: These are stocks that hedge funds are accumulating shares of and demanding change in. Believe me, these hedge funds piggyback each other. And once they start rocking the boat, things happen quickly. This should be on the must-view list.
One final place to frequent is the Answers section on Stockpickr, where ideas such as those presented in this article are thrown around daily. And you can further discuss your ideas and share opinions in Stockpickr's Member Forums section.
At the time of publication, James Altucher had no positions in stocks mentioned.
A note from James Altucher:
Every weekend I send an email to Jim Cramer and several hedge fund managers about the most interesting portfolios posted on Stockpickr that week. Usually those portfolios not only list stocks according to a theme but also offer significant analysis as to why the stocks are cheap.
Here are some examples:
Stocks related to drilling the Marcellus Shale
Microcaps trading for less than tangible book
Stocks that do well after Hurricanes
Here's the challenge: Build a portfolio at Stockpickr.com with great analysis, and send me the link. Each great portfolio (with analysis) will get posted on TheStreet.com with your byline (as a "Stockpickr Guest Columnist") and will be included in my email I send to Jim and the other
hedge fund managers on my list.
Published July 28, 2008
