AB Analytical Services

QQQ Momentum Suggests Bull Market

As I shared on my private blog on Friday, the market should have been crushed on the very disappointing news regarding employment. Rather than fade the elevated levels after the rally of the past couple of weeks, investors apparently used the bad news to add to positions, as the lows were set 90 minutes into the day and the market closed at the highs, ending the week up. I think that this type of action is very telling, suggesting that the nascent summer rally is just getting started.

Another "tell" is the strength in the NASDAQ 100 (QQQ), which is the first major index to clear the April highs. Already up twice as much as the S&P 500 this month, with its 3.5% gain, it had it's highest close of the year on Thursday

 

READ MORE

 

Big REITs Outperforming Smaller Ones

If you have been investing in REITs this year, you should be happy, right? Maybe you have owned one of the highly liquid ETFs designed to replicate the sector, like iShares DJ Real Estate (IYR), which is up over 9%, Vanguard REIT (VNQ), which is up almost 11%, or SPDR Wilshire REIT (RWR), which is up 11.5%. Nice, right?

Unfortunately, these fantastic returns are misleading, as the typical REIT isn't faring nearly as well. The average return YTD for all REITs in excess of $200mm market cap currently (123 companies) is just 5.4%. Of the 123, 45 are up in excess of 10%, while 39 are actually down in price.

I have had a theory that I wanted to test, so I did. As you can see in the histogram below (click to enlarge), which has YTD return on the y-axis and the market-cap on the x-axis (log-scale), there is a very apparent size bias:

Read More

9 Lonely High-Growth Companies with No Analysts Following Them

One of the things I like to do is to research companies with absolutely no Wall Street coverage. If I do my research correctly, I can often find very solid companies with reasonable valuations. With that in mind, I ran a screen to find some high growth companies that are reasonably priced, hoping to find some potentially undiscovered gems to consider. Here are the parameters of the screen: 

• Russell 2000 member Sales Growth > 15% over the past year
• EPS Growth > 40% over the past year
• Trailing PE < 20

Here are the results:

 

 

READ MORE

Cautious on Mortgage REITs

As a frequent blogger, I am often approached by the public about a variety of topics. One of the most common questions over the years has been regarding the Mortgage REITs. I usually answer that they are attractive most of the time and horrible some of the time. This is one of those times I fear could be horrible.

I began my career trading mortgages back in 1986, so I have some understanding of the nature of the underlying investments that are being made (agency mortgages). That asset itself has what the finance professionals call "negative convexity". In lay terms, that means they can go up just a little in price but can go down a lot. Why? If interest rates decline, the borrower can refinance. Therefore, the investor typically doesn't like to pay a big premium. On the other hand, if interest rates rise, they can sink like a stone as their perceived maturity extends.

The mortgage REITS, which I've included not only invest in this asset that is essentially "short volatility", but they layer on a lot of leverage. They then, as REITS, pay out the vast majority of the spread between their borrowing costs and the mortgage interest. That's how they produce the big dividends.

As I said in the introductory paragraph, this is a strategy that works more often that not. The problem is that when it fails, it really fails. The main issues are the value of the underlying assets and the difference between borrowing costs and the yield on underlying investment. The steeper the yield curve and the lower interest rates, the better it is for producing big fat dividends. More leverage will help too.

 

 

READ MORE

1500 on the S&P 500 Likely Ahead

In October, I first shared my very bullish views for 2011, projecting the S&P 500 would attain 1500 by the end of the year, up from 1146 at the time. While the call got off to a fantastic start and was even ahead of trend substantially at the end of April, the recent pullback in the market with the subsequent rally leaves my forecast appearing to be roughly on track.

Halfway through the year, it appears that I have underestimated the earnings potential for the S&P 500. The Standard & Poor's website, which requires registration to access the data, indicates that 2012 earnings (as of 6/21) are expected to now be almost $112, an increase of 14% from the nearly $98 projected this year.

Read More