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Don't Throw Caution to the Wind With Your IRA

Richard Moore

My longer-term indicators remain solidly bullish. Value measures continue to be positive. The breadth of the market is matching the action of the major averages. Market-sentiment measures are bullish, as short-sellers remain very active, always anticipating the bear market they feel is right around the corner. I cannot find any reason to believe that this bull market that began in 2002-2003 is close to coming to an end.

My intermediate-term indicators remain categorized just as they were last week. One of my put/call volume ratios remains neutral, while the other one remains bearish. This bearish indicator, though, did record some improvement last week. My third indicator, which measures the ratio of odd-lot sales to odd-lot purchases, which has been trending higher because odd-lot investors have stepped up their selling a bit, nevertheless remains in neutral territory.

This set of indicators leads me to maintain my target cash position of 15%. If we were to experience a downward-trending market over the next couple of weeks, I would anticipate that my intermediate-term indicators would improve, and I would then reduce my target cash position. Currently, in my IRA, I have a cash position of 13.5%.

Tough Sale, Tough Hold

Last week, I sold my position in Buckeye Technology (BKI Quote). I had held this stock for seven months, and it no longer appears on my screening system as a buy. This was a difficult decision for me, and I actually delayed selling for a week or two because the only metric that was missing to continue to hold this stock was the six-month relative strength. It never did improve, though, so I didn't force the issue and simply sold it. I would very possibly buy this back if it were to show up on my screen again in the near term.

Whenever I have the misfortune to own a stock that declines 20% or more from my purchase price, I look very hard at that situation, with the preferred course of action being to simply sell the stock and re-evaluate the situation from the perspective of a non-owner.

This is the current situation with Boots & Coots International Well (WEL Quote). I bought this stock in late March at $2.25 and was rewarded immediately with a run up to almost $3.00. In fact, the stock was getting close to a price I consider to be fair value. Subsequently, though, the stock began to decline, and two factors reinforced that decline.

First, the company handled a stock sale poorly by offering the stock at a very substantial discount to prevailing prices at the time. Second, the company announced first-quarter earnings that were apparently disappointing to some investors. While EBITDA was up for the quarter, the company cited delays in customer projects in the Gulf of Mexico and Venezuela for the less-than-hoped-for results. There were some positive comments made regarding expected results for the second and third quarters.

Currently, WEL sells at an enterprise value/EBITDA ratio of 4.9 times. This is about one half of the ratio for the median company in the oil services business. Therefore, I have decided to hold the stock until second-quarter earnings are released and then re-evaluate the situation. The real lesson to be learned here is to avoid $2.00 stocks with funny names.

Stock Movement

While last week was basically flat in terms of the major averages, I had several nice moves in my holdings. Amerisafe (AMSF Quote) was up 6.9% as it recovered back to near previous highs. This company sells at 10.6 times this year's earnings, while the median company in the accident and health insurance industry sells at 13.1 times. I view this stock as a buy.

Cal-Maine Foods (CALM Quote) was up 6.6%. I currently view this stock as a strong hold.

Parexel International (PRXL Quote) was up 7.3% and still seems modestly attractive at an enterprise value/EBITDA ratio of 12.8. Comparable companies are valued at around 15 times.

TBS International (TBSI Quote) continued its run and was up 10.3%. I view this stock as now close to fair value, and I will reduce my position this week.

Warnaco Group (WRNC Quote) was up 6.9% and was one of my best performers during the second quarter. I currently view this stock as a hold.

The Portfolio

The second quarter turned out to be a very good one for my IRA. It was up 11.2% compared with the S&P 500, which was up 5.8% (not including income). The complete list of my current IRA holdings is as follows:

Please note that due to factors including low market capitalization and/or insufficient public float, we consider American Dental Partners, Amerisafe, Cal-Maine Foods, O'Charley's, Integramed America, Quadramed, TBS International and Boots & Coots 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.