PICKINGS
| Market |
Trend Direction |
Trend Start Month Price |
Latest Signal Month Price |
| S&P 500 |
Buy |
Oct 2003 1050 |
Sep 2006 1350 |
| NASDAQ 100 |
Buy |
Jul 2003 1300 |
Nov 2006 1800 |
| Russell 2000 |
Buy |
Aug 2003 500 |
Nov 2006 785 |
| 10yr T-Note |
Sell |
May 2004 110 |
Feb 2006 108 |
| Euro (US $) |
Buy |
Nov 2006 $1.33 |
Nov 2006 $1.33 |
| Crude Oil |
Buy |
Sep 2002 $30 |
Jul 2006 $75 |
| Gold |
Buy |
Sep 2001 $290 |
Sep 2005 $470 |
Parabolic Stock Picker uses a short-term trading strategy but monitors the broader market outlook.
As seen below, we see equity markets still in a long-term uptrend started Jul-03 (for NASDAQ). In
January, stocks posted decent gains to start the new year, with NASDAQ doing the best, up +2.0%;
Russell 2000 rose +1.6%, while S&P 500 was up +1.4%. The only global index to break out to a new high this
month was the Nikkei, Japan’s equivalent to NASDAQ; it gave a repeat Buy signal for the first time since
Aug-05 (Buy trend started Feb-04) on signs of continued strengthening in the Japanese economy.
Nikkei also rallied because of weakness in Japanese Yen, aiding exporters; JY hit four year low
against Dollar, and record low vs Euro, flashing a Sell signal as interest rates were not increased despite
the better economic news. Crude Oil lost almost $10 at its January low point, but rebounded to end the
month down $3 (at $58) and avoid a Sell signal. Treasury bonds slipped -1% as interest rates keep trending
higher with strong US economic signals; investors had hoped the Fed would start lowering rates, but we do
not expect it in 2007.
Parabolic Stock Picker has previously written about the folly of trying to invest in takeover targets.
Pinning your hopes for a stock’s success on the chance it may be bought by somebody else does not seem like
the best way to assure a winning portfolio. Too often, buyout rumors turn out to be just that, rumors, and
the stock ends up going nowhere special. A stock needs to be bought on its own investment merits, not
because it is in a hot sector or identified by some pundit as a takeover possibility.
On the other hand, the recent pickup in buyout activity, especially by private equity funds, cannot be
ignored. These funds use some of the same financial metrics the Parabolic Stock Picker uses, to find
attractive candidates, and could end up targeting our Picks. It is no secret that one way buyout funds make
their returns is by using leverage, adding debt to the balance sheets of companies they buy. This way, the
funds can make bigger purchases with less of their own equity in much the same way a homeowner uses a
mortgage.
In order for this strategy to work, the buyout funds need two things that Parabolic Stock Picker
looks for: low current debt and strong cashflow. We like low debt-equity (DE) ratios because company
profits flow to the benefit of stockholders; buyout funds like low DE ratios because it means they can
leverage the balance sheet so profits flow to their investors. If a company already has high debt levels,
the game cannot be played.
Private equity funds need companies with strong operating cashflow (one of our favorite measures) if
they are going to be able to service the new debt they pile on. Parabolic Stock Picker likes strong cashflow
because it means a company can readily sustain an economic blip, or other issues, without falling into
distress and starting to chop operations like a panicked homeowner chopping the furniture for firewood
because they didn’t have cash for a load of heating oil. Cashflow also allows a company to pressure
competitors, to grow its business, by funding marketing campaigns or new initiatives; buyout funds want
cashflow to pay debt.
So, we look for some of the same company characteristics as buyout funds, if for different reasons,
but Parabolic Stock Picker does not count on these funds to achieve our market beating returns. We expect
stocks to rise in value because the companies actually have improving, or fast growing, operations that
were undervalued by the market at large. While others, including private equity investors, may see the same
thing, we do not depend on one investor class to drive returns. In fact, a Pick has the best chance to Go
Parabolic if it has interest from a wide variety of potential buyers all driving the price higher.
06-Jan-2007
In 2006, Parabolic Stock Picker beat the market for the second consecutive year, and we don’t mean a
mild beating; we’re talking about an old-fashioned whipping. Our Picks returned a total +31.2%, almost
double the +17% gain for the Russell 2000 small cap index, and more than 3x the NASDAQ’s +9.5% gain.
With such numbers, some might ask what kind of risk is being taken to earn these outsized returns. What
kind of volatility does an investor face trying to follow these Parabolic portfolios?
The answer is that Parabolic Stock Picker consistently outperforms the indices and does it with lower
volatility. Over the past two years, we beat the Russell 2000 in six of eight quarters and beat NASDAQ
in all but one quarter. During that time, the average quarterly gain was +6.6%, with a range from -3.4% to
+26.6% that means the worst loss was covered almost 8x by the best gain.
At the same time, Russell 2000 averaged just +2.6%, ranging from -5.6% to +13.7%, a noticeably less
attractive profile than that sported by Parabolic Stock Picker. NASDAQ is even less appealing, with a
puny quarterly average of +1.5% the past two years, ranging from -8.1% to +6.9%, with a best quarter that
doesn’t even offset its worst quarter.
Parabolic Stock Picker’s +21.5% gain in 2005, in the face of very poor performance by all of the major
stock indices, might have been regarded as beginner’s luck. Or, it might have had investors wondering if the
gains came all in one month that, if missed, blew the whole year. In fact, our Picks made money consistently
through last year and this year, except for the consecutive -3.4% losses in 2Q06 and 3Q06.
Parabolic Stock Picker subscribers who follow our complete portfolios, and invest equally in all Buys as
we do, are not likely to stay in the red for long no matter when they start. On the risk question, our
investment strategy does not require margin investing or other leverage; the winning returns posted the
past two years are cash returns. We also don’t invest in exotic securities to achieve our returns; all
investments are exchange traded common stocks.
As odd as it sounds, Parabolic Stock Picker thinks it is not necessary to take extraordinary risks to
achieve extraordinary returns. Small cap value investing offers opportunities to find hidden values,
Bargain Growth, where above average returns can be earned by those patient enough to search for, and have
the courage to invest in, those stocks ready to Go Parabolic.
09-Dec-2006
In November’s issue, Parabolic Stock Picker discussed value of diversification to reduce portfolio risk,
by holding a mix of businesses, in different industry sectors, rather than putting all one’s eggs in one
industry basket. This month, we review industry groups of our Top Ten Picks of 2006 (see p. 4) to learn
which sectors have produced the best gains this year and whether our belief in diversifying is proven out by
the returns.
All of the trade’s on our Top Ten Picks of 2006 list returned at least +45%, so any hints we could learn
about their success would be worthwhile. The first thing to notice is that seven technology stocks are on
the list; this is a broad description, and the companies break down into three distinct subgroups of
software, services and equipment, but our strength this year was clearly in the technology arena.
Parabolic Stock Picker also notes that none of this year’s Top Picks are healthcare stocks; however,
before we jump to conclusions, we must remember that three of last year’s best stocks were medical firms,
including OTC cold/flu drugmaker Mattrix Initiatives (MTXX), our second highest gain of 2005 at +78.3%.
While we didn’t see any health stocks on the list, two stocks at the top of this year’s heap are both
specialty chemical businesses, at least a cousin to the medical field. Grain producer MGP Ingredients
(MGPI) already had a nice business from sales of wheat gluten and drinking/industrial alcohol before the
ethanol craze swept the market, fueling our Top Pick’s +91.2% gain. Chemical supplier American Pacific
(APFC) was up a Parabolic +85.1% in 41 days on being selected by Roche to assist Tamiflu production during
Spring’s flu scare.
Parabolic Stock Picker was surprised to see no direct to consumer businesses on the list; in 2005, we
had MTXX (see above) and large women’s clothing retailer United Retail (URGI), +42.8%, in the mix. Auto
parts supplier Keystone Automotive (KEYS), +48.6%, may be dependent on consumer spending but sells
products to repair shops, not individuals. Similarly, data storage device maker SimpleTech (STEC), +55.0%,
sells some drives to consumers but mostly to manufacturers; note that STEC also made our 2005 list with
a +29.8% gain.
Big gains were not dependent on buyouts; only two Top Ten Picks of 2006 made the list this way.
Computer component maker SBS Technologies (SBSE) was just breaking even before GE made a very rich
cash offer, for a +48.2% gain; signal processor Essex (KEYW) added +20% this month on sale to Northrop
Grumman but was already up over +25%. Parabolic Stock Picker sees these strong gains as simple
recognition by the market that the stocks were undervalued, and validates our selection process for finding
Bargain Growth stocks ready to Go Parabolic, regardless of their industry sector.
