The Meek Continue to Dominate Equities

Submitted By Trader Mark
Early in April after a month long run off the bottom I posted a list of equities that gained at least 60% in the preceding 4 weeks [Apr 5: The Meek Shall Inherit the Earth: 92 Stocks Over $10 Returning 60%+] The list was a whose who of beaten down merchandise. Generally, by week 4-5 of an oversold rally these type of names begin to peter out but the ramp has been relentless in lower quality, low price stocks. My gut tells me quant (and other varieties) of hedge funds have been shorting these names, using fundamental reasons - expecting some pullback after huge runs - only to be run over again and again even in week 6 and 7 of this rally. All it takes nowadays is saying "business has stabilized at the worst levels we've seen in decades" to elicit glee and massive short covering rallies.

While the market was flattish last week, I tend to look at the action underneath the surface and there was a lot of speculative fervor which was hidden by the indexes themselves. I will say it again, although I said it two weeks ago to no avail - generally when this type of stock is rocketing, we are Level Red of froth and it (usually) signals topping action as people run out of ideas in quality stocks. But much like August 2007 (but in opposite direction back then) we are seeing some very strange moves of magnificent quantity in individual names that do not square up with any reasonable fundamental reason; it just appears to be hedge funds leaning hard and being snared... in August 2007 the moves were down, now the moves are up.

The other explanation are mutual funds are running in to buy these type of stocks even after 40,60,80% type of moves - the same stocks they wanted nothing to do with 2 months ago. That doesn't seem like smart risk control but judging from results in 2008 it doesn't seem like risk control is priority #1 in mutual fund land, so perhaps this is contributing.

Here are the winners from last week with the following criteria

Criteria

Market capitalization $500M+
Average trading volume 200K+
Stock price $5+
Return this week 15%+

Many names that we've pointed out with weak fundamentals have their fingerprints all over this list; I still love Mohawk (MHK) myself - this was bid up 30% Friday, for $0.29 worth of earnings for 2009. For a company that makes carpets. Let's say the $0.29 is very wrong and indeed its $1.00 in EPS for 2009. So we're paying 50x forward earnings... for carpet. That is but one example of many - valuations simply do not matter to whomever is buying things. I know what the logic is; Mohawk was $100 at the all time peak during the housing bubble so still 50% off sale! Apply same logic to any number of names - as long as you believe we're heading back to those "good times" of the bubble economy... well then little things like earnings apparently do not matter. Masco (MAS) is the same kind of "housing company"...

Other names of interest - Las Vegas Sands (LVS) which continues to run, now up 200% in a month; but at $7.50 its still down from its previous $150. As long as you believe bankruptcy is off the table, limitless upside I suppose. CBL - commercial real estate is hot. BYD - Americans (increasingly unemployed) are using their home ATM and apparently heading to casinos. WYNN? See LVS and BYD. Radio Shack (RSH) - I have not been in one for 10 years but apparently the hot new item is digital TV conversion boxes - a very sustainable business model. CAKE, PFCB - remember, casual restaurants are the new Internet stocks circa 1999. Royal Caribbean (RCL) was at risk of bankruptcy a few months ago [Jan 30, 2009: Royal Caribbean Continues Free Fall] [Jan 28, 2009: Royal Caribbean to $1?]- now it appears the house ATM must be allowing Americans to once again freely cruise - much more time now without jobs. And in between cruises they are obviously sleeping at the highest end of hotels - only the best will do; see Starwood (HOT). And these same American consumers are using their American Express (AXP) to shop at Coach (COH) when they are not gambling, cruising, or buying Harleys.

Folks? What is the stock market "telling us"? We will soon be back to 2006 with unemployment in the 4% range, house flipping, gambling, cruising, shopping at high end stores, consipicious consuming, while sleeping in high end hotels. We just can't see it, because we are heathens... the market can look into the future and see it. So apparently "in 6 months" everything is back to 2006. This whole "getting back to reality" era? Just a nightmare - the Fed fixed it. Carry on loading up your credit cards and spending money you don't have - nanny state says it's fine. I have my doubts it is just that easy - but the stock market is "always correct" just as it was forecasting the great times ahead in October 2007 as it ran to all time highs. Or perhaps a more likely explanation is these are among the most highly shorted (for fundamental reasons) stocks on the entire exchange. Nah... green shoots it is. See you at the mall!

Two old holdings I am curious on were NuVasive (NUVA) and American Superconductor (AMSC) - the former had earnings this past week so it appears the market liked them; the latter is a "go to" play for Obama infrastructure/hope. We touched on Juniper Networks (JNPR) and Riverbed Technology (RVBD) - Juniper is earning nothing but cut enough heads to "stabilize" (and that's all you need in the future 'worker less' economy to thrive) - you don't actually need to make any money to be rewarded now; simply whisper "stabilization". I do wish I had not missed RVBD but I don't like to gamble on bipolar outcomes such as earnings. [Apr 24: Missed Opportunity in Riverbed Technology; Ok Results in Juniper Networks]

p.s. three gold names also made this list, foreshadow or China accumulation news reaction? We'll know soon I believe.

Symbol Company Name % Price 1 Week TIN Temple-Inland Inc 48.8 LVS Las Vegas Sands Corp 47.5 ELX Emulex Corp 44.6 JAVA Sun Microsystems Inc 37.5 CBL CBL & Associates REIT 34.0 NTGR NetGear Inc 33.5 AAI AirTran Holdings Inc 33.2 MHK Mohawk Industries Inc 33.2 BYD Boyd Gaming Corp 31.4 RSH RadioShack Corp 27.3 AWI Armstrong World Industries Inc 26.3 WGOV Woodward Governor Co 26.1 IR Ingersoll-Rand Co Ltd 26.0 JEF Jefferies Group Inc 25.6 F Ford Motor Co 25.0 NTY NBTY Inc 24.9 CAKE Cheesecake Factory Inc 24.3 EMN Eastman Chemical Co 23.7 PTV Pactiv Corp 23.5 IP International Paper Co 23.1 PAS PepsiAmericas Inc 23.1 NUVA NuVasive Inc 22.7 ARA Aracruz Celulose ADR 22.4 SEOAY Stora Enso Sponsored ADR 22.1 PBG Pepsi Bottling Group Inc 22.0 WL Wilmington Trust Corp 21.7 AMSC American Superconductor Corp 21.5 ALGN Align Technology Inc 21.2 JNPR Juniper Networks Inc 20.8 GOLD Randgold Resources ADR 20.8 HST Host Hotels & Resorts REIT 20.7 RCL Royal Caribbean Cruises Ltd 20.7 WYNN Wynn Resorts Ltd 20.7 WMS WMS Industries Inc 20.5 USG USG Corp 20.0 HMY Harmony Gold Mining ADR 19.5 DLX Deluxe Corp 19.5 CBG CB Richard Ellis Group Inc 19.4 PFCB P.F. Chang's China Bistro Inc 18.5 CYT Cytec Industries Inc 18.3 BKD Brookdale Senior Living Inc 18.0 WFT Weatherford International Ltd 18.0 CMTL Comtech Telecommunications Corp 17.9 WAB Wabtec Corp 17.5 PNK Pinnacle Entertainment Inc 17.2 WU Western Union Co 17.1 PKG Packaging Corp of America 16.9 TCK Teck Resources Ltd 16.8 SNA Snap-on Inc 16.8 MAS Masco Corp 16.7 ACF AmeriCredit Corp 16.7 COH Coach Inc 16.7 EBAY eBay Inc 16.6 STAR Starent Networks Corp 16.6 BRCD Brocade Communications 16.3 KGC Kinross Gold Corp 16.3 AXP American Express Co 16.0 HOT Starwood Hotels & Resorts 15.9 CCJ Cameco Corp 15.7 JLL Jones Lang LaSalle Inc 15.5 EGO Eldorado Gold Corp 15.4 ORB Orbital Sciences Corp 15.3 RVBD Riverbed Technology Inc 15.3 ISRG Intuitive Surgical Inc 15.3 ACOR Acorda Therapeutics Inc 15.1

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