PSB Portfolio Update February 2009

| February 17, 2009

February 17, 2009

Small Cap Stocks Showing Strength

According to a Wall Street adage, small cap stocks usually outperform large cap stocks in the first twelve months following a recession.  If recent market action is any guide, small caps are setting up to once again lead the market out of a recession.

The mainstream financial news has not yet caught on to this developing trend.  They’re too focused on arbitrary performance numbers like the past 52-weeks, year-to-date, month to date, etc.  These numbers are interesting but have limited research value.

If you want to find money-making trends, you have to be more creative.

Take a look at the chart below.  It shows the performance of the Russell 2000 versus the Dow since the November market lows.


Both indexes rallied hard off the bottom going into the end of 2008.  Take note how the Russell initially lagged behind the Dow but then caught up at the rally’s peak.  This shows small caps were getting stronger as the rally progressed.

After peaking in early January, both indexes began moving lower.  They moved down largely in lockstep with the Dow leading the way.  Near the end of January though something important happened.  The Russell began moving sideways while the Dow continued falling.

As I write this, the Dow is up just 5.3% from the November lows while the Russell is up a whopping 16.3%.

What’s it all mean?

A major shift is happening in the market.  Investors are favoring small caps over large caps.  They’re positioning for small caps to lead the market out of the recession.  It means the time is now for adding high quality penny stocks to your portfolio.

Now on to the updates…

Position Updates

. . . China Security & Surveillance Technology (CSR) – Buy up to $6.60

CSR is a new trade for us this month.  Following our recommendation, CSR rallied hard up to $6.24.  A gain of 13% in just eight trading days.  The shares are pulling back on weakness in the overall market… but the upside potential far outweighs the downside risks.

. . . TETRA Technologies (TTI) – Buy up to $6.25

TTI was also introduced in the February issue.  The shares immediately rocketed up to $6.28.  We had gains of 21% in just five trading days.  Then management threw us a curve ball… they preannounced weaker than expected fourth quarter and full year 2008 earnings.  They also revised their 2009 profit outlook down from $1.18 per share to a range of $0.70 to $0.90.  We still believe in our investment thesis, but we’ll be watching this one closely.

. . . GigaMedia (GIGM) – Buy up to $7.50

GIGM continues to trend higher along its 20-day moving average.  The shares are up another 11% since our last update.  As we pointed out in our buy recommendation, online gaming companies are proving immune to the global recession.  As consumers stay home to cut back on spending, they’re turning more to online gaming as a relatively cheap form of entertainment.  More important, online gaming companies are one of the few defensive plays with high earnings growth rates.

. . . American Software (AMSWA) – Buy up to $5.88

AMSWA has rallied 20% off its January low.  The shares are moving up as investors show renewed enthusiasm for technology stocks.  Management announced today a quarterly dividend of $0.09 per share payable May 29th.  The company will report third quarter 2009 financial results on March 5th.

. . . SunOpta (STKL) – Buy up to $2.30

STKL is pulling back after failing to break through resistance around $2.86.  We still believe the fundamentals behind our original recommendation are firmly in place.  The shares are now trading in our initial buy range.  As a result, we’re lifting our hold recommendation on the shares.

. . . eResearch Technology (ERES) – Buy up to $7.00

ERES jumped 14% since our last update.  Small cap index funds are buying the shares following their addition to the S&P Smallcap 600 Index.  The shares are close to trading up and out of our buy range.

. . . VAALCO Energy (EGY) – Hold

EGY rocketed up almost 25% since our last update.  This is impressive as oil and gas prices have been falling.  Investors are beginning to recognize the huge upside potential in EGY due to its successful exploration and development activities.  The company just announced plans for 5 additional exploratory wells this year.  We’re showing strong gains of 88% and expect more to come.

. . . MFA Financial (MFA) – Buy up to $6.75

MFA reported fourth quarter net income skyrocketed by 144%.  Its mortgage backed securities jumped in value thanks to the Fed’s program of buying up to $500 billion of these securities.  The shares are currently trading below book value per share and represent a terrific value.  The upside potential outweighs the downside risks at these levels.

. . . Alliance One International (AOI) – Buy up to $5.50

AOI’s third quarter net profit exploded 279% to $59.5 million.  Revenue shot up 23% to $690 million.  The gains were due mostly to an increase in average sales prices for tobacco leaf.  AOI is up more than 30% since our last update.

. . . Questcor (QCOR) – Hold

QCOR is up a hefty 22% in February.  The shares are rallying ahead of the company’s fourth quarter earnings announcement on February 24th.  Investors are sensing an upside surprise.  Analysts have increased estimates for the fourth quarter, full year 2008 and full year 2009 in the last 30 days.  Moreover, QCOR has posted upside surprises in each of the last 2 quarters.

. . . Obagi Medical Products (OMPI) – Hold

After rallying strong into the end of 2008, OMPI has been in a consolidation pattern in 2009.  The shares have retraced 50% of the prior rally.  We’re watching the shares closely to see if they find support at these levels.  We’re also looking forward to the company’s fourth quarter and full year 2008 earnings report on March 5th.

Action To Take

•  No changes right now.  We’ll keep you updated…

Category: PSB Portfolio Updates

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