While I continue to look at some of our weaker stocks for possible elimination for Top 20, I actually am adding to one of those positions. We are reducing our exposure to the Large-Cap Tech stock, making it average. I like the valuation still (40% to my target over the next year, which is based on just 12.5 PE plus cash and investments net of debt and deferred revenue), but the stock is overbought and nearing resistance at 19.50.
We are adding to two of our smaller positions, both small-cap and classified as Industrials. We are increasing the satellite imagery company to 5.4% from 3.5% and adding 1.6% to the Micro-Cap pollution control equipment maker to bring it to 4%. The targets for the two suggest upside over the next year of 70% and 63% respectively. The former is a unique company with a dynamic new CEO who joined earlier this year and seems to be making progress in tweaking the go-to-market strategy. There is signficant fear priced into the stock because it is reliant upon government contract revenue, but I expect the contract to get honored and the commercial opportunities to develop as well. The stock is overextended to the downside and signficantly oversold. I believe that it is suffering from primarily investor exhaustion and end-of-year tax-loss selling rather than enduring a real fundamental deterioration. The latter has an increasing backlog and is later cycle - I expect next year to be very strong. It will be reporting Q3 earnings within a few weeks, and I expect better progress on the earnings front.
In SSETF, we are eliminating the Large-Cap Energy position to add to Small-Cap (actually Micro-Cap) exposure and Technology. We are also reducing Industrials . We had trimmed Technology in late September to increase Industrials and in early October to buy some Energy, and this trade reverses both of those profitably. As far as adding to the Micro-Caps, our purchase enables us to take advantage of what appears to be early tax-loss selling.
Comments