AB Analytical Services

Should You Sell All Your Stocks?

The 10% jump (and 10.6% total return) for the S&P 500 (SPY) in Q1 was off-the-charts, literally, as the close of 1569 was an all-time closing high. This marks the fourth consecutive year of a strong start to the year, a topic I raised in January when I discussed the new seasonal tradeand predicted the rally would persist. Of course, this Q1 wasn't as good as the first quarter of 2012, which saw a 12.6% total return, but it was one of the best quarters since the rally began in 2009, which had two very strong quarters in the middle of the year as the rally began, with a 14.6% gain in Q2 and a 15.6% advance in Q3. More recently, Q4-2011 saw an 11.8% return, and Q4-2010 saw a 10.8% return on the back of an 11.3% return in Q3-10.

With the market up a lot and at all time highs, nervous nellies are coming out of the woodwork, proclaiming that this must not be a good time to own stocks. While I am in the camp of those who believe a small pullback could take place soon, I think that this bull market has legs, is healthy and has much further to go. I began the year with a 1664 year-end forecast, and, after capturing 60% of the expected gains in just one quarter, I think the market could end up exceeding my target. With that said, though, I don't think that every quarter will rise 10% or more! With such a big debate developing over whether or not setting an all-time high is a warning sign of imminent danger for stock investors, I thought it might be useful to take a look at the market from several different perspectives.

 

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Believe in Resurrection? Here's 5 Stocks That Could Come Back To Life

As Q1 comes to an end, window-dressing, a practice where institutional investors dump losers and buy or at least retain winners in order to "look smart" to their investors, has likely almost ended, making it potentially a good time to focus on some of the laggards of late. Given how many stocks bounced back from the dead this quarter, like Netflix (NFLX), BlackBerry (BBRY), Best Buy (BBY), Sunpower (SPWR) and SUPERVALU (SVU), I thought it might make some sense to focus on stocks that have performed very poorly that could be due for a big bounce.

395 of the Russell 3000 members (>13%) trade at least 30% below their 52-week highs. Given that I am a little concerned about the market's rally being a bit extended, which could lead to a bit of rotation, I decided to screen this universe for a few other signs of a potential resurrection:

• >3% return in March
• <15% above the 52-week lows

Pretty simple screen. The point was to find big losers (down more than 30% when the rest of the market is at new highs), but that were starting to bounce but not yet up that much. Here are 30 stocks that made the cut:

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Why You Need To Be Careful Using Price-to-Sales To Value Stocks

When it comes to predicting stock prices, we all want convenient, easy-to-use metrics that will give us the answer to our question: Can I make money in this stock? Unfortunately, like many things in life, simple and quick short-cuts can lead us to the wrong conclusions. It's been a little over a year since I attempted to debunk one such valuation tool, the PEG Ratio, which I called "silly" (perhaps a bit too sensational!). That article, as old as it is, still gets hundreds of views a week, suggesting to me that these discussions of how to value stocks are of interest.

Today, I want to tackle another popular metric, known as "Price/Sales" (P/S). To calculate the value, and here is the simple part, all you need to do is divide the market cap (price of stock times number of shares outstanding) by the trailing sales (typically the last four quarters). The result is always a positive number. You can apply this to an individual stock or even to the whole market. The S&P 500, for instance, currently trades at 1.4X its trailing sales. This is pretty much the middle of the road for the past two decades, with a range of 0.7 (early 2009) to 2.3 (2000).

While there are many circumstances that are appropriate for using sales, like when there are no earnings, it can't be used without understanding how to use it properly. The bottom line is that you can't make money buying low P/S stocks (or shorting high P/S stocks) blindly.

What's Wrong with P/S?

 

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10 Seemingly Safe Stocks In An Extended Market

I have been sharing my view that the market may be approaching an interim top, which can make owning any stock a risky proposition. With that said, not all stocks move in the same direction and to the same magnitude. Also, I could be wrong! Rather than chasing extended stocks, which are likely to perform poorly if the market does consolidate its run, I think it makes sense at this stage of the market rally to look for stocks with favorable growth and valuation but that offer less risky entries. With that in mind, I used Baseline to screen the Russell 3000 for stocks with market caps above $500mm and meeting the following criteria:

• 50dma > 200dma
• 50dma within 3% of 200dma
• 1-year price return > 11% (S&P 500 return)
• Price within 20% of 52-week high
• Price within 5% of 50dma
• 1-year Sales Growth > 10%
• 1-year EPS Growth > 10%
• 2014 EPS Growth > 10%
• PE < 1.2X 5-year average

To summarize the technical requirements, these stocks are all pretty close to both the 50dma and 200dma but have been outperforming the market over the past year. Fundamentally, sales and earnings have been stronger than the market, and the outlook for 2014 (which will guide the price action over the next year) is solid. Finally, the PE ratios aren't too extended from recent history.

Here are the 10 companies that meet these criteria:

 

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Can Stocks Keep Rallying in a Flat Economy?

To those who subscribe to the notion that the stock market needs a strong economy to deliver strong returns, one would think that four years of a strong market and a weak economy would provide strong enough evidence to the contrary. In the last four years, the market has erased the losses incurred during the financial crisis. While Gross Domestic Product {GDP} has recovered, its growth has been anemic. In 2012, for instance, it grew just 4%.

Many economists will refer to "real" GDP (which is inflation-adjusted), but, when it comes to stocks, the actual GDP (Nominal GDP) is "real" as far as I am concerned. Stocks are priced of earnings, and earnings are tied to the actual and not inflation-adjusted economy.

These growth rates are based on the average quarterly GDP during each of the past 23 years. As you can see, we are suffering in the age of the "new normal", where what used to be a "bad" GDP is now just the way it is. A recession is defined as when inflation-adjusted growth is negative for two or more quarters. Prior to the 2008-2009 downturn, we experienced this in 1991 and 2001-2002. As you can see, 3% Nominal GDP growth was the "pain". The most recent downturn saw something that I don't believe had happened since the Great Depression: Negative Nominal GDP growth. Now, we just can't get that extra 2% that would take us to historical levels of 6%.

What's The Secret?

How is it that the markets have recovered in such a weak economy? The secret, if there is one, is

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Is It Ulta Beauty or Ulta Beast?

Ulta Beauty (ULTA), a 2007 IPO, has been on a rocket ride, almost doubling from the initial price of $18 before trading to $4 in early 2009 and then running to $103.52 last year. Today, after reporting its Q4, the stock is down sharply, trading at a 52-week low in after-hours trading.

ULTA caught my attention in January as I was looking at strong 2012 performers getting off to a bad start in 2013. Here is what I said:

Ulta Beauty began 2012 with a sprint and has flat-lined for the past three quarters. The company, which is the largest beauty retailer that operates 550 stores, shared an update two weeks ago, indicating 23% sales growth in the seven-week holiday period ending 12/29 (including 7.4% same-store-sales growth, which excludes e-commerce). The company affirmed its Q4 guidance it had shared in late November for same-store-sales growth of 5-7%, which accounts for some impact from Sandy.

Q4 Review

The quarter was fine, with EPS of $1 slightly ahead of the consensus and representing 37% growth. The company said that the extra week added .05, so 30% is a more accurate growth rate.. $759mm was ahead of the sales consensus by $6.5mm. This represented 30% growth on 8% comparable-sales growth (14 weeks vs. 13 weeks). GM improved 10 bps (34.2%), while SG&A relative to sales declined 1% to 20.3%. One concern is that inventory was up 48% (20.5% on a per-store basis) and up a bit more than the company had intended.

Outlook

 

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11 Egregiously Extended Stocks Vulnerable To Rally Reversal

We are moving into a time frame for which I have been expecting a pullback in the market. While I maintain my longer-term bullish view, this week's options expiration marks the beginning of a three-week period in which I anticipate the market could see an interim peak. I think that we could set a nominal new high in the S&P 500 (say 1590, which would be about 2.5% higher than the close on Friday and less than 1% above the all-time high of 1576), but then see a pullback of 5%-7% (1478-1510).

If we see this long-awaited and rational pullback, I would expect some of the most extended stocks to suffer the biggest retreats. While the Russell 1000, which is up 9.1% YTD, is only 3.8% above its 50-day moving average and 10% above the 200-DMA, there are 117 stocks in the index (12%) that are 10% or more above their 50-DMA, a level that typically signals caution. This group of stocks is 29% above the 200-DMA on average.

In order to identify some candidates that might be most vulnerable, I screened the Russell 1000 using Baseline, employing the following parameters:

• Price vs. 50-DMA > 15%
• Price vs. 200-DMA >25%
• One-year Price Return > 50%

11 stocks made the cut:

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CBIS: Massive Dilution, Troubled Finances

Several weeks ago, I shared my initial thoughts on a group of penny stocks that had enjoyed a massive rally in the past few months following the elections which saw the expansion of medical marijuana and the legalization for recreational use in two states, calling the run-up a bubble as I described "reefer madness". I followed up with a look at two of the most popular stocks in the space, both connected to the "King of Pot" Bruce Perlowin, Medical Marijuana Inc. (MJNA.PK), which engaged in aquestionable transaction with CannaVest (FCLS.OB), and then Hemp Inc. (HEMP.PK), which has snookered the public with its gigantic preferred stock that inflates its market cap dramatically, leaving the company, which is devoid of any real revenue besides sales of MJNA.PK, at a ridiculous valuation.

It appears to me that many of the investors in these penny stocks are not getting a shot at participating in what surely will be a rapidly growing industry as marijuana is decriminalized in the coming years. Rather, they are buying a proverbial bag of oregano, enabling their "dealers", who excel at enriching themselves by printing shares of their stock at will. In this article, I want to examine what may be one of the most legitimate companies in the space, Cannabis Science, Inc.(CBIS.OB). Sadly, here too there are just too many red flags and the valuation makes no sense.

 

 

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Trade Into Tech???

We are about 75% through Q1, and how you have positioned with respect to sectors is likely having a dramatic impact on your equity performance. It's been a great quarter so far, with the S&P 500 (SPY) up in price by almost 9%. While I remain bullish for the intermediate-term, I feel like we could be facing an interim top within the next few weeks. There are several technical indicators I am watching, and I have some fundamental concerns too. On the latter, I am concerned about the big positive dynamic this year of Yen weakening potentially halting or risking the wrath of Europe. Also, all those capital gains taken in front of year-end are likely to lead to some cash-raising in front of April 15th. Finally, we might see some nervousness as we begin to start earnings season in a few weeks.

If the market reverses, I suspect it will be a profit-taking type of scenario rather than the start of something more alarming. In this case, what has gone up the most is likely to be at risk of correcting the most. With this in mind, I wanted to see how the different sectors have been performing so far in 2013:

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HEMP: .06 is WAY TOO HIGH

This is my third look at a part of the market that I believe is in a bubble, with many seemingly uninformed investors speculating that the change in the regulatory landscape for both medical and recreational marijuana will lead to small fortunes for a handful of companies trading publicly. To be sure, small fortunes are being made, but not by the investing public. In my first article, I examined the whole space, sharing the analogy that this phenomenon is similar to the dotcom mania. In my second article, I offered my perspective on a transaction involving the best-known marijuana play, Medical Marijuana Inc. (MJNA.PK) and a new play, CannaVEST (FCLS.OB). Today, I want to share my perspective on Hemp, Inc. (HEMP.PK), which I believe at .06 per share may be almost .06 overpriced. The presence of a massive amount of preferred stock dilutes shareholders who appear to be unaware of the capital structure.

What is Hemp Inc.?

This is how the company describes itself:

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