Investing in a “show-me” stock market
In a slower market, fewer but better stocks will emerge, say these Canadian small-cap stock specialists, updating two of their best buys.
It hasn’t happened yet.
On Friday, shockingly good GDP news from the U.S. gave the markets something to smile about. But commodities clunked and that smile turned into a frown.
Still, a serious correction has not yet descended on the markets. Nonetheless, they have slowed down. Now investors are going to have to be a little more selective in picking stocks.
One group of Canadian experts is not just ready for this situation, but pleased as punch about it. Here’s how the independent researchers at KeyStone’s Small Cap Stock Report put it.
“Indeed this ‘Bounce-Back’ part of the rally, or the returns that were seen when the market determined we were not headed to Armageddon, is gone. So the market is now in ‘show-me’ mode.
“The winners are and will be those producing actual growth and that suits us just fine. Fundamentally, we are happy to see the market performing more rationally, rewarding those with a strong financial position.”
These analysts proceed to take the bulls to task, and outline their own strategy in the months ahead. We also get an update on two small cap stocks that stand out. These, they say, are just the kind of fundamentally sound stocks that will reward investors. Each gets a firm buy call.
Not cheap anymore
While it’s nice to see the market settle down, this advisory says, stocks aren’t really cheap anymore. The trailing price/earnings multiple on the S&P 500 Index has ballooned by a “massive” 10 points since the market turned around last March.
Now it’s near 27 times. Normally, when the economy turns from contraction to expansion, that multiple is about 15 times.
“This type of data continues to guide us toward profit taking whenever a stock moves out of line with its underlying fundamentals.”
But beware of the bulls, these experts say. The bullish rallying cry is “liquidity, liquidity, liquidity. Fundamentals should take a back seat because there is so much liquidity and/or cheap capital to be put to work and it will eventually all find its way into equities.”
In short, all the cash parked in money market accounts will pounce on the markets, so where can they go but up?
Mountain of money
“The problem is we heard the same liquidity talk during the peak of the bubble in late 2007,” the analysts remind their readers.
“The reality is that the mountain of money is no higher or lower than it was when the market was scraping to new lows in 2008. Money market funds held the same $3.5 trillion that they do today.”
Back in the autumn of 2007, everyone believed stocks would never fall. Yet even with all that “liquidity” waiting on the sidelines, they fell.
What this means today is, be careful. There are still select buying opportunities out there, say the analysts. But the number of small cap GARP (great at reasonable prices) stocks is shrinking.
“It will not be enough to just list in the wind with a stock symbol to produce gains as we saw in 2009,” say the experts a bit sarcastically.
Nor will it be enough to just cut costs in order to produce gains on the bottom line. “The true winners will be those who are able to resume a path of growth, both on the top and bottom line.”
It is time to be cautious, take profits where warranted, they add. Paraphrasing Mr. Warren Buffett, they are “now somewhat fearful as others get greedy — but we will not panic.” There is value out there for long-term investors and growth opportunities that they pledge to uncover.
“2010 will be a true stock pickers market.”
Five-minute loans
One stock they have already picked and still like very much is The Cash Store Financial Services (TSX-CSF).
This storefront lending company, headquartered in western Canada, announced on January 19 that it was entering into a “strategic relationship” with RTF Financial Holdings. This company does “micro-sized short-term lending” with automated mobile technology, specifically text messaging (SMS).
Cash Store has bought 20 per cent of RTF and will give it management and administrative support. This SMS lending business began in Finland five years ago, and RTF operates in Finland and Sweden and is about to expand into the Netherlands, Denmark and the U.K.
With its proprietary technology, RTF can process these loans in about five minutes! And costs are low since no storefront is required.
The market likes this news, and bid the company’s shares up to a new 52-week high of $12.50. It currently trades at $11.93. It also yields a rather solid 3.3 per cent on its 40¢ dividend. The advisory has this stock on a near-term buy and a long-term buy.
Corn and coal
Meanwhile, across the Pacific in China, Asia Bio-Chem Group (TSX/V-ABC) announced that its corn-processing plant in Daqing had reached its designated production capacity in the first week of January.
There is one problem — a temporary shortage of railroad cars with which to ship coal into the plant and products out. This shortage was compounded by the demands of Chinese New Year transportation.
Asia Bio-Chem is talking to the rail bureaus involved and expects to resolve the issue shortly. Just to be sure, it has signed an agreement with the state-owned coal company to ensure a regular supply, and has already received an initial shipment via truck.
Not least, it is upgrading its loading system to handle bi-modal container cars at the plant.
Since the advisory put Asia Bio-Chem back on buy in September, the shares have risen from $0.69 to as high as $1.52. They trade today at $1.30. It pays no dividend. Like Cash Store, this stock is a near-term buy and a long-term buy.
In a “show-me” market, these two stocks have shown the capacity to grow. As far as these analysts are concerned, with any stock that can’t demonstrate sound financial growth, the show’s over.
|
E-mail this article
Printer-Friendly
