Trading stocks can be a cruel and unpleasant process, especially in the short term. Stocks go through all sorts of growing pains all the time: There are missed earnings, misunderstood press releases, negative management meetings and all other sorts of company nonsense.
But sometimes the stocks that drop the most snap back the hardest.
And that’s what we look for in developing each week’s Rocket Stocks portfolio.
Names you want to keep an eye on next week include:
XL Capital (XL) is a property and casualty insurance company, which is down about 75% over the past 52 weeks due to its exposure to the insurance industry and weakening reinsurance market. However, XL is poised to snap back hard in the coming days and weeks.
The way XL and most reinsurers make their profit is that they reinsure insurers’ paper; almost acting like the "big brother," if you will, of the insurers, such as MBIA (MBI) and Ambac (ABK).
In short, XL’s insurance portfolio is broken up into the following: 23% casualty, 17% property 32%, Specialty (which includes environmental and aerospace) and 28% professional.
For the reinsurance business, it is broken up as follows: 33% casualty, 31% property, 15% property cat., 14% other, 3% marine and energy and 1% health
So why trade/buy XL Capital? Third Avenue is boosting its stakes in Ambac (7% of shares outstanding) and MBIA (10%-plus share outstanding). S&P affirmed Ambac’s AA rating, which is a positive going forward.
But the most important reason came recently from MBIA’s extremely complex earnings report, which can be found here.
1. MBIA did not change its estimates of “stress” case losses. Meaning that the company could be overcapitalized.
2. MBIA booked no new reserves or impairments on its residential mortgage-backed securities and collateralized debt obligations.
3. MBIA’s CDO exposure actually fell by $5 billion.
All in all, XL Capital is a less-risky way to play the recent 100%-plus movies in the bond insurers, while still offering substantial upside.
Another name I like next-week is HJ Heinz (HNZ). This company said that commodities prices actually peaked for them three quarters ago. Last quarter’s sales increased 11.2%, well above the long-term target growth rate of 4%. Double-digit sales growth for a “food” stock is unheard of. Organic sales increased 6.7%, with organic growth generated in all five business segments. Volume increased 4.0%, reflecting strong volume growth of 5.9% in Europe and sustained growth in North American Consumer Products, Australia, New Zealand and the emerging markets. Net pricing increased sales by 2.7%, mainly in North America, as well as Heinz’s businesses in the U.K. and Latin America.
Growing well above management’s forecasts, Heniz could see a multiple expansion as investors look for an indirect/safe way to play international growth. A staple company with recession proof products, EPS should be solid despite an economic downswing.
Look out: This low beta stock could really move higher.
For more ideas, including plays like Goldman Sachs (GS) and BHP Billiton (BHP), 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.
Posted on Aug. 18, 2008
