According to the Japan Robotics Association, the consumer robotics market is projected to reach 24 billion this year, and balloon to 66 billion by 2025. I personally think that the long term estimate is a bit pessimistic. Bill Gates is on record for predicting that robots will be as common as computers are today.

If he is even half right, investors that get in on promising techs today will be fantastically compensated for their vision and patience in the long run. Getting in on the next wave of robotics now will be like getting in on Intel, AMD, Apple, and Microsoft in the 1980s.

Of course, the Great Recession has dealt a few temporary blows. A mainstay of the robotics industry has been assembly line machines for the automobile manufacturers. But the robotics industry is diversifying, and the automotive industry itself gives a good example of what can happen.

While automobile sales plummeted during the Great Depression, crucial improvements in automotive technology like the fully automatic fluid transmissions and hydraulic brakes were being made that would revolutionize motoring once it was all over. Once that storm passed profits and sales went up, along with share prices.

Robots are already being used for dangerous jobs that humans would rather not do. The US Commerce Department decided to fund a project with Fibrwrap Construction Inc to develop robots that will be able to repair aging water transmission pipelines from the inside. The advantage of this method is that the infrastructure won’t have to be torn out of the ground to be repaired. But the robotics market is rapidly spreading beyond these types of dangerous applications…

Robotics is being aided by a simple economic fact: while cost of production for goods has generally declined over time, prices for services generally don’t fall quite as much. Consider that your computer costs a fraction for the performance you receive compared to two decades ago, but the technician that repairs it has generally remained quite expensive to hire.

Food prices, to give another example, have fallen steeply in real terms over the last century. This is not only due to better agricultural techniques, but also because of increased automation. From John Deere and Alice-Chalmers, from the balers to combines, mechanized agricultural equipment has drastically reduced what we have to pay to consume our daily bread. Robotics will be no different, and we are on the cusp of big changes.

In our day and age, the healthcare service industry has proven highly resistant to price declines partly because of labor costs. Improved robotic automation is one of the fastest ways to increase productivity and reduce labor costs. With the leading edge of the Boomer generation entering retirement, there will be huge financial incentives for improved robots. There will be tremendous demand for anyone that can build an affordable robot that can help with housekeeping and basic care.

Families that want to keep older members out of assisted care facilities and closer to home will look to robots for help.

I spoke with Martin Spencer, President of GeckoSystems International Corp regarding his vision for robot assisted health care. Having spent over a decade working on his dream of a personal care robot, his company has developed unique technology that is starting to demonstrate its usefulness in marketable models.

According to Spencer, the hardest problems related to robotics in this role are software and AI related, not hardware related.

Their flagship robot, called CareBot, has advanced modular artificial intelligence and a proprietary compounded sensor system that allows it to reliably move about the typical home landscape. Unlike other robot designs that seek to reduce sensor inputs to cut down on processing overhead, GeckoSystems’ CareBot is sensor loving. This property is necessary if a viable multipurpose self-directed robot is to become successful. The main reason is because multiple inputs help to give the robot a better reading on its environment. For example, when you are driving a car, you not only receive inputs through your vision, but also through the sensing of acceleration or deceleration, engine vibration, a honk from a nearby car, or the bump of a collision. Being able to use multiple sensor feeds is particularly important in a robot that needs to move about the home on its own.

The CareBot also has an AI module that is designed for human/robot interactions. This module, called GeckoChat, can respond to voice requests, create voice reminders, and even engage in word games with a human being. The beauty of GeckoSystems’ AI platform is that it can run on common PC hardware and operating systems like Windows XP and Linux, keeping down costs. Spencer estimates that the CareBot can pay for itself in a matter of months, due to the high cost of assisted care.

Along with my colleague Patrick Cox, I am closely investigating advancements such as CareBot, along with other opportunities in this space. These life-changing technologies will become commercialized sooner than you may think.

Ad lucrum per scientia (toward wealth through science),

Ray Blanco
for The Penny Sleuth

Robotics and Health Care: A New Growth Market was originally featured in the Penny Sleuth.

But before I reveal my screen criteria, I want to show you why I believe we’re entering an important moment for small stock investors…

Right now, the market is beginning a powerful underground rally, boosting small-cap stocks close to their pre-correction highs. The Russell 2000 is up more than 11% year-to-date, easily topping large-caps in the S&P 500 and the Dow.

Small-caps are winning the race right now because they are the most potent stocks to own during the early stages of a rally. As you probably know, investors see small-caps as riskier investments. That’s why they are the first to be sold off after a long bull market.

But small-caps are also the first stocks to rise once the market has bottomed out. The rush to get back into smaller names pushes these same stocks up farther and faster than their larger counterparts.

Even though small-caps are outperforming the S&P 500 and the Dow so far this year, we haven’t seen a watershed buying moment just yet. That’s why I’m still calling this an “underground” rally. But with every passing day, I think we’re getting closer to that powerful breakout. All that’s left to do is to coax investors on the sidelines back into small stocks.

Retail investors have pulled almost $18 billion out of small-cap funds over the 36 of the last 39 weeks, according to data from J.P. Morgan. This shows us that a great deal of Main Street’s money is still in cash, waiting until the investing waters are declared safe before buying smaller stocks. All we need is volatility to remain low and the market to remain stable for these market watchers to dive back into stocks.

That’s where my 3-part screen comes into play. Follow these easy steps, and you will be able to track down the small stocks that are the best candidates to beat the market. If you do it today, you’ll even have the chance to get in on these names before the next leg of the rally begins to take off…

To begin, go to your favorite free financial website. Google Finance, Yahoo or any of the other major sites will do. If you want a more comprehensive list of screening tools, just search for “stock screeners” online. There are plenty of viable options out there. You don’t even need a subscription or any special software.

[Editor’s note: For a more in-depth piece on free stock screening sites, click here.]

Now you’re ready to begin your search.

1. First, drill down to the most viable sectors: Right now, the investing environment is most suited for consumer stocks, tech names, and pharmaceuticals. These are the types of small-cap stocks that are looking strong right now. Get rid of stocks in the utilities, energy and financial sectors. These are the names that aren’t showing strong earnings or growth at the moment. There’s no point in wasting your time sifting through stocks in a lagging sector. Cut them, and move on.

Setting up the screen is simple. Just adjust your market cap parameters to find stocks in the $300 million – $2 billion range. Then you can enter your sector of choice…

2. Find the profitable companies trading at a low price-to-earnings ratio: The next metric you need to add is price-to-earnings ratio. Investing in companies that are cheap compared to how much money they are earning is a great way to prepare for a rally. Filtering out stocks with P/E ratios higher than 15 is the perfect way to narrow your search. When stocks are moving higher, bargain hunters will swoop in and bid up these “cheap stocks” to more reasonable levels.

Now that you’ve added this second key metric, you can begin searching your selected sectors for cheap plays. Make a list of all the companies that interest you. Now you’re ready for the final step…

3. Finally, select the stocks with the most momentum potential: Your final step involves some quick chart analysis. But don’t worry—you do not have to be seasoned market technician to complete this task. Simply take your list and look at each company’s daily chart. Then ask yourself one simple question: What is the primary direction of this stock?

There are three answers to this question: up, down, and sideways. Get rid of any stock that looks like it is moving lower. That will leave you with names that have bottomed out and are moving sideways, and stocks that are moving higher. As you narrow your list, you can use these charts to separate your best ideas. If you have two stocks you really like, compare charts. Unless you have a compelling reason to pick one name over another, I would recommend going with the stock in an uptrend every time.

Here are a couple of examples I found after searching for only 10 minutes:

Iconix Brand Group Inc. (NASDAQ:ICON): Iconix owns a large portfolio of apparel brands. Its P/E comes in at about 13, and the company has proven it can steadily increase its sales and earnings. The stock has also moved steadily higher since it bottomed in early October.

Greatbatch Inc. (NYSE:GB): Greatbach is in the medical device sector. Its P/E comes in at 14. The stock is also only slightly above sales—another sign of a cheap name. GB is also recovering from last year’s slump. Shares are quickly approaching pre-correction highs.

Of course, this lightning-fast analysis just scratches the surface of these two companies. Still, you can see how a quick search yielded two strong possible investments.

Sincerely,

Greg Guenthner
for The Penny Sleuth

3 Keys to Playing the Underground Small-cap Rally was originally featured in the Penny Sleuth.

It’s the rule that every successful investor has used to build wealth. And it’s the same rule that will destroy your trading account if you fail to heed its warning.

That’s why I want to alert you to a group of stocks that could cause you a lot of unnecessary pain this year. I’m talking about the so-called social gaming sector — specifically Zynga Inc. (NASDAQ:ZNGA) — the developer of FarmVille and other fad games for Facebook and mobile phones.

It all comes down to unrealistic expectations. I saw this same story play out last year when OpenTable Inc. (NASDAQ:OPEN) and Green Mountain Coffee Roasters (NASDAQ:GMCR). Both lost more than half their market value after failing to meet outrageous growth projections. The same fate awaits Zynga. If you invest in this stock expecting a huge payout by next year, you could be in for a terrible surprise.

Here’s why you need to avoid this stock — and the entire social gaming sector…

Since Facebook formally submitted its IPO paperwork last week, analysts and investors have been buzzing about Zynga’s growth prospects, bidding the stock up nearly 40% in a little more than a week. But I don’t see this growth story playing out much longer without a serious correction.

Unfortunately, countless eager investors will probably get sucked into this stock before it crumbles. It will begin next week when Zynga will announce fantastic earnings. The company will beat estimates, predict incredible growth and win over plenty of new followers. Yet despite the hype, Zynga will eventually disappoint anyone who buys this stock right now. In fact, the entire social gaming sector is a sham. And it will quickly unravel once investors realize Zynga and its peers can’t live up to the lofty expectations…

Of course, this hasn’t stopped the financial media from highlighting some gaudy numbers. Analysts have even reverse engineered Facebook’s recent IPO filing to predict Zynga’s performance. Since Facebook reported that Zynga was responsible for 12% of its revenue, it’s easy to see that its game sales were worth $450 million to the social networking giant last year. One analyst who dissected the report even raised his fourth quarter revenue forecast for Zynga to $315 million from $300 million…

That’s a considerable amount of money. However, I don’t think the good times will last.

There are simply too many factors working against Zynga and the social gaming sector. Just because of the nature of the business, it will be incredibly difficult for Zynga to protect its current position at the top of the industry. Simply put, there’s nothing standing in the way of a garage-based start-up from destroying Zynga’s market share. It doesn’t take tens of millions of dollars to put together a game development operation and release a title.

Innovative start-ups could quickly pose major problems…

These pesky start-ups aren’t the only threat. Established video game companies are also fighting for their piece of the social gaming pie. Even video game giant Electronic Arts Inc. (NASDAQ:EA) has emerged as a Zynga competitor. As if we needed more proof that the EA threat is very real, Zynga went on the offensive last month and hired away the head of EA’s interactive division. This is the kind of poaching I expect from this sector. In the end, none of these firms will walk away with enough of an advantage to be a staying force in the industry. In the long run, they will continue to cannibalize sales from one another, leaving no possible way for the average investor to capitalize.

Furthermore, games that are popular now won’t stay popular forever. I do not believe social gamers are going to be loyal to one game developer or another. They will play the “hottest” game at any given moment, and then move on to the next-best title once it becomes available. Zynga is bound to miss the mark with one of its upcoming games. That’s all it will take for investors to head for the exits. Just one mediocre launch that falls short of expectations will send the stock into a tailspin…

Right now, analysts are betting big on Zynga’s foray into gambling-related games. But I’m not willing to take these odds. I’m seeing better opportunities (with far less risk) elsewhere in this market. I’ll highlight some of these soon. For now, steer clear of Zynga and social gaming. As investments, these stocks just don’t make a whole lot of sense.

Sincerely,

Greg Guenthner
for The Penny Sleuth

Why You Should Avoid Zynga and the Sham “Social Gaming” Sector was originally featured in the Penny Sleuth.

In scientific circles, this type of anecdotal evidence, no matter how persuasive, cannot be relied on or cited. Those are the rules, even if they’re regularly broken.

Economists and analysts, however, have different rules. We make predictions that scientists cannot make, at least publicly…

I predicted that further research would prove that this substance citrate is one of the most important breakthroughs in modern medicine. This is because I am convinced of its ability to halt or ameliorate the underlying mechanisms of autoimmune disorders, in part at least from personal experience.

Therefore, I am enormously gratified to see the first clinical data validate my assumptions and predictions. We don’t yet have multiple double-blind studies, but first published results are, in a word, stunning.

Data was just released regarding this substance’s impact on hs-CRP (high-sensitivity C-reactive proteins).

CRP levels, as you know, are strong indicators of various medical conditions as well as general health. High CRP levels are associated with increased risk of diseases ranging from heart disease to cancers.

The bottom line is that low doses of this substance dropped highly sensitive C-reactive protein levels by about a third in test group of mostly obese smokers. Because reductions in CRP levels have the most impact on health when they are high, these reductions are extremely meaningful.

Though it is not blinded data, it is still extremely meaningful. We already knew, from animal and cell studies, that this substance outperformed other anti-inflammatories ranging from Lipitor, aspirin and ibuprofen to Celebrex.

Until now there had been no clinical evidence that this substance works as well in human studies as it does in cell and animal studies. This is, therefore, an important point in the history of this technology…

Remember, numerous studies link statin use to reduced risk of heart and other diseases. Others believe that inflammation is the driver behind most cancers.

When all is said and done, I believe the impact of widespread use of this substance will have a profound impact on our demography as well as investors’ bank accounts…

Yours for transformational profits,

Patrick Cox
for The Penny Sleuth

One of the Most Important Breakthroughs in Modern Medicine was originally featured in the Penny Sleuth.

With the New York Giants’ win fresh in the minds of 111 million Super Bowl viewers, I guess it shouldn’t come as a huge surprise that a slew of financial media outlets are talking about the “Super Bowl Indicator”.

Here’s a bit from the Wall Street Journal:

Robert Stovall of Wood Asset Management in Sarasota, Fla., is the veteran market analyst who has popularized the [Super Bowl Indicator].

“I don’t have any particular expertise in predicting the outcome of sports events,” says the 85-year-old Mr. Stovall, but he nonetheless leans toward a Patriots win, which would mean a down year for the market. “But if the Giants win, a happy feeling should spread through the bulls.”

The so-called “Super Bowl Indicator” predicts that if an NFC team wins the Super Bowl, the stock market will have a bullish year. On the other hand, an AFC Super Bowl victory predicts a bearish year for stocks. In the last 41 years, the Super Bowl Indicator has had an 80% success rate in determining the market’s direction. The Giants’ win, then, should foretell of a bullish year for stocks. So, should you believe it?

Absolutely not…

There are some major holes in the story behind the Super Bowl Indicator (SBI) — ones that may not be readily apparent to most investors. After all, they weren’t apparent to the Wall Street Journal, the Indianapolis Star, Forbes, or scores of other major media outlets that have been gushing about this false prophet for stock performance.

When it comes to the Super Bowl Indicator, it’s important for you to realize that “correlation doesn’t imply causation”. In other words, just because there’s a correlation between two things doesn’t mean that there’s a causal link between them. Just because your cell phone stops working after a power outage doesn’t mean that the outage broke your phone. In the investing world, that’s one of the most important concepts to understand…

And just because there’s no logical link between Super Bowl winners and market performance doesn’t mean that there’s no complex relationship at play. Just because a high correlation doesn’t prove they’re connected doesn’t mean that they’re not.

Incredibly successful traders have been known to look for bizarre links between outside factors in the market. Billionaire hedge fund manager Jim Simons even admitted once that his firm researched connections between sunspots and market performance — but he wouldn’t tip his hand as to what they found out…

So, with an 80% success rate, why is the SBI a bunch of bunk?

Well, the first thing to look at is the possibility that that 80% win rate was due to luck or chance — in other words, is that rate statistically significant?

On the surface, it looks that way. With 41 games played and measured against the following year’s performance, the statistical chance of an 80% correlation being luck is infinitesimally small. But — and here’s the clincher — the SBI doesn’t follow a normal distribution. Put in plain English, there’s a very logical reason why it’s garbage…

You see, historically, the stock market has been trending higher. As a result, we’ve had more up years in history than we’ve had down years — so it’s statistically more likely for any random year in the last 41 years to be a positive year. Now, let’s look at the NFL.

Like stock market performance, the winning conference in the NFL is hardly random. Thanks to a long NFC winning streak between the 1980s and the late 1990s (in part the result of the dominance of the Dallas Cowboys and the San Francisco 49ers franchises during that time period), NFC teams have won more Super Bowl match ups than their AFC rivals. As a result, it’s statistically more likely for any randomly chosen Super Bowl year to have an NFC winner just because a couple of dynastic teams happened to be in the NFC.

When you put those two statistics together, it’s more likely that a year will be up than down, and it’s more likely that the Super Bowl winning team would have been in the NFC than the AFC. So the high correlation between up years and NFC wins isn’t a huge surprise after all…

The fact that the SBI is worthless hasn’t kept otherwise smart people from touting the usefulness of the metric. A professor at Washington & Lee University even went as far as developing an investment strategy that selects different asset classes depending on the winning team of the big game.

“When I present this you can see the smile on their faces ‘You’re not serious are you?’,” says the prof…

Of course, even the good professor hasn’t invested his own money in the Super Bowl Indicator strategy. In fact, of all of the mainstream cheering of the SBI, there wasn’t a single person who actually said that they invested real money based on the indicator — only those who “wished they did.”

That may be the biggest red flag of all — if an indicator’s biggest fans aren’t putting their cash on the line with it, neither should you.

The old joke goes that 68% of statistics are made up. Well, if the Super Bowl Indicator proves anything, it’s that even compelling statistics can be misleading when they’re not approached with mathematical rigor. Regardless of which team you were cheering for last night, do yourself a favor and avoid the indicator everyone’s talking about today.

Cheers,

Jonas Elmerraji
for The Penny Sleuth

Debunking the Super Bowl Indicator was originally featured in the Penny Sleuth.

But before I get into the details, let me explain why I’ve been so reluctant to take a serious look at any Chinese stock, even those trading on major U.S. exchanges…

For almost a year, I’ve honored a self-imposed ban on the purchase of any Chinese stocks. I haven’t touched a single Chinese ADR since my ban — and I haven’t recommended a single one to my readers.

The saga began last year with a small Chinese travel stock called Universal Travel Group (NYSE:UTA). Back in September 2010, I recommended shares of the small-cap Chinese travel company to my readers, pinning hopes on a dirt-cheap valuation and breakneck growth in the Chinese travel industry. But the morning after I sent out the recommendation, a short seller published a report detailing why UTA was a fraud and why he was actively betting against shares. The stock opened for trading down 30%, and we quickly sent out an alert for readers to sit tight before buying while we investigated the claims.

After some digging, I felt the claims boiled down to a misunderstanding of the company’s business. Every argument for UTA being a fraud looked incorrect. Luckily, we were able to take advantage of the situation, re-issue the buy recommendation — and even ended up booking gains on the investment.

Even though we did well on the UTA investment, we were concerned about the power that unknown short sellers could have over Chinese ADRs. While there had been some rumblings about the abundance of fraud in China, UTA was one of the first major short attacks on a Chinese stock.

Then the floodgates opened. Fraud allegations appeared left and right. And short sellers eventually targeted another one of my recommendations, Advanced Battery Technologies (PINK:ABAT).

ABAT was a Chinese battery stock I recommended back in March 2010. It was up as much as 21% early last year — but that was before another short attack shoved shares more than 40% lower in a single trading day. I ended up closing the position for a loss — but was spared the 90% drop that eventually crushed the stock.

That’s when my ban went into effect. Even if Chinese fraud wasn’t truly widespread, the risks of a short attack were just too real to justify buying any of these ADRs — no matter how rosy the growth picture may have been at the time. Investors were eating up every fraud report that hit the web. There was no telling what stock would be the next target —or if the claims of fraud would even be legitimate…

But now, something has changed. I’ve found this new growth market in China that could have the potential to deliver early investors significant gains. It has the potential to be so powerful, in fact, that it could easily repel short attacks just like the ones I’ve experienced firsthand…

I’m talking about the Chinese pharmaceutical market. It’s growing faster than any other drug market on the planet right now, with some projections expecting it to balloon to $115 billion in the next three years.

Here’s the kicker: Because the Chinese government requires local testing of medicines — and because the cost for conducting the animal research to perform these tests is about half what it is in the U.S., domestic companies are beating down the doors of these Chinese drug research firms. They want to get their foot in the door so they can grab some of the profits of this red-hot growth market.

Because these Chinese-based firms are now buyout targets for major U.S. Pharmaceutical firms, we now have an extra margin of safety while exploring the sector for potential investments. If Big Pharma has sent its best people to China to investigate these businesses and their growth claims, I sincerely doubt a short-selling raid would hold up to the scrutiny.

That’s why the small-cap ADR WuXi PharmaTech Inc. (NYSE:WX) has caught my eye. Not only does WuXi grab 70% of its revenue from research for U.S. companies, it also was involved in a “near miss” $1.6 billion takeover attempt from U.S.-based Charles River Labs, according to Bloomberg. The only reason the deal went sour is because Charles River shareholders voted it down because they felt the premium was too high.

In my view, this was a huge mistake made by short-sighted Charles River shareholders…

A precedent was set by the offer — which represents a premium of more than 60% above WuXi’s market value right now. Analysts don’t see the company accepting anything less. Frankly, neither do I. WuXi is simply making too much money — and monopolizing too much U.S. business — to humor a lowball offer. According to data compiled by Bloomberg, WuXi’s profit margins are 5 times that of its U.S. counterparts. WuXi is eating their lunch, and they know it.

A buyout offer is not a matter of “if” but “when” at this point. Someone will come along with a massive offer for WuXi — or even one if its competitors in the research sector. An event like this should trigger a ton of activity in the sector. And anyone with the foresight to see the big buyout on the horizon stands to capitalize on the action.

Sincerely,

Greg Guenthner
for The Penny Sleuth

The Only Chinese Growth Story Worth Buying Right Now was originally featured in the Penny Sleuth.

We’ve entered a high-stakes election year, where the market should cycle into strength as those in power attempt to win the hearts and minds of the electorate…

The slow-burn of the Eurozone crisis is also beginning to fade. Negative headlines and poor economic data — the exact same information that paralyzed investors just a few weeks ago — just don’t seem to matter anymore…

Some analysts (including a few of my colleagues) are attributing recent market strength to the Facebook effect. But I’m not completely sold on this explanation at all. Your mom and her friends talking about the Facebook IPO does not trigger a broad market rally. Sure, stocks in similar sectors will see some buying. But no one is bidding up shares of Waste Management in anticipation of Facebook going public.

However, Facebook’s impending offering is a symptom of the market rally itself. The billionaires and soon-to-be billionaires behind the IPO weren’t going to float this stock to the general public while the rest of the market was having a fire sale. That’s not good business. Waiting until the market has its legs back will always trigger a rush of offerings that have been patiently waiting in the wings — this one just happens to be a biggie.

But it doesn’t matter who is right — it all comes down to this: the bears might win today or tomorrow, or even most of next week. But ultimately, they will suffer as stocks continue to rally, sparking short-covering that will push the market up even faster…

That’s the thing with early-stage market rallies. Buying is contagious. And when it spreads, those on the wrong side of the coin are unceremoniously slaughtered. The euphoria of stocks moving higher after months of declines lobotomizes traders. They will jump on the big move, shoving aside anyone who gets in their way.

Of course, this is not a friendly game. At the beginning of a new trend, there are winners — and losers. If you don’t properly position yourself in the early stages of a rally, you will lose. It’s a simple as that…

If you’re buying stocks that are the strongest movers off the market’s lows — with the intention of holding them — you could be setting yourself up for failure. These stocks that catch fire and outperform during an initial broad rally are usually the most heavily-oversold names on the market. Most of the time, it’s because these stocks don’t have the fundamentals to backstop any intense selling pressure.

To put this into perspective, take a look at this chart of Response Genetics Inc. from 2009:

RGDX is a micro-cap biotech with no earnings and very few assets. The stock jumped big in March 2009 as the broad market put in a bottom, but the rally couldn’t hold. Investors moved on to other stocks that offered a stronger financial cushion.

Fast forward to present day, and we’re seeing similar action in RGDX:

After a sharp selloff in 2011, RGDX is roaring back to life. But while this stock might make a fine day-trade, I don’t see it holding up as a viable medium- to long-term investment. History could very well repeat itself here — with RGDX ending up back at $1 before the market runs out of steam.

On the other hand, the stocks you can find that will ride this emerging rally will have the backing of solid fundamentals and tangible industry trends. You’ll still have the upside of an in-favor stock — but your risk will be mitigated by revenue and earnings growth and the powerful economic conditions that drive the particular sector or industry.

The week before Christmas, I laid out three major stock trends that I believed would shape the market in 2012. The first major trend revolves around a slew of pharmaceutical patents that are set to expire this year. That means Pharma stocks that are favorably positioned in the generics business should easily outperform the market.

Here’s one of the fastest-growing, profitable small-caps in the generic drug industry:

Akorn Inc. (NASDAQ:AKRX) might not be one of the best performing stocks so far this year. However, the stock continues to build on its market-beating trend from 2011 while the business consistently grows its profits and raises guidance. That’s why I recommended this stock to my readers last year — and why we’re still holding the stock today.

If you continue to seek out stocks like AKRX that have strong fundamentals and a steady, rising trend, you should have no problem avoiding the garbage stocks that sucker in so many investors during the early stages of a bull market rally…

Sincerely,

Greg Guenthner
for The Penny Sleuth

Finding an Edge When the Market Moves Higher was originally featured in the Penny Sleuth.

And we must admit, the banking system we are saddled with today is a root cause of much of the economic panic roiling the markets…

On the other hand, a new technology that promises to transform banking’s consumer end is something I can get excited about. Mobile banking and payment plays have been on our radar for quite some time, and I’ve been looking at the emerging field in order to identify actionable opportunities. We’ve even had the chance to converse with a radio frequency engineer who reads this newsletter and who had very helpful insights to share.

I’ve been watching one mobile payments player in particular for nearly a year. At this year’s Consumer Electronics Show, Patrick Cox and I had the chance to interview company representatives in the field at length. I think that the time to invest in mobile payment technology has finally arrived. First, however, I’d like talk about what’s happening in the space.

Paying From Your Phone

Previously, mobile phones have helped us satisfy our need to communicate. Now, however, they are beginning to satisfy the need to engage in commerce by providing a convenient means of exchange. Smartphones are becoming a tool to accomplish what has previously required the use of cash, checks or credit cards.

As their name implies, however, smartphones aren’t dumb like these legacy payment options. Unlike a piece of plastic with a magnetic stripe, a payment system based on an intelligent, networked device has the advantage of providing real-time feedback on account and payment information. Combine these advantages with the fact that most of us are carrying a mobile device anyway, and a virtual wallet could eventually make credit cards as uncommon for retail transactions as personal checks are today.

Despite the obvious advantages, mobile wallets have seen slow adoption in the United States compared with elsewhere. Other places that lack the banking system the U.S. enjoys, but have cell phone coverage, have led the way in using mobile payment technology. In locations in Africa, Asia and Latin America, money is often stored in a mobile account and transferred to another one during a purchase by bringing the buyer’s and seller’s cell phones into close proximity. This is done by means of a short-range wireless connection called near field communications (NFC). Just as elsewhere, NFC will lead the mobile-transaction revolution in the U.S.

NFC is a set of radio communication standards that allow devices to communicate with each other over short distances. It is also very fast at establishing a network connection, taking only a fraction of a second. If you’ve ever used a contactless payment system before, such as the kind that you can attach to your key ring and use at a gas station, you’ve used an early form of NFC.

These objects use radio frequency identification (RFID) chips that transmit a unique, secure identification code that performs the same function as the magnetic stripe on a credit card. Unlike NFC on a mobile device, however, these systems allow only one-way communication. As such, these aren’t much more than easier-to-use credit cards.

With major payment processing companies finally signing onto the mobile payments game, the U.S. is entering an inflection point for NFC technology. Much of the infrastructure has already been built…

In the 2000s, for example, Visa and MasterCard developed payWave and PayPass, respectively, both contactless payment technologies. More recently, Visa, MasterCard, Discover and American Express have licensed these systems to Google for use in smartphones with its mobile payment system, Google Wallet.

Along with the software and systems sides of the mobile payment equation, we are seeing increasing numbers of smartphone models equipped with NFC technology. 2011 was the biggest year on record for NFC adoption, with 35 million new smartphones equipped with the technology, according to IMS Research.

With this kind of growth and industry support, NFC technology is set to revolutionize the way we pay in a manner very similar to what the credit card industry accomplished in the second half of the 20th century.

Innovators pioneering the transformation with a strong market position should do very well for themselves and their investors.

Ad lucrum per scientia (toward wealth through science),

Ray Blanco
for The Penny Sleuth

How To Turn “Boring Banking” Technology Into Riches was originally featured in the Penny Sleuth.

As a group, social media stocks have thus far been a rather unimpressive group…

Linkedin Corp. (NYSE:LNKD) continues to find lower ground after its 2011 IPO (it’s currently down more than 21% from its first-day price). Daily deal provider Groupon Inc. (NASDAQ:GRPN) is performing even worse — it’s down more than 25% from its IPO high. Even the Social game maker Zynga Inc. (NASDAQ:ZNGA) is still shy of crawling back up to its IPO day high of $11.50.

However, all will be forgiven once Facebook is finally on the market — at least, that’s what some in the financial media would have you believe…

Late last week, we learned that Facebook is finally preparing to file its initial public offering which could raise as much as $10 billion. The offering will place the value of the social networking site somewhere between $75 billion and $100 billion. The $10 billion IPO alone easily places Facebook among the largest offerings of all time — and the biggest U.S. internet IPO by leaps and bounds.

For some perspective, Google’s 2004 IPO netted the search engine (and now-Facebook rival) what now seems like a paltry $1.2 billion.

But what if investors aren’t so eager to own a stake in The Social Network? What if —after a couple of high-flying weeks — the stock begins to fall? Or even worse — what if it tumbles right out of the starting block?

While I can’t try to predict the trend of a stock that does not yet exist, I can tell you this: If shares of Facebook fail to deliver reasonable gains, this new stock will cut down every other stock in the so-called social media sector. After all, if the biggest and best example of the group fails the investor’s litmus test, how can the others expect to outperform the market?

Needless to say, I don’t recommend buying these stocks. Even without the specter of Facebook looming over the industry, there’s too many unknown factors at work. First, these IPOs have no trading history- and therefore no chart to refer back to. This makes it difficult to gauge sentiment, or what the important emotional price points of the stock will be.

Second, there are major shareholders and big money investors who will probably be selling their shares for a quick buck, especially if the stock debuts higher than its pre-IPO price, which most higher-profile IPOs often do. This has a tendency to drive the share price down even after an initial spike as these early investors sell their shares.

Obviously, the financial media — and even the mainstream media — tend to fall all over the bigger name IPOs, especially these household name companies that are working to go public. Don’t buy into the hype right away…you could get burned.

Sincerely,

Greg Guenthner
for The Penny Sleuth

Facebook’s IPO Could Cripple the Social Media Market was originally featured in the Penny Sleuth.

If there was a single phrase to describe the market in 2011, it would have to be “investor uncertainty”. Investors have been anxious for the last year, and for good reason: incompetent politicians have had significant control over the broad market. Now that we’re in the new year, I think that the single most critical factor for stock performance remains Europe.

First, though, let’s take a look at what’s been going on across the pond. To fully grasp the problems that have been plaguing the PIIGS countries, it makes sense to take a look at what was going on in debt-plagued countries like Greece and Spain for the last several years. In a recent article, Bloomberg reporters took a look at the “Cayenne Crisis” spreading through Spain as the used car market gets flooded with $88,000 Porsche SUVs that middle-class Spaniards realize they can no longer afford:

Juan Ramon Valdivia, 19, who works at his family’s restaurant in Malga on Spain’s sourthern coast, is looking to unload his Cayenne for a less expensive VW or Peugeot.

“This car was the paradigm of how we lived above what we could afford,” Victor Conde, marketing professor at Madrid’s Universidad Nebrija, said.

Teenage restaurant workers being approved to buy Porsches is only part of the problem. The fact that 98% of wealthier Greek swimming pool owners lie on their tax forms is another. And the massive debt loads that a handful of the Eurozone’s least stable economies undertook is the nail in the coffin.

Europe’s debt crisis has remained one of the biggest black clouds for U.S. markets, driving some of the past year’s most memorable crashes. In 2012, it’s still going to be one of the biggest factors impacting uncertainty and volatility in the stock market.

As Europe’s financial instability teeters, investors are betting against the euro. In fact, as I write, short selling in the EU’s currency is at a record high — spurred by investors who are concerned that the PIIGS could take down the whole region’s currency. Worse, they fear that a default on Europe’s sovereign debt could destroy the banks that own huge positions in eurozone bonds.

We’re seeing that play out in the TED spread, a measure of the perceived health of commercial banks. The TED spread is the difference between the interest rates on interbank loans (known as eurodollars) and on U.S. treasuries — when the difference is large, it indicates that investors are factoring in bigger risk to the financial system.

Right now, the TED spread is the highest it’s been since the height of the financial crisis. That tells us that investors are more anxious about the financial system than they’ve been in years. And that’s carrying over to the behavior we’re seeing in the stock market…

Even though stocks have been trading relatively flat for the last week and change, investors should be getting ready for things to get worse before they get better — the financial system can’t be as risky as it is right now without some consequences.

And since the TED spread measures interbank credit risk, those consequences are going to show themselves in the financial sector. You see, even though the TED spread tells us that risk is ratcheting higher under the covers, we haven’t seen that risk get priced into financial stocks by nearly the same amount. As a result, a bet against financials makes a whole lot of sense right now…

One of the easiest ways to do that is through the Direxion Daily Financial Bear 3X ETF (NYSEARCA:FAZ), an exchange traded fund that tracks three-times the inverse of the financial sector’s performance. So, in other words, for every 1% that financial stocks fall, FAZ rallied by 3%. While leveraged ETFs hold additional risks, it still makes a lot of sense for traders who approach this as a short-term, aggressive bet.

We’ll be keeping a close eye on the macro technical environment in the next few weeks — and keeping you filled in here at the Penny Sleuth.

Sincerely,

Jonas Elmerraji
for The Penny Sleuth

Highs in the TED Spread

Why You Should Be Betting Against Financial Stocks was originally featured in the Penny Sleuth.