PSB Portfolio Update March 2012

March 15, 2012

Small-Cap Breakout Is Imminent!

This month the bull market is celebrating its three-year anniversary.

It’s hard to believe we’re now more than three years removed from the housing bubble bursting and the credit crisis that followed.

However, the ripple effects of the ensuing recession are still being felt today.

The Greeks and the rest of the Euro Zone are still on life support despite the new bailout package.  And according to the Fed stress test, four large US banks, Citigroup(C), SunTrust Banks (STI), Ally Financial, and MetLife (MET) are still at risk of failing in a severe economic slump.

Even so, stocks have logged impressive gains over the last three years.

Since March 9, 2009, the S&P 500 is up a little more than 100%… The tech heavy NASDAQ 100 is up an impressive 152%… And, of course, the top honor goes to the S&P Small Cap 600 Growth Index with an eye-popping 157% gain.

Amazingly, the current bull market now ranks as the ninth longest bull market in history. And of those nine, it’s the only one that saw the S&P 500 gain more than 100%.

And here’s the best part…

Small cap stocks are still the best performers despite lagging large cap stocks lately.

You see, the Dow and S&P 500 have both broken out to fresh 52-week highs.  And the NASDAQ has soared even higher.  It’s now above pre-recession highs last seen in 2008.

But the Russell 2000 small cap index hasn’t made a new 52-week high yet.

As you can see in the chart below, the Russell 2000 is stuck below stiff resistance of the downtrend off the 2011 highs (blue line).

But that’s just part of the story…

The downtrend resistance is part of a much bigger and powerful technical setup… the cup and handle.

The pattern’s funny name comes from it looking a bit like a tea cup.

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.

As you can see, it’s in an uptrend (green line), it’s gone through a multi-month consolidation (blue line) to form a cup, and it’s formed a handle as it consolidated again (red lines).

Now the Russell is once again on the verge of breaking through the downtrend resistance. And it’s only a matter of time until it does.

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.

. . . . Manitex (NASDAQ: MNTX) – Sell

MNTX has more than doubled from the price we recommend buying it in January 2011.  The heavy equipment manufacturer is riding high as construction spending accelerates.

However, predicting how bullish management will be on their 2012 guidance is a bit of crapshoot.  Remember, management and investors have been faked out by false recoveries in construction spending before. So, most companies are playing it safe.

There’s no reason to wait around for earnings.  Let’s lock in our profits of up to 103% today.

Sell your shares of MNTX now for a cool double.  Congratulations on a successful trade.

. . . . Smith & Wesson (NASDAQ: SWHC) – Hold

As expected, shares of SWHC are soaring.  Since our recommendation, the stock has shot up nearly 60%.  And the stock went into overdrive after reporting a great fiscal third quarter.

The firearms manufacturer is benefiting from multiple tailwinds.

A cyclical upswing in gun sales is driving revenue higher.  Additionally, the company is reaping cost savings from the recent restructuring.

All in all, SWHC had a great quarter.  The stock is currently trading for $6.89 and it should continue pushing toward our $7.50 price target in short order.  Continue holding for bigger gains to come…

. . . . Culp (NYSE: CFI) – Hold

CFI hit a high of $11.00 earlier this month.  But the stock has fallen back a bit after reporting fiscal third quarter earnings.

Here’s the thing…

The upholstery and mattress fabric maker had a great quarter.  And they’re projecting a strong finish to their fiscal year this quarter.

However, their pre-tax income guidance for the current quarter of $4.5 to $5.4 million is wide enough to drive a truck through.  Consider this, last year the company made $4.7 in the same quarter.

In other words, if CFI falls to the low end of their guidance, they’ll go from growing to slowing.  And that’s never good…

However, if CFI hits the high end of their guidance, they’ll be growing at nearly 15% year over year.  And that’s better than expected.

Obviously, investors didn’t like CFI’s wide guidance.  But I’m confident CFI will come through with a good number.  Continue holding CFI…

. . . . The Hackett Group (NASDAQ: HCKT) – Hold

HCKT shot up 27% after their latest earnings.  Shares of the consulting firm soared from $3.87 to $4.92 in just days.

What’s behind the recent jump?

The company announced a Dutch auction tender offer to purchase $55 million of the stock.  That boils down to 27% reduction of the company’s outstanding shares.

Obviously, that’s great news for our shares.

HCKT is in great shape financially.  And the stock looks extremely undervalued with earnings projected to climb 10% next year.  Continue holding…

. . . . Magnetek (NASDAQ: MAG) – Hold

After a year of volatile year, MAG is back on the right track.

As I maintained throughout the year, MAG’s business is fine.  However, a reverse stock split and changing from a fiscal year ending in June to a calendar year derailed investor interest in the stock.

However, the manufacturer bounced back with a 72% increase in earnings per share last quarter.  And sales shot up 13% last quarter as well.

As a result, MAG rocketed past our $13 buy up to price.  I’m moving MAG to a hold.  I believe MAG is on the verge of living up to the potential we saw when we recommended it last year.  Continue holding MAG…

. . . . Aurizon Mines (AMEX: AZK) – Hold

AZK is under attack from falling gold prices.  The Canadian gold miner just can’t catch a break.

Operations at their existing mines are going smoothly.  Their exploration efforts have been fruitful.  And their balance is rock solid.  Yet the stock continues to trade at dirt cheap prices.

Look, mining stocks lagged behind the recent run in gold.  And now the decade long gold bull market is in danger of coming to an end.

That’s bad news for Aurizon…

Keep an eye on our $6.50 stop loss.  If AZK closes below this level, it’s our cue to sell.

Action To Take

• Sell Manitex (NASDAQ: MNTX) for gains of 103% or more
• Move Ambassadors Group (NASDAQ: EPAX) from Buy to Hold
• Move Aurizon Mines (AMEX: AZK) from Buy to Hold
• Move Magnetek (NASDAQ: MAG) from Buy to Hold

Category: PSB Portfolio Updates