The idea of selling in May and going away is an old Wall Street adage that’s based on the seasonality of summer stock prices. Historically, May through September tends to be the weakest period of stock performance — and that fact is fresh in recent memory. In 2010, the S&P fell 8.2% in May. In 2011, Mr. Market fell more than 17% during the summer months.

But don’t get too startled by the numbers. Two years does not a market rule make…

Think about it: if everyone decided to blindly sell in May and go away until the Fall, then June would become a pretty good time to buy — stocks would become so undervalued that opportunistic buyers could pick up bargains by the fistful. And a quick Google search shows just how popular this “market rule” is; a quick search of the phrase returns 54.7 million hits.

In reality, “sell in May and go away” is just another one of those clichés that doesn’t mean a whole lot without context. It’s like telling someone to “buy low and sell high” or “diversify”; unless you know specific steps to do those things correctly, it’s worthless.

In the context of a bearish market, sell in May and go away can be a bit of added information that the drop is going to be especially painful. But in the context we’re in now (a correction after a bull run), it’s meaningless…

To show you that context, I want to share three charts that add some important color to what’s going on in the S&P 500.

The first is a look at the S&P’s advance-decline line, a measure of market strength:

Taking a look at the indicator, it’s clear that the uptrend in the A-D line is still in force. In a nutshell, that indicates that a larger number of stocks are still participating in this rally. So even though the S&P has corrected for a few weeks, the underpinnings of the market remain strong.

Next up is volatility, as measured by the Bollinger Bandwidth of the S&P 500:

In case you’re not familiar, Bollinger Bands are statistical measures of how volatile stocks are right now. When the bandwidth reading gets higher, it tells us that stocks are “risky” right now; when it shrinks, the market is relatively smoother. With the bandwidth reading trending towards 52-week lows right now, we’ve got a good indication that volatility readings are due for a spike.

In other words, if that S&P 1,430 target is correct, it could come quickly…

But that leads to another important question: just how high can stocks safely go right now? Taking a look at historical levels, the answer may surprise you. This chart from Bloomberg tells an interesting story:

The chart measures the value of the S&P 500 as a percentage of the gross domestic product of the United States. In other words, it’s a look at how valuable [predominantly] U.S. companies are versus the value of all of the trade that takes place within U.S. borders.

Historically, stock values have eclipsed GDP — barring the massive price swings of 2008, the market hasn’t been holding at these “cheap” levels for the better part of a decade. Typically, I’m not a huge fan of platitudes like “stocks are cheap”, but in this case, it does do a good job of showing us what’s going on in the broad market.

From there, we’re clear to apply solid technical analysis to figure out which stocks investors think are cheap right now, and pounce when high probability trades pass through our crosshairs.

The bottom line is this: don’t sell in May and go away. Instead, look for the trades with big targets on their backs. Technical traders should be looking for breakouts and bounces off of support. Fundamental investors should be scooping up the bargain names. Buying in May and deciding to stay could fuel your gains for the rest of the summer…

Cheers,

Jonas Elmerraji
for The Penny Sleuth

Selling in May and Going Away was originally featured in the Penny Sleuth.

In this respect, the markets leave us blind. We can only look back for clues to discern where we might be headed. In this case, we can look toward recent support for some answers. Thursday afternoon, The S&P 500, NASDAQ and Russell 2000 all bounced higher off critical support levels.

It was the kind of action one should expect in a bull market. The averages fade to support levels, prepping for yet another run to new highs. We’ve seen it for months — every dip has been been a buying opportunity.

However, this week has been an entirely different story. The market fell hard again yesterday. And over the the past 5 trading days, the NASDAQ has fallen nearly 3.5%, while the S&P 500 has dropped 2.75%. It’s enough to make any trader — or investor, for that matter — wary of what might come next.

Luckily, the market offers us some important clues as to what might happen next. And while none of the following indicators are right 100% of the time, the signals are convincing enough to persuade many traders to the sidelines for the time being…

• Down days are active days — For the past 6 trading days, the S&P 500 ended up in the red 4 times. That’s not what concerns me. What’s important during these down days is volume. Each day the market has been in the red, volume has handily surpassed the days when the market recovered. In a stronger market, the opposite volume pattern would hold true.

• Microcaps are feeling the pain — The Russell 2000, a preferred benchmark for small-caps, has reacted similarly to the market at large. Yet while the index remains above its 50-day moving average, many individual microcaps in my investing universe are beginning to falter. These are the smallest of the small stocks that are not represented in the index. Most investors consider these small stocks to be the riskiest on the market — and the recent downturn might have convinced some to take their money to safe haven investments.

• An excuse to worry — Oil prices are surging and the geopolitical climate is heating up with demonstrations from the Middle East to the Midwest. I don’t think its fair to say that strife in Egypt and Libya have a stranglehold on our stock market, but it is important to note that a major political shift could shake up the world enough to pause the overall market trend — especially since energy prices are in play.

It’s important for me to note here that as of early this morning (before the market opens) the market has not given us a clear-cut sell signal. What I have detailed above are simply observations that could lead to a more decisive move to the downside sometime in the near future. The best we can do as traders is to watch our critical indicators and act on any new developments.

Sincerely,
Greg Guenthner
Penny Sleuth

March 2, 2011

3 Reasons to Hold Off on Buying Stock This Week was originally featured in the Penny Sleuth.

However, scattered among the rising share prices have been some huge disappointments. Looking back on first quarter earnings, it has become readily apparent that some stocks that were once market leaders have become victims of unrealistic expectations from an overly-excited investing public.

But instead of running away from these names with the herd, I recommend you take a second look a several of these names that could continue higher in spite of a rough first quarter…

Take blue chip carmaker Ford Motor Co. (NYSE: F). While the other members of the Big Three were completely decimated during the financial crisis, Ford continued to improve its business — all while famously not asking for bailout money from Uncle Sam. The company returned to profitability in 2009, and as a result, shares more than doubled between late 2009 and January 2011.

But the carmaker’s picture-perfect rise was cut down in late January. Ford posted its largest annual earnings in a decade, yet fell short of analysts’ expectations when it came to its fourth quarter numbers. While the company reasoned that it was the added expense of prepping to launch the new Explorer and Focus models, investors took the wide miss as a sell signal.

Shares tanked. In only 24 hours, Ford stock dropped from the $18.80s to $16, which is about where shares remain today. The fall was simply the result of overzealous investors wanting perfect financial results that just weren’t there. Ford’s business is far from troubled. In fact, the stock looks well undervalued right now. Of course, the investor that bought at $17 or $18 has been set back a bit — but I wouldn’t expect these buyers to be underwater by the end of the year.

Turning to smaller stocks, we saw a very similar situation yesterday when Sirius XM Radio (NASDAQ: SIRI) announced earnings before the bell. Before its earnings announcement, Sirius XM shares had rallied more than 70% over the past six months.

But Sirius XM also fell victim to missing the number, reporting a loss of 2 cents per share, compared to breakeven earnings a year earlier. Shares tanked premarket, and remained weak all day. By 4:00 p.m., the stock had lost more than 7%.

Much like Ford, all is not lost for Sirius XM. The company beat its own growth targets, tallying 20.2 million subscribers (that’s a 8% rise since last year). Sirius XM also boasted a nearly 9% rise in revenue and paid off another large chunk of its once-crippling debt.

The bottom line is neither of the two stocks mentioned above was irreparably damaged by their respective setbacks. In fact, bullish arguments can easily be made for both names. Furthermore, each of these stocks are trading at important support points, so it isn’t far fetched to say that Ford and Sirius XM could both be trending higher in the coming months.

Sincerely,
Greg Guenthner
Penny Sleuth

February 16, 2011

Buying on Unrealistic Expectations was originally featured in the Penny Sleuth.

Over the past several weeks, I’ve written a great deal on strategies to help you manage your trades, along with set-ups to avoid as the market became overheated.

Today, I want to expand on this theme by discussing an ideal risk vs. reward trade. By incorporating this setup into your scans, I can all but guarantee that you will increase your winning percentage by limiting your trading to only the most favorable opportunities on the market.

We’re all aware that stocks will not go up indefinitely. Even the strongest uptrend needs a break to properly consolidate. You need to be able to find and exploit the best consolidation set-ups in order to successfully navigate current market conditions. These are the stocks that have the best chance at continuing their uptrends when the market rights itself. In order to help you properly identify the best pullbacks of uptrending stocks, I’ve listed some important tips below.

For our example setup, take a look at the following chart snippet:

First, I want you to note the moving averages. In this example, I’ve added the 10- (green), 20- (red) and 50-day (blue) moving averages. When planning a pullback trade, you always want to find the short-term moving average that the stock obeys.

Aside from a sharp break in November that quickly recovered, you can see that this particular stock is obeying its 20-day moving average. With this important point identified, we can use the moving average as a guide for our entry and stop loss.

Now that the uptrend’s support has been established, you have to examine the trading volume to ensure the stock is consolidating properly. Ideally, you are going to want a stock that shows fading volume as it retraces toward support (red lines). If you see any big red volume bars, you might want to reconsider the trade. For this strategy, the volume pattern is just as important as the price action.

In order to pinpoint the right time to buy, simply wait out the consolidation pattern. Your buy signal will occur on the day that the stock bounces off support (blue arrows) on higher relative volume (blue circles). In our example, there are two strong buy indicators flashing in December.

All that remains is setting your stop loss just a few cents below support—which in our example is the 20-day moving average. A low-risk trade following our example is the perfect maneuver in this choppy market. It gives you the opportunity to set a tight stop loss while reaping the benefits of a strong stock bouncing off support.

Sincerely,
Greg Guenthner
Penny Sleuth

February 2, 2011

Choppy Market Trading Strategies: Play the Pullback was originally featured in the Penny Sleuth.

However, the best traders are answering another important question about every one of their trades before they pull the trigger.

It’s a relatively easy process that a lot of traders simply ignore. But if you ask this question — and answer it properly using the following steps — you will have the chance to squeeze additional gains out of every trade you make…

Here is the all-important question: What is your target exit price?

If you have ever jumped blindly into a trade without considering where you will sell, you probably lost money or left valuable gains on the table. Believe it or not, many traders ignore this step entirely. In my mind, this is a terrible mistake that leads to poorly executed sells.

As you’ve probably already figured out, a poorly planned sell will cost you money.

Instead, what you need to do to stay ahead of the pack is take the planning process you use for buying a particular stock and use it to carefully plan when you will sell your shares.

As with any trading question, this one must be answered in multiple steps. First, you have to decide on your trade horizon. How long do you plan on holding the stock? Is it a day trade or a swing trade, or even a stock that you will plan on holding for months?

Your charts will help answer these first few questions. And even if you only plan on holding a stock for just a few hours, you should look at a daily and weekly chart. This will help you identify important areas of support and resistance that will tell you where you can expect your stock’s trend to run its course.

For example, if you plan to trade a stock that has just broken resistance, where are the next levels of resistance that could stop the stock’s progress?

Once you identify these areas on your charts, you’ll get an idea where the breakout might slow down, or reverse entirely. If you’re planning a short-term trade, a prudent target can be the next level of resistance above the initial breakout.

Of course, your target exit price isn’t just set for when a stock follows through — it works for cutting losses as well.

You should set two targets:

• Set a hard or trailing target for taking gains.

• Select a strict stop loss for cutting the trade loss.

The stop loss can be a moving average, or a recent area of consolidation and/or support.

Performing this quick research will give you a better idea as to how a given trade will potentially perform to the upside and the downside. You’ll be able to set more accurate and efficient stops and targets, helping you optimize every single trade you make.

Sincerely,
Greg Guenthner
Penny Sleuth

December 22, 2010

Learn to Plan Your Next Trade: What’s Your Target? was originally featured in the Penny Sleuth.

There has already been a record $54 billion in buyouts in Africa this year — not including Wal-Mart’s initial $4 billion offer for Massmart, an African retailer. There have also been a number of Africa-focused funds gathering money of late.

These investments are not fool’s errands. The people behind them are not stupid. They see something: growth and opportunity.

The IMF recently upped its estimate for economic growth in sub-Saharan Africa to 5% for the year and 5.5% for next year. Africa is riding a boom of trade with resource-hungry China, but also with developing economies throughout Asia and Latin America. Money goes where it can get the best return. So far, African investments have offered higher returns. And prices remain far cheaper than developed markets, for similar assets.

Of course, Africa is an enormous continent of 54 countries — a diverse group, to say the least. It hardly makes sense, really, to talk about Africa as if it were a set of like countries. It isn’t. But there are pockets and regions and broad similarities of experience.

In any event, the opportunity in this vast area of 900 million people is hard to ignore.

Recently, I attended Grant’s Fall Investment Conference in New York. One of the more interesting presenters was Francis Daniels, co-founder of the Africa Opportunity Fund, who delivered a talk titled Reflections of a Value Investor in Africa.

Afterward, we had lunch together and I got to chat with him a bit more about investing in Africa. Daniels is a soft-spoken, modest Ghanaian who left his home country in 1982 to study in Canada. By that time, he had witnessed six coups. The first was in 1966. “It had the tremendous benefit of giving me an unexpected school holiday,” he said. But by the sixth attempt in 1982, he had a different view. “I was tired of coups and exhausted by Africa’s seemingly perennial coups, corruption and mediocre leaders.”

Over his 15-year career, he’s invested in every region in Africa. His reflections included many super-cheap stocks that later delivered some multiple of his initial investment. For a Graham-and-Dodd investor, Africa was a carnival of riches. Price-to-earnings ratios of 2 or 3 times with 20% growth rates. Yields of 30% on convertible debt. All kinds of hidden treasures — such as free real estate or unrealized portfolio gains — lurked in the folds of African balance sheets. Africa, too, was rich in untapped natural resources that the world craved.

Africa, though, is famous for its resources, and a value investor has to figure out a way to apply these principles to natural resources or miss out on a big piece of the pie. Daniels made them work, and some of his best investments came from mining stocks. (Uramin, for example, was a uranium explorer in Namibia and South Africa. It delivered 1,000% returns in two years.)

Here is one of Daniels’ favorite holdings… The stock is Zimplats, a platinum and palladium producer on the Great Dyke in Zimbabwe. It lists on the Aussie exchange under the ticker ZIM.

Zimplats does not produce refined platinum and palladium. Rather, it makes an intermediate product called matte, which it sells to refiners in South Africa. Impala Platinum of South Africa is the second largest producer of platinum in the world and has offtake agreements with Zimplats. It also owns 87% of the shares.

Daniels has owned Zimplats since 2003 and paid an average price of $2.25. Today, it is $12, but Daniels feels it is still too cheap. The stock trades for a price-to-earnings ratio of 10 times. Its enterprise value is $57 per ounce of reserves, compared to $193 for the industry.

Zimplats is also the lowest-cost producer in the world. Costs are $325 per ounce, versus the industry average of $948 per ounce. Zimplats mines from shallow depths at 50 meters below the surface, whereas South Africans have to go at least twice as deep.

Zimplats mines 350,000 ounces a year and plans to reach a million ounces. Its proved and probable reserves will last 67 years at current production. It has about six centuries of resource — yes, six centuries.

Let me finish with a few of Daniels’ lessons from 15 years of investing in Africa, as I think these are applicable to investors everywhere:

• “Macro-time is slower than micro-time. It took a few years for the hyperinflationary logic of Zimbabwe’s fiscal and monetary policies to end in actual hyperinflation.” I think we are seeing the same thing happen in the U.S. While it’s clear where deficits and money printing ultimately lead (i.e., high rates of inflation), the market has been slow to realize it, as shown by a 10-year Treasury rate still smaller than my hat size.

• “Government paper is riskier than private paper.” This one sounds less surprising than it might have three years ago. But a slew of sovereign debt defaults (i.e., Greece, et al.) shows that, as Daniels says, “fantastic promises prove to be just that in the long run.”

• “The best way to preserve real wealth in Zimbabwe was to own the equity securities of companies that earned non-Zimbabwean dollars.” Applied to the U.S., it would be to own the stocks of companies that earn their bread in stronger currencies.

These are just a few. I think Daniels shows a smart value investor can do very well in Africa. Of course, you could just buy his fund, which as I write trades for a 27% discount to underlying NAV. I also think Daniels’ lessons in Africa are worth thinking about, even if you never invest in Africa.

Sincerely,
Chris Mayer
Penny Sleuth

November 29, 2010

How You Can Profit from Investing in Africa was originally featured in the Penny Sleuth.

I had to pause as I typed that last word.

Even as a 20-year market veteran, the old timers liked to point out that most traders have never really seen a sustained bear market only corrections. The 1987 Black Monday when the DOW lost 22% in one day occurred my freshmen year in college. Healing over time it regained all of the losses in 2 years by 1989 while I was still learning business theory and hitting the books. So the word “decline” may underplay the force and magnitude of the financial uncertainty that occurred.

Price is relative and money can be made in all market conditions, which is important to keep in mind while looking back at the past 2 years.

Further more, it hasn’t been long since the Nasdaq hit 5000, Crude oil was at $10 a barrel just a few short years ago and Gold was below $100 an ounce in the 1970’s. Interest rates recently hit zero for short-term money – marking an inexplicable negative real return. Corn has traded below 60 cents in the past with Soybeans hitting $16.00 a bushel in 2008. With a broad perspective it’s plain to see price movement goes both ways.

Much to my continued amazement, the reflation of beaten down assets continues to surprise and bewilder investors. I find myself in a day-to-day battle among colleagues and TV’s talking heads defending the current uptrend — but as you can see, it’s still intact.

The depressed stock shares and commodity resources stopped digging the hole lower in March 2009 and resumed the value role for investors, who were searching to retain and maintain returns. Look no further than the new yearly highs in crude made last Monday at $87 coinciding with new yearly S&P highs at 1188 (already eclipsed by today’s upside action).

The current move to Dow 11,000 measures an even shorter 18-month time period to regain ground than the 1987 sell off. This bullish stock price recovery action has left many commodities lagging behind and relatively unappreciated in many uses of the word.

This week marks the beginning of the earnings season for the quarter once again. The four times a year short-term corporate scorecard can be a boost or bailout for sidelined skeptics that have watched the S&P 500 rally more than 75% from the 2009 lows. Better than expected results can fuel the hot running furnace of finance.

This from Reuters:

Keep your eyes pegged to the market this week – earnings numbers could easily fuel a buying frenzy as companies to marginally better than the Wall Street set expect.

It all comes back to commodities,
Alan Knuckman
Penny Sleuth

April 14, 2010

Making Sense of This Irrational Market was originally featured in the Penny Sleuth.

The most reliable way for investors to lose money is to buy assets that have been inflated by a bubble. Considering the lofty prices investors are paying for highly cyclical trucking stocks, many must believe that they cannot lose — especially in today’s echo stock market bubble environment engineered by the Federal Reserve and Treasury Dept.

Many stocks exhibit bubble characteristics, having rallied far ahead of evidence that earnings have really recovered. In typical economic recoveries, rallies often occur on scant evidence that fundamentals have turned. But we are dealing with a hangover from a giant credit binge.

This hangover will return after the effects of the stimulus wear off, and it will correct many of the capital spending mistakes made during the credit bubble. Some of those mistakes are obvious, including supply gluts in residential and commercial real estate. But mistakes were also made in asset classes you might not expect, like building too much capacity in the trucking industry.

If businesses react to misleading price signals, they can easily make capital spending errors. Credit bubbles cause misleading price signals. These signals are unhealthy because they act to pull future demand into the present.

This artificially boosted demand sends the signal to businesses to add capacity. Then, once the growth in credit slows, or even reverses, demand can fall far below supply. The industries that were most aggressive during the boom are left with excess capacity. Even the best businesses within each industry suffer from the investment enthusiasm of their peers, which winds up suppressing prices and profits.

Governments, central banks, the banking system, and borrowers worked together to inflate the biggest credit bubble in history. The bubble was so large that most of its fallout cannot be stopped — only delayed. Governments are running huge stimulus programs, which eases and delays the adjustment process. This temporarily restores some of the earlier boom conditions. But sooner or later, prices adjust until supply and demand fall into balance.

Inventories Are Critical for the Trucking Business

As the global economy adjusts to post-credit bubble reality, it remains to be seen how much inventory of physical goods is sustainable. The desire to hold inventory is critical for the trucking industry. Lower demand for inventory and lower final consumer demand translate into less frequent deliveries from 18-wheeler trucks. Inventory is in a constant state of flux, and reflects businesses’ estimates of their customers’ demand.

Most mainstream economists expect inventory replenishment to boost GDP growth in the coming quarters as government stimulus spending wanes. But I have my doubts. Those expecting an inventory replenishment cycle are operating under the assumption that 2006–2007 inventory levels were sustainable.

How much inventory do businesses really need?

This is something that each business must decide for itself. But with hindsight, we know that retailers in particular held far too much inventory heading into the 2008 collapse in retail sales. Inventory planning has its tradeoffs: Too much inventory leads to weak profit margins and returns on capital, while too little inventory leads to missed sales opportunities. The recent buying behavior of many retailers reveals that most are willing to sacrifice sales in order to protect profit margins and are not expecting a quick recovery to peak sales levels.

This nasty recession has forced every business involved with physical trade — from manufacturers to distributors to retailers — to reassess how much inventory is appropriate to hold. The inventory-to-sales ratio provides a rule of thumb. This ratio has historically trended downward as more businesses adopt just-in-time inventory management. But during the 2008 crisis, this ratio spiked as sales dropped much faster than inventories.

According to the U.S. Census Bureau, the economywide inventory-to-sales ratio was 1.3 at the end of October 2009, down from an early 2009 peak of 1.45. This ratio is now back to the 2004–2007 average of 1.3, so unless final demand picks up dramatically, the widely anticipated inventory rebuilding cycle will be tame.

With many businesses still shell-shocked from the crisis, it’s unlikely that we’ll see a rush to preemptively build more speculative inventories. Yet the trucking stocks have already priced in a robust recovery in freight volumes and pricing.

While I think that trucking is the industry with the most downside right now, a similar situation is likely to continue for a number of other industries, including bulk shippers and companies that operate in similar transportation niches. Stay away from these issues until further notice.

[Ed. Note: Some small-cap trucking names worth watching for a downside play include Quality Distribution (NASDAQ: QLTY), YRC Worldwide (NASDAQ: YRC), and Arkansas Best (NASDAQ: ABFS).]

Regards,
Dan Amoss, CFA

December 22, 2009

Why Inventory Numbers Point to a Tame Recovery for Trucking Stocks was originally featured in the Penny Sleuth.

In short, people seem to have had enough of stocks. They’re moving into bonds. Oddly, and as strange as it sounds, this inflection point just might be the turning point for stocks. Put another way, investors as a group just got the last 10 years wrong. Thinking in contrary fashion, they may get the next 10 years wrong as well.

Stocks, as a group, have not done well now for 10 years. As of yesterday, if you had put $10,000 in the S&P 500 10 years ago, you would now have about $6,200 — a loss of 38%. And it’s worse than that considering the effects of inflation.

If you look at bonds, they’ve done much better. The Merrill Lynch U.S. Corporate Master index, a measure of high-grade debt, for instance, has gained 58% in the last 10 years.

You can hear the gears turning. Stocks have not done well, investors reason, and bonds have done much better. Therefore, buy bonds.

That’s what they are doing in large numbers. Here are some telling quotes from a recent Wall Street Journal article. From a manager of $185 million in individual accounts:

“I think a lot of investors have just had it with the equity markets… The baby boomers are saying, ‘I’m too old to make up these losses… I’m not going to risk it.”

Another, who has $414 million in assets under management:

“The credit markets are the market, and the stock market is a sideshow, period.”

One more, from a money manager of $900 million in assets:

“The debt markets seem pretty well understood, while the outlook for equities is still murky.”

Even the Journal itself waxes on about the simplicities of bonds. You only have to figure out if the company can meet the minimum payments of the bonds. You don’t have to worry about figuring out growth rates or what earnings per share may be. “With no end to the recession in sight,” the Journal sighs, “logic for buying equities is wavering.”

(If you’re like me, you’re probably suspicious of someone who repeatedly says “equities” when the plain-old word “stocks” suffices.)

So the stock market has been cut in half… and NOW these advisers are all cheerleaders for the bond market. Already this year, bond funds have added some $15 billion to their assets. Last year, investors took out nearly $200 billion from their stock mutual funds.

Going with what’s worked well in the past sounds reasonable, but investing is an odd thing. It’s not like many other areas of life.

If you get a bad haircut after going to the same barber for a few times, you stop going to that barber and find another. You don’t stick with bad barbers and you don’t go looking for bad barbers.

And if you get a good meal at a restaurant, you keep going back. You don’t worry about the restaurant getting too popular. You don’t look for a dive where hardly anyone goes, thinking you’ll get a better meal.

Investing is almost the exact opposite — which is one of the things that make it so hard. The best way to make a lot of money in stocks is to buy something good that few people seem to want. Then you sit on it, and when people get excited about buying it again, you gladly sell at a premium price and make some multiple on your initial investment.

All the greats made most of their hay in just this fashion — John Templeton buying up small-cap stocks in the Great Depression… Warren Buffett picking up The Washington Post and adding shares of GEICO in the depths after the 1973 market tank… and on and on…

The best deals become available during times like now. That much is a fact. I’m not saying it’s easy. I’m not saying all stocks will rise. Some of them are going to go to zero. Some of them are never going to come back. But some of them are great businesses and have great assets that will certainly come back at some point.

I know it can be tough when stocks you own are down so much. But looking ahead, I can’t help but be more optimistic…

Regards,
Chris Mayer

February 27, 2009

Why You Shouldn’t Move to Bonds was originally featured in the Penny Sleuth.

We all thought the age of easy credit killed layaway for good late last century. There simply wasn’t the need to put a new television on layaway for $15 a week when you could just buy now…and pay later. But with credit markets frozen and the average consumer swamped with leftover debt, retailers have grabbed back onto their old layaway strategies.

Kmart pushed a revamped layaway program during the Christmas shopping season. But America’s retail Goliath continues to hold out—Wal-Mart discontinued its layaway program several years ago… and its showing no signs of bringing it back.

In fact, we seriously doubt that layaway will ever again become as popular as it once was. Regardless, cheap, payment-oriented retail methods should flourish while the average and below-average income shopper retreats to survival mode.

What the consumer needs now more than ever are options—especially when it comes to the purchase of big-ticket items. That’s why we’re taking a close look at the rent-to-own industry.

Two small-cap names come to mind in this field. There’s industry leader Rent-A-Center Inc. (RCII: NASDAQ) and close competitor Aaron Rents Inc. (RNT: NYSE). Their business models are simple: both stores rent and sell furniture, appliances and electronics

This earnings season has been downright poor across the board. But these rent-to-own firms are one of the few bright spots in today’s market. Rent-A-Center posted a fourth quarter profit and finally seems to be benefiting from a recent restructuring plan that reduced its store count to 315 locations. Aaron Rents posted strong fourth quarter numbers and raised 2009 guidance.

Both RCII and RNT have been solid post-crash performers. Aaron Rents is hovering near break-even since the beginning of November, while Rent-A-Center is up nearly 50%. These two firms have actually benefited from the growing ranks of unemployed workers.  The connection is clear: If you have no job, you’ll be hard pressed to get store credit. But you’ll still need to replace a broken appliance…

According to Cowen and Co. analysts, Aaron Rents in particular is helping customers who have not been able to get credit at Best Buy or Sears but still have to replace a broken fridge or other large appliance.

Will major retailers like Best Buy and Sears try new layaway or rent-to-own plans in an attempt to boost slumping sales? In our opinion, the economy will have to get much worse for this scenario to unfold…

Best,
Greg Guenthner

February 13, 2009

Cash In on Our Rediscovered Layaway Culture was originally featured in the Penny Sleuth.