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Monday, November 7, 2005
Consolidation
Good evening SwingTraders! We saw consolidation in
the markets on Friday after the previous two days of
sizable gains. Although we do expect a short term top
this week, we don't expect a heavy sell off, just a
retrace and consolidation. Many stocks from our watch
list had moves up last week, so we're doing some
editing and getting a new watch list together. We
would like to point out that any stock we suggest is a
valid trade, even if we don't trade it. We may decide
that we're too heavy in one sector, so won't go into a
stock from the list even though we like it, but we
hope some of you will play them anyway. PROG, DGII,
SOHU, and several others had very nice moves last week
that we missed entries on or decided not to purchase,
but they were still great trades. We're in a 50% cash
position right now, but will be going into more
positions as we continue into November, one of the
traditionally strongest market months. We will also
start watching some little, lower float stocks. As
big caps reach lofty prices, money often flows into
these smaller stocks. When we trade these, however,
we do so with smaller positions since they're not as
liquid as mid and big caps. By smaller position, we
mean 5% of our portfolio value. We also trade them
short term, meaning one to three days. We have
several we're watching for signs of interest and will
monitor them through the coming weeks. By request, we
are re-running our five part series on Trend Lines
with some additional information and charts. Trend
Lines are an important part of our chart analysis that
often help us identify support levels when stocks
reach extreme technical readings.
| In Today's Trader's Tribune:
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Trading Ideas for
Monday
(Editor's Note: These are stocks we are putting on watch for the week ahead. It does not necessarily mean that we’ll be entering a position on Monday.) |
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Webex Communications (Ticker: WEBX)
Trade Type: Long
Current Price: 23.40
Entry: 22.50 to 23.10
ST Target: 25.00
Stop: 21.90
Risk: Medium
Very Good risk/reward ratio
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WEBX is a solid company with a lot of cash, no debt, and healthy balance sheet. They missed earnings by a penny, lowered fourth quarter guidance by 5% and promptly dropped 15%. We would like entry closer to the 22.50 support level. If we see that break, the next real support level is 20.00. WEBX is a leader in internet file sharing and conferencing, an area of potentially high growth in the coming years. The longer term investor may view this range as an excellent entry, but we're looking at it more for some short term tax loss selling, then rebound. We won't enter at current level since the short term upside is probably limited to 25.00, but on a retrace to 22.50 area we are very interested. The chart shows an initial bounce already, now we're looking for a slight retrace.
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Friedman Industries (Ticker: FRD)
Trade Type: Long
Current Price: 5.66
Entry: 5.00 to 5.75
ST Target: 7.00
MT Target: 10.00
Stop: 4.70
Risk: Low
Excellent risk/reward ratio
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From the why the heck is this stock so cheap file, FRD seems to be one that is forgotten and lost. Trading just above the 52 week low with a 52 week high of 16.56, despite posting .16 in earnings last quarter. Trailing twelve month price to earnings ratio is under 8, and the company pays an annual dividend that equates to 5.6% at current price. The company supplies pipe and coil to the oil industry, so this is a peripheral play to increased future exploration. Margins were hurt a bit due to high steel prices last quarter, but the company is showing steady revenue growth, and exceptional free cash flow. With earnings due by the 15th, this could get a sudden rise. We like this one a lot at this price, and the chart is showing a double bottom with the first signs of accumulation. Note that the current price is roughly asset value, and the company has an exceptional balance sheet. A noticeable decline in earnings last quarter created the sell off despite higher revenue, so we'll have to see if the compan
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Connetics (Ticker: CNCT)
Trade Type: Long
Current Price: 12.00
Entry: 11.00 to 12.00
ST Target: 14.00
Stop: 10.60
Risk: High
Excellent risk/reward ratio
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Back on watch and we think ready for the "revenge" trade after our stop out on it a few weeks ago. We can't figure out what is wrong with this picture. The company reported earnings of .39, but if you deduct a one time gain, earnings were .21, slightly below the .23 estimate. Then they raised fourth quarter and full year guidance, and announced a 50 million dollar share repurchase program. The results in an analyst downgrage to market perform, but a price target of 17.00 causing the stock to sell off to 12.00. What we think is happening is with the recent down trend while the markets have rally, CNCT is seeing early tax loss selling, and frustration selling. We're ready to start accumulating and believe a nice rebound is ahead in the coming weeks. We may get a last gasp of selling pressure first, so we'll accumulate slowly and in quarter positions.
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Imax Corp. (Ticker: IMAX)
Trade Type: Long
Current Price: 8.30
Entry: 7.90 to 8.50
ST Target: 10.00
Stop: 7.70
Risk: Medium
Excellent risk/reward ratio
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IMAX sold off after missing earnings estimates, but with the release of "Chicken Little" in the new 3-D IMAX format, interest could pick up in the week ahead. We're looking at this as a short term trade only, and volume was impressive Friday at two times average. Watching closely for a dip Monday morning but we won't chase a gap up.
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LaserScope (Ticker: LSCP)
Trade Type: Long
Current Price: 21.33
Entry: 19.50 to 21.00
ST Target: 26.00
Stop: 18.80
Risk: High
Excellent risk/reward ratio
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LSCP is complicated. The maker of medical laser systems beat earnings but missed on revenue. Although they predicted 20% to 25% growth for 2006, Medicare lowered the amount of coverage for certain procedures that use their devices generating concerns that they may have a slow down in new sales. The stock hit a new 52 week low on Friday, a 50% discount to its 52 week high. We think there may be on wave of selling left and would look for entry at that time. This has been a popular trading stock over the last year, and can be very volatile. When it rebounds, it should return a nice short term percentage gain. The risk comes timing the bottom.
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Ventana Medical (Ticker: VMSI)
Trade Type: SHORT
Current Price: 39.64
Entry: 39.50 to 40.50
ST Target: 37.50
Stop: 41.30
Risk: High
Very Good risk/reward ratio
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VMSI missed estimates at earnings but reaffirmed full year guidance. Regardless, we believe the stock is overvalued at these levels, despite always carrying a lofty valuation, and they recently lost a patent infringement suit against a competitor. Expenses in appeal could cause them to miss next quarter as well, so we're watching this as a nice short entry. Our short term target could easily be overshot to 35.00. There should be stiff resistance around the 40.00 level.
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Positions Initiated
Friday |
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Key Tronics (Ticker: KTCC)
Trade Type: Long
Closed: 3.39
Entry: 3.35
ST Target: 4.00
MT Target: 5.00
Stop: 2.86
Risk: Medium
Excellent risk/reward ratio
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KTCC dipped to 3.30 after hovering near 3.50 most of the day so we decided to take a starting position. This is a potential January effect stock so we started with only one quarter the total number of shares we're willing to own. We wouldn't risk more than 12% of total portfolio value in this stock. We do think a bounce is likely from these levels in the week ahead, so we're willing to add to our position around 3.40, or certainly on a dip to 3.20, with a final entry around 3.00. Please see this week's small cap profile for more information about the company. Current level is a traditional support area, incidentally.
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Update of Current Positions |
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FMTI: Long (1.77 average, closed Friday at 1.82)
Waiting on a dip to add to our position, preferably at 1.65. This is a longer term investment for us, so little new to report.
Click here to see updated chart
YAKC: Long (3.44 average, closed Friday at 3.61)
There's been decent news out of the telecom sector, so YAKC could see a lift soon. We'll add under 3.50 with stop at 2.90, and short term target remains 4.50.
Click here to see updated chart
TISA: Long (2.52 average, closed Friday at 2.77)
Earnings should be out soon, but they don't pre announce the date, so we'll keep an eye out for their release. Target mid 3's with stop at 2.25.
Click here to see updated chart
WEDC: Long (4.98 average, closed Friday at 5.04)
Earnings are scheduled for the 16th, so we should get a rise ahead of the report. We will add to our position on any dips in the week ahead with stop at 4.70 and a 5.85 target prior to earnings.
Click here to see updated chart
HTRN: Long (7.31 average, closed Friday at 7.11)
HTRN didn't dip enough Friday for us to add. We will watch for Friday's low of 6.87 to hold and consider adding, alhthough we'd really like the 6.50 level. We're still targeting 8.00 to 8.50 for a rebound.
Click here to see updated chart
AACC: Long (18.40 average, closed Friday at 18.50)
Showed some strength into the close on Friday, so we won't hesitate to add at this level. Stop at 17.30 with 20.00 target. We would prefer to add closer to 18.00 on a dip.
Click here to see updated chart
IVII: Long (9.58 average, closed Friday at 9.80)
Earnings release Wednesday after the close. We expect a run into that, targeting high 10's. Stop at 9.00. We will make a decision closer to Wednesday as to how much we hold through earnings.
Click here to see updated chart
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Continuing Watch List |
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Long
DECK:
DECK traded down early but moved up with the retail sector on Friday. The 18.00 level doesn't scare us for entry with a second scaled buy planned in the low 17's and stop at 16.70. Any weakness Monday should be a buying opportunity.
PKTR:
Still hovering around 8.00, and we're still watching for a retrace to mid 7's.
BFCF:
BFCF should report earnings soon which we'll watch for prior to entry. Mid 5's should be safe.
DWRI:
Might get some interest ahead of earnings and with continued strength in retail. Low 8's should be a good entry but won't hold through earnnigs on Thursday. We would like to see more volume.
ABLE:
Made a nice move up on Friday. We'll keep on watch with energy prices.
ESMC:
Recovered on Friday, but on light volume. We would like to see earnings prior to entering.
SOHU:
Jumped up Friday with a solid gain, as we said was likely after Thursday's trading. We'll watch for a dip and buying interest on that dip to consider entry.
BEBE:
Like DECK, BEBE moved up with retail. We'll see if there's follow through.
STKL:
Seems to be stabilizing after earnings miss, but we don't see a short term catalyst so we'll watch for a few weeks.
CRNT:
Continued up, so we missed the 3.50 entry. Doubt we'll play it any time soon.
ITWO:
Jumped up off the 12.00 level late Friday. Watching for follow through.
QTWW:
Downgraded Friday and down to 3.00. Doubt we'll enter ahead of earnings. We think this will be a better December buy after tax loss selling.
RSAS:
Gapped up on no news Friday and had a nice move up. Missed it.
Short
YHOO:
Watching for a possible double top around 38.50.
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Today's Trading Tidbit |
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Trend Lines, Part I
Trend Lines, or TL’s, are one of our most valuable technical indicators. A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance. The direction of the line, up or down, determines the trend. A flat horizontal line of connecting points establishes a support or resistance level. It takes at least two points to establish a trend line, and the more connecting points in the line, the stronger the trend. Some of the strongest TL’s combine points that formerly made a line of resistance, but once that line was crossed, became a support line.
Many of the stocks we trade have broken under traditional support measures, such as the 50 day simple moving average or 200 day simple moving average (simple moving averages, or SMA’s, represent the average price a stock has traded over that period of time). We then have look for Trend Lines that may provide support. We look for these on both short term and long term charts.
This is the beginning of a 5 part series on Trend Lines, and we’ll examine more intricate TL’s and chart patterns they form in the next four parts. The first key to understanding Trend Lines is recognizing the most basic TL’s. The following three charts display the most basic Up Trend Line (UTL), Down Trend Line (DTL), and horizontal line.
The ADSK 2 year weekly chart shows a very strong Up Trend Line that formed after the previous resistance level was broken, and provided support throughout the ascent. Note the circled price points that form the TL:
The PEGS one year weekly chart shows a significant downtrend line that provided resistance throughout the decline. Note the circled price points that form the TL:
The CULS chart shows how horizontal lines connecting a series of resistance and support price points form long term support levels. When the first support line was broken, the second line provided support. Please note the circled price points showing former resistance and support.
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This Week's Small Cap Profile
(appears in each Monday edition) |
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KeyTronics (TICKER: KTCC)
Friday's Closing Price: 3.39
Shares Outstanding: 9.69 million
Public Float: 9.60 million
Market Cap: 32.86 million
TTM Revenue: 202.9 million
TTM Revenue per share: 20.43
Price to Sales: .16
TTM Earnings per share: .44
MRQ Revenue: 44.3 million
MRQ Earnings per share: .07
Cash per share: .15
Book Value per share: 2.85
Business Description:
Key Tronic Corporation, doing business as KeyTronicEMS Co., provides electronic manufacturing services (EMS) primarily in the United States, Mexico, Ireland, and China. The company also manufactures keyboards and other input devices for personal computers, terminals, and workstations. It provides various EMS services, including product design, surface mount technologies for printed circuit assembly, tool making, precision molding, liquid plastic injection molding, prototype design, full box builds, and printing screened silver flexible circuit membranes. Its customers include some of the world's leading original equipment manufacturers. Key Tronic was founded in 1968 and is headquartered in Spokane Valley, Washington..
Our Commentary:
KTCC is a pure value play and turn around story over the past two years. For the fiscal year ended July 2, 2005, KeyTronic's net sales rose 36% to $202.9M. Net income totaled $4.4M, up from $110K. Revenues reflect an increase in sales of SMT printed circuit board assemblies, printer & printer accessories and consumer electronics, due to higher end market demand of the company's primary customer programs. In their seasonally weakest first quarter, they reported earnings .04 better than the prior year, despite lower revenues. Margins have steadily improved over the past 18 months.
The primary question is, why did KTCC sell off so hard after their most recent earnings report? The first concern was the drop in revenue in their first quarter, and possible delays in OEM programs scheduled to start in the second quarter. However, the revenue will eventually be there from existing customers, and they are actively pursuing several new contracts, any of which could make up for shortfalls from current customers. More importantly, the company has done an exceptional job of controlling costs and improving margins, resulting in higher earnings despite slightly lower revenue. So although revenue growth is always preferred, when the current low valuation is taken into account, this would appear to be a minimal concern going forward.
The second issue was the wide range of guidance for their second quarter, earnings per share between .06 and .10. We've followed KTCC for over a year and, one thing we notice is, the company consistently hits the high end of their guidance, or beats slightly. We expect this trend to continue since the company has worked diligently to improve margins.
While we often prefer companies that demonstrate growth, in the case of KTCC, we see the recent sell off as presenting an opportunity for value. Any new customer wins will immediately erase fears of declining revenue, and the company's demonstrated ability to control costs, improve margins, and increase earnings should compensate for a short term revenue decline. KTCC is projecting FY 2006 earnings of .40. With a FY price to earnings ratio of under 8.4, this is an extremely attractive level for entry in our opinion. Any upside surprises or new contracts could cause a very dramatic rise in share price, and the company is consistently conservative in its own guidance.
KTCC is resting just above a traditional support level with additional support in the 3.00 range. We are willing to accumulate through potential tax loss selling with a stop at 2.75. We believe the current very low price to sales and price to earnings multiples represent an attractive entry. KTCC is a potential "January Effect" stock that may see increased buying interest prior to the end of the year due to the value at these levels. We are looking for a rebound to 4.00 short term, and 5.00 to 6.00 in January.
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Short-Term Market Overview |
The markets showed consolidation on Friday after a mixed Employment Report. Both the Nasdaq and DJI opened higher, traded down most of the day, then rallied at the close. The majority of the day was spent in a narrow trading range on light volume. By the end of the session, the DJIA gained 8.17 to close at 10,530.76. The Nasdaq rose 9.21, closing at 2169.43. The Employment Report showed a gain of 56,000 jobs in October, fewer than the expected 100,000. The unemployment rate fell from 5.1% the prior month to 5.0%. Hourly earnings increased a greater than expected .5% indicating possible inflationary forces at work, but also raising hopes for the holiday shopping season. A solid increase in same store sales figures from Walmart and Target lead to a rise in retailers throughout the day. With very little economic data until Thursday of the week ahead, and the majority of major earnings reports out of the way, the markets could continue the current up trend based on overall strong earnings reports. Key r
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| All Trader's Tribune charts created at StockCharts.com.
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