General Market Outlook: As mentioned in last week’s brief Interim Report, the market staged a follow-through day on Tuesday December 20th, the 17th day after its first rally attempt. (Please see the Interim report 12/20/21). We remain optimistic but cautious especially since Wednesday the following day, December 21, the Nasdaq suffered from a higher volume selling day (distribution day).
Market Condition: → Late follow-through, cautious uptrend
This post looks at: NUAN, V, LKQX, CATM
The technical view: The market staged a follow-through day on Tuesday. However on Wednesday the Nasdaq suffered from a distribution day. The importance of these events goes as follows (credit to my friends at Investor’s Business Daily, IBD, who throughout the years have studied and crunched the data): Since 1880 every market rally started with a follow-through day, however not all follow-throughs lead to a sustainable rally. Furthermore, if you get a distribution day as we did the first day after a follow-through, the probability for a rally failure is at 95%. The distribution day was observed only on the Nasdaq market and was driven by Oracle’s (ORCL) disappointing outlook. Oracle’s volume was 7 times higher than its average volume, contributing to the volume surge on the Nasdaq also Oracle dragged down the other tech stocks with it.
On a positive note, on Friday the Nasdaq closed above the 2600 level and also closed above the 50 day moving average (of 2617). The SP 500 well above its 50 day moving average (1233) and also on Friday able to close above the 200 day moving average (of 1259). Volume as expected was low due to the Holiday environment. One stock CATM did pop out of a short consolidation on Friday (please see attached sheet on CATM)
There are still only a few breakouts since the follow-through and investors willing to commit money to the markets at this time should look for sound stocks popping out of sound bases and ease into the market as it improves.
Fundamental view: Last week’s issue I listed approximate values for the SP 500. This week I would like to present some compelling data by one of my favorite economist Brian S. Wesbury, Chief Economist for First Trust Portfolios. Brian uses what he calls a capitalized profits model to value stocks, dividing corporate profits by the 10-year Treasury yield. They compare the current level of this Index to that from each quarter for the past 60 years to estimate an average fair value. Right now 10-year yields are below 2% and corporate profits are growing strongly. As a result this model says that fair value for the Dow is currently 40,000!
Of course Brian realizes that the bonds are in a bubble so the yields will rise and using a more conservative discount rate of 5% for the 10-year Treasury generates a “fair value” of 18,500 on the Dow and 1940 on the SP 500. But again trying not overstate things corporate profits are one of the highest (12.9% of GDP) so if they come down to the historical mean of 9.5% of GDP and assuming a 5% yield on the 10-year Treasury you get a fair value of 1430 for the SP 500 and 13,700 on the Dow (this is taking in the worst case scenario for both profits and increased yields).
Thus, once we can get out of this current fear scenario stocks could do nicely. I would recommend you to read Brian’s book “It’s Not as Bad as You think” which was published in 2010.
Again the following pages covers some stocks we are looking at. Stocks that we are looking at does not consititute a buy or sell recommendation. Please refer back to the last few reports as well. As of this writing we are long DG, GNC, CXO, NUAN, CJES, CATM. We may initiate postions in other stocks mentioned or others, at any time depending on the market environment. Also we may sell existing positions at any time due to market conditions.
Since our follow-through day, at this point we are willing to commit small positions to certain stocks although we still do view the risk being high due recent market action. Please contact us at 1-866-903-1822 for help on this matter.
(Nuan) Nuance Communications develops embedded speech and digital imaging software
The Story: Nuance’s strategy is to keep acquiring patents and other companies in the field. Nuance is the front-runner in speech recognition technology and imaging products. Nuance made five buyouts this year and has bought up over 25 firms over the past five years. Siri uses Nuance technology, Siri voice recognition software in used in Apples’s latest iPhone 4s. Nuance’s FlexT9 keyboard is available on Google’s Android-based phones. Nuance’s health care business account for its largest revenue (about 40%), mostly doctors multitasking and getting access to fast and accurate information. Doctors use Nuance’s speech products to transcribe patient data into computer files. Nuance acquired health IT firms Dictaphone in 2006, eScription in 2008 and Wedmedx in June.
The company is expected to keep growing its presence in next generation devices and keep pursuing buys.
Recent News: 12/20/2011: Nuance said it will buy rival Vlingo, it’s fifth acquisition in the year, to beef up its voice assistant offerings for mobile devices and automobiles. In August, Nuance bought Loquendo, a unit of Telecom Italia. In October, Nuance bought Seattle-based Swype, a developer of touch-based tech used on many Android phones. In June, Nuance bought German speech company SVOX for $81 million. SVOX’s customers include German carmakers.
Fundamentals:
- Last 3 quarters earnings have accelerated to +14%,+17%, +27%
- Last 3 quarters of sales steady, +17%, +20%, 18%,.
- ROE of 18%
- 4 quarters of increasing fund sponsorship
- Forward estimates for 2012 and 2013 +17%, +11%
Technicals: Nuance sold off with the market on weaker volume, a welcome sign, then recaptured its 50 day moving average on increased volume and has found support around this area. Nuance may offer a low risk entry here as it springs off its 50 day line
(V) Visa Inc. Provides global payment solutions in support of the credit and debit payment programs of financial institutions.
The Story: Visa’s innovations, however, enable its bank customers to offer consumers more choices: Pay now with debit, ahead of time with prepaid or later with credit products. In fact, approximately 70 percent of Visa payment transactions in the United States are debit and prepaid, not credit. Visa’s global strategy is to provide the next generation of payments solutions, enabling consumers to transact wherever and whenever they choose, using a card, a computer or a mobile device with Visa’s reliability, security and global acceptance.
Recent news: Nov. 16, 2011– In an effort to simplify and accelerate the development and adoption of innovative payment products globally, Visa Inc. (NYSE: V) today announced the launch of its new Visa Developer Center. The primary purpose of the center: to provide approved application developers with easy access to tools needed for the rapid creation and deployment of payment applications.
Fundamentals:
- Last 3 quarters of earnings accelerating +28%, +30%, +34%
- Last 3 quarters of sales + 15%, +14%, +13%,
- ROE of 14%
- 3-5 year growth rate of 46%
- Consensus forward estimates 2012 and 2013 +17%, +16%
- 4 quarters of increasing fund sponsorship
Technicals: Visa broke out of a flat base on 10/28/2011 pulled back with the market, recently formed a 3 weeks tight pattern and this week has moved past the high of this pattern of 98.60 on volume. Showing a lots of strength in this market RS line leading the price a very bullish sign
(LKQX) LKQ Corp. Distributes aftermarket replacement parts to collision repair shops and mechanical repair shops throughout the U.S.
The Story: LKQ strategy consist of acquiring other companies as it consolidate the wholesale parts supply business for auto body and commercial auto repair shops. Earlier this year LKQ spent $100 million for seven companies consisting of parts distributors, a heavy duty truck salvage operation and a do it yourself parts recycler. In this environment consumers and insurance companies are looking to save money on replacement parts, and drivers are holding onto their cars longer in this economy, which is good for parts dealers.
Recent News. This fall LKQ spent $347 million for its first overseas acquisition, the UK based Euro Car Parts chain, the number 1 commercial distributor of aftermarket auto parts in the UK. On 10/27/2011 LKQ saw Q3 EPS rise 36% to 34 cents, 2 cents above views, revenue surged 29% to $783.9 million, above views.
Fundamentals:
- Last 3 quarters earnings accelerated +14% +23% + 36% estimates for the next 2 quarters at .37 and .51 an increase of 32% and 24%
- Last 3 quarters sales +30%, +30% +29%
- 3-5 year growth rate of 28%
- ROE of 13%
- 4 Quarters of increased fund sponsorship
- Forward estimates for 2011 and 2012, +25% +27%
Technicals: The stock is forming a base on base pattern it broke past the 28 level which now appears to be a level of support. One can try a low risk entry near the 50 (near 29) day average selling a few % points below this if it slips or wait to it see if it can take out the high of 31.25 on big volume.
(CATM) Cardtronics Inc. Operates 42,000 ATMs via a network of merchant locations throughout the U.S., Canada, U.K., Mexico and Puerto Rico.
The Story: Cardtronics is the top ATM operator with double digit revenue and profit gains. Cardtronics kept growing through 17 acquisitions over the last 11 years. According to the CFO Chris Brewster, current data says that the use of cash is growing. Some analysts believe that Cardtronic’s cash trade will likely benefit from new debit-card regulation and growth of pre-paid cards. There are about 400,000 ATMs in the U.S., half are owned by banks, the other half by independent vendors, of which Cardtronics is the largest.
CATM Daily Chart
Recent News: 12/8/2011 Cardtronics announced a long-term ATM placement agreement in Puerto Rico with National Lumber & Hardware, covering 38 locations for the home improvement and interior design retailer. National Lumber & Hardware is a division of Pitusa, the island’s largest Puerto Rico-based retailer. 11/7/2011, Cardtronics said Q3 EPS rose 39% to 39 cents, beating by 2 cents. Sales rose 21% to $165.1 mil. It sees Q4 EPS of 37 cents, 5 cents above views.
Fundamentals:
- Last 3 quarters earnings +42%, +31%, +39%
- Last 3 quarters of sales, +8%, +11%, +21%
- ROE of 208%
- 8 Quarters of increasing fund sponsorship
- Forward estimates for 2011 and 2012 +37%, +19%
CATM Weekly Chart
Technicals: Daily and weekly charts show a lot of institutional accumulation with high volume buy days. On 12/23/2011 CATM broke out of a three weeks tight pattern on a 76% surge in volume despite the holiday trading session. If the market hold this may be a leader. Please see daily and weekly charts.