PSB Portfolio Update April 2012

April 19, 2012

Small-Cap Breakout Is (Still) Imminent!

Let’s face it, penny stocks are lagging behind their large cap brethren.

Over the last month, the Russell 2000 small cap index is down about 3.5% while the S&P 500 and Dow are only down about 1.5%.

And it’s the same story when you look at their performance over the last year.  The S&P is up nearly 8.5% and the Down has tacked on 9.5% while the Russell 2000 has struggled to breakeven.

What’s behind the recent price action?

I think it has to do with dividends.  In the current low interest rate environment, investors are looking for yield.  So they’re bidding up stocks that pay a dividend and shunning those that don’t.

Remember, stocks in the Russell 2000 have a dividend yield of 1.4%, the S&P’s dividend yield is 1.9%, and the Dow checks in with a 2.4% dividend yield.

Clearly, the more dividends they pay the better they’ve performed.

On the face of it, that may not sound good.  But when you dig a little deeper, you’ll see it’s not such a bad thing after all.

Obviously, we want penny stocks to perform well at all times.  But don’t forget, investing runs in cycles.

Right now large cap stocks are outperforming.  Next quarter we could see small cap stocks outperform.  And the quarter after that it might be growth or value stocks.

In other words, penny stocks are cheap right now.

But it’s not going to stay this way.  Once investors inevitably turn their focus to the next hot thing, penny stocks should be at the top of the list.

And based on the chart of the Russell 2000, I think penny stocks are in for a great rest of the year.

As you know, I’ve referred to a cup and handle chart pattern forming on the chart of the Russell 2000 the last few months.

It’s considered a bullish continuation pattern.  And it has a great track record of occurring just before a stock or index makes a big move higher.

And while it hasn’t played out as quickly as I had hoped, the pattern is still intact.  As you can see in the chart below, the Russell 2000 is setting up in a perfect cup and handle.

The Russell 2000 was in an uptrend (green line), it’s gone through a multi-month consolidation (blue line) to form a cup, and it’s forming a handle as it consolidated again (red lines).

In short, if this pattern plays out as expected, small cap stocks are on the verge of a 20% surge.

Now on to the position updates…

Position Updates

Please Note:  We don’t necessarily update every open position each month.  We focus on the positions experiencing significant news, notable price movement, or a change in recommendation.  Please refer to the Performance page on our website for our current buy, sell, or hold recommendation for any positions not mentioned in the Update.

. . . . The Hackett Group (NASDQ: HCKT) – Sell

HCKT hit our $6.50 price target earlier this week.  That’s a 50% gain from our $4.34 purchase price.

No doubt about it, the consulting firm has had a great run.  But it’s time to lock in our profits.

Sell your shares of HCKT now for a 50% gain.  Congratulations on a successful trade.

. . . . Triangle Petroleum (AMEX: TPLM) – Buy up to $7.17

TPLM has had a rough month.  Earlier this week, TPLM released their most recent quarterly earnings.  And it wasn’t pretty…

They came up short of revenue expectations and missed big on earnings per share.  As a result, the stock slipped from $7.17 to $5.50 per share.

Here’s the thing…

The Bakken oil field driller and fracker had a horrible quarter.  They’re obviously not getting oil out of the ground as fast as expected.

But they’re still loaded with great assets.  And they’re forecasting significant production growth in 2012.

What’s more, their new fracking business, RockPile Energy Services, is scheduled to begin working on July 1st.  So new income streams are coming online soon.

The bottom line is this looks like a great buying opportunity.  However, in light of the recent decline in the stock price, I’m lower the buy up to price to $7.17.  Go ahead and buy TPLM up to $7.17 if you haven’t already.

. . . . Carriage Services (NYSE: CSV) – Hold

CSV has had a great run.  Over the last month, the funeral home operator’s stock shot up from $6 to $7.50.

What’s more, we’ve collected $1.00 in dividends since we recommended the stock last year.  That’s good enough for a 40% gain on this rock solid company.

Obviously, that’s great news.  Continue holding CSV for bigger gains.

. . . . Culp (NYSE: CFI) – Hold

CFI continues to shine.  The share price shot up to a high of $11.81 before pulling back a bit.  That’s an excellent 32% gain.

What’s driving the impressive gains?

Simply put, solid revenue and earnings growth.

As a result, analysts have been busy increasing their earnings estimates.  In the last month, analysts increased their earnings estimates for the year ending this April from 75 cents to 76 cents.  And they’ve bumped up next year’s earnings estimates from $1.00 to $1.03 per share.

Continue holding CFI for bigger gains.

. . . . Modine Manufacturing (NYSE: MOD) – Buy up to $9.00

MOD has struggled out of the gate.  The stock has slipped from $9.08 to under $8.00 per share.

The decline comes without any news about MOD.  But weakness in Europe, where they sell 37% of their products, is likely to blame.

The stock is trading at a ridiculously cheap PE of 6.7x forward earnings and a PEG of just 0.35.  If MOD can manage to meet or beat earnings estimates this quarter, it could really pop.

In light of the recent selloff, I’m lowering the buy up to price to $9.00.  Go ahead and buy MOD up to $9.00 if you haven’t already.

. . . . Krispy Kreme Doughnuts (NYSE: KKD) – Hold

KKD has had an interesting month to say the least.

On March 20th, they reported a strong 4th quarter.  Revenue beat expectations while earnings of 6 cents per share met expectations.  And their forecast of $0.35 to $0.41 EPS in 2013 topped Wall Street estimates of $0.35.

Sounds like a great earnings report to me.  However, the solid quarter and positive outlook was met with a swift selloff.

This looks to be nothing more than profit taking after the stock soared 28% to start the year.  After all, the bullish case for the stock is still intact.

In fact, KKD is already on the upswing again.  Continue holding KKD for greater gains.

Action To Take

• Sell The Hackett Group (NASDAQ: HCKT) for gains of 50%
• Lower the buy up to price on Triangle Petroleum (AMEX: TPLM) to $7.17
• Lower the buy up to price on Modine Manufacturing (NYSE: MOD) to $9.00

Category: PSB Portfolio Updates