401k Investing

Odd-lot investors stepped up their shorting again last week to the second-highest level ever. The large short-selling ratios mean we could see a short-term correction. My intermediate-term indicators have two at neutral and one bearish.

Investing
IRA Investing: Still Long-Term Bullish
By Richard Moore
RealMoney.com Contributor
7/25/2007 9:53 AM EDT
URL: http://www.thestreet.com/p/rmoney/investing/10369807.html

The market was a bit more volatile last week, hitting a new all-time high for the Dow Jones Industrials and then falling sharply Friday on what commentators decided was a reaction to possible additional subprime mortgage problems.

I don't pretend to be an economist, so I don't think I have any unique insight into the mortgage market. I prefer to use my typical sentiment measures to ascertain how worried small investors and speculators are about the possibility of economic problems. Then I try to take an opposing position because, if small investors and speculators are very worried, I believe the market has already discounted the odds of something truly bad occurring.

Below is a five-year chart of the S&P 500 plotted in black on a weekly basis and the ratio of odd-lot short-sales to odd-lot purchases plotted in red. The green trend lines relate to a weighted moving average of this indicator and its standard deviations.

There has been a large increase in the volume of short-selling, at least partially because of the increasing impact of hedge funds, but regardless, these shares will be bought back at some point.

Odd-Lot Short-Sale Purchases vs. S&P 500

Click here for larger image.

Last week, odd-lot investors stepped up their shorting again to the second-highest ratio ever at 36%. The only higher week, at about 38%, occurred during the correction in March. These large short-selling ratios mean to me that, while we could continue in a correction mode in the short run, the longer-term outlook remains positive.

My intermediate-term indicators remain unchanged from the prior week. Two of the three indicators remain neutral and one remains bearish.

These indicator readings mean that there is no change in my target cash position of 15%. At the end of last week, the actual cash position in my IRA was 14.9%.

Sales and Purchases

There was a large amount of trading activity in my IRA last week. The major reason for the increased trading was the monthly rebalancing of my five-stock screen that is very similar to my main screening system, but substitutes increasing volume for high relative strength as one of the components. Stocks picked here, though, do need to be near their 52-week high.

URS Corp. (URS) remained on the screen for the second month, so it will continue to be held for at least another month. The other four stocks were sold. These included Century Aluminum (CENX) , DRS Technologies (DRS) , Keystone Automotive (KEYS) and Lionsgate Films (LGF) .

The four stocks purchased were: Nova Chemicals (NCX) , PepsiAmericas (PAS) , Schweitzer Mauduit (SWM) and UAP Holding (UAPH) . These will be held until at least Aug. 16, 2007.

I sold two other stocks last week. Amerisafe (AMSF) was sold because I had held the stock for seven months, and it no longer appeared on my screening system as a buy. Similarly, Ameriprise Financial (AMP) was sold for the same reason. Full disclosure: I own AMP in another taxable account and will continue to hold at least until my gain is classified as long-term.

I took a new position in Elizabeth Arden (RDEN) . This is a cosmetics company that has been showing solid growth at around 15% in revenue. However, earnings have not kept pace until the most recently reported quarter, having been held back by the integration of recent acquisitions that are actually doing better than planned.

The real challenge for the company is to increase margins that are substantially below other cosmetics companies. At current prices, RDEN sells at an enterprise value/EBITDA ratio of 9.8. This is about a 20% discount to the median company in the personal products industry that sells at 12.1 times. Other valuation measures are similarly well below industry averages.

In order to hold my cash position near my 15% target, I also took a new position in the S&P 500 SPDR (SPY) .

The Portfolio

Even though the market was down last week, I had a couple of big winners. Kinetic Concepts (KCI) reported earnings last week that were above estimates and the stock was up 16.7%. Even at these price levels, this stock sells at a 30% discount to the median company in the medical-appliance industry, and I still view this company as a buy.

TBS International (TBSI) was up 14.2%, as another company in the dry-bulk shipping business received a takeover bid. I now consider this stock to be overvalued and my remaining position will be sold this week.

I will be on vacation for the next couple of weeks, so my next article will appear during the week of Aug. 13.

The following table shows all the holdings in my IRA as of July 20, 2007:

Symbol	Name	Purchase Date	Cost	Price	Gain
Regular Holdings
ADPI	American Dental Partners	1/30/2007	$20.75	$25.11	21.01%
AHG	Apria Healthcare	11/16/2006	$24.42	$29.57	21.09%
CALM	Cal-Maine Foods	4/16/2007	$13.30	$20.20	51.88%
CF	CF Industries	5/3/2007	$40.57	$63.68	56.96%
CGX	Consolidated Graphics	5/1/2007	$76.88	$72.74	-5.39%
CHUX	O'Charleys	2/1/2007	$21.55	$19.87	-7.80%
CMCO	Columbus McKinnon	7/13/2007	$33.05	$30.54	-7.59%
GIB	CGI Group	3/9/2007	$8.52	$11.39	33.69%
INMD	Integramed America	2/6/2007	$11.47	$12.19	6.28%
JDAS	JDA Software	6/8/2007	$19.04	$20.59	8.14%
KCI	Kinetic Concepts	2/6/2007	$49.75	$64.98	30.61%
LAYN	Layne Christensen	5/22/2007	$41.26	$43.92	6.45%
PRXL	PAREXEL Int'l	6/12/2007	$39.80	$41.78	4.97%
QD	Quadramed	3/19/2007	$3.06	$3.00	-1.96%
RDEN	Elizaberth Arden	7/18/2007	$23.44	$23.82	1.62%
SCHL	Scholastic	1/3/2007	$36.23	$33.80	-6.71%
SPY	S & P Dep Receipts	7/18/2007	$153.92	$153.50	-0.27%
TBSI	TBS International	5/15/2007	$18.48	$36.18	95.78%
WEL	Boots & Coots	3/22/2007	$2.25	$1.65	-26.67%
WHQ	W-H Energy Services	5/17/2007	$60.96	$66.20	8.60%
WRNC	Warnaco Group	3/14/2007	$26.99	$39.15	45.05%
One Month Screen
NCX	Nova Chemicals	7/16/2007	$38.59	$40.64	5.31%
PAS	PepsiAmericas	7/16/2007	$24.74	$24.52	-0.89%
SWM	Schweitzer Mauduit	7/16/2007	$31.75	$30.57	-3.72%
UAPH	UAP Holding	7/16/2007	$31.13	$29.72	-4.53%
URS	URS Corp.	6/15/2007	$50.24	$55.07	9.61%
Performance Results As Of 7/20/2007			IRA	S&P 500
	Quarter To Date		4.8%	2.0%
	Year To Date		26.6%	9.1%
S & P 500 does not include income for latest quarter

Please note that due to factors including low market capitalization and/or insufficient public float, we consider American Dental Partners, Cal-Maine Foods, O'Charley's, Integramed America, Quadramed, Boots & Coots and Schweitzer-Mauduit International to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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At the time of publication, Moore was long American Dental Partners, Apria Healthcare, Cal-Maine Foods CF Industries, Consolidated Graphics, O'Charley's, Columbus McKinnon, CGI Group, Integramed America, JDA Software, Kinetic Concepts, Layne Christensen, PARAXEL, Quadramed, Elizabeth Arden, Scholastic, S&P Depository Receipts, TBS International, Boots & Coots, W-H Energy Services, Warnaco Group, Nova Chemicals, PepsiAmericas, Schweitzer-Mauduit, UAP Holding and URS, although positions may change at any time.

Richard Moore, CFA, has 40 years of experience in various facets of the investment business. He has been employed by banks, mutual funds and investment advisory organizations during his career and has also owned retail and service businesses. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Moore appreciates your feedback; click here to send him an email.

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