Each week, in my research for potential rocket stocks, I look for the possible near-term catalysts that could drive specific stocks higher. I'm searching for stocks that are likely to have the most volatility in the coming days, with the idea that the odds are greater that the volatility will move in a positive direction.
Last week was a great one for the Rocket Stocks portfolio, with each name ending the week in positive territory. One of the stocks featured in last week's Rocket Stocks column, however, prompted a great deal of debate later in the week.
trade is over -- the stock ended the week 10.6% higher -- I've included, at the end of this column, some comments on the discussion and how I view a "rocket stock" as opposed to a long-term investment. I also address an earlier "mistake" of this rocket stocks series of columns --
First, let's look at a few of this week's
. With earnings season coming up, this week's list offers some excellent selections.
is first on the list. The slide in natural gas has affected Halliburton the most out of the major oil and natural gas companies.
Halliburton is a great play on the rising price of oil, but it also does a lot of business in the natural gas pressure-pumping space. With 70% of its natural gas contracts "locked in," the odds that it misses earnings when it reports July 23 are slim to none.
I also believe that with a multiple of 7.6 times EBITDA, Halliburton could prove a bankable buyout candidate. I'm also encouraged that analysts have raised their average earnings estimate for the current year from $2.27 a share 90 days ago to $2.34. This type of activity is encouraging.
Natural gas has been in a slide, but it could tick up and lift Halliburton with it. A summer heat wave means increased use of large central air conditioner units, which results in increased demand for electricity and natural gas. Another potential catalyst in the near term is the release of earnings results later this month.
Next up is
. The stock is just getting set to rock and roll. It has been in a multiyear slump ever since the online auction company bought Skype, but that factor is more than baked in to the stock's price.
Want more? Check out TheStreet.com TV video. Gregg Greenberg discusses the newest additions to the Rocket Stocks Stockpickr portfolio.
eBay basically has total market share, now that
has pulled its auctions site. eBay is also a beneficiary of
iPhone as there has been a ton of sales of the device on the auction site since its release two weeks ago launch.
While eBay is not going to $45 this week, investors should consider adding the stock to their portfolios as the company is starting to get its marketing structure right.
eBay reports earnings next week, on July 18. I believe the stock runs up into that event. How come? I believe eBay used its
to boost its earnings to whatever level it needed to get a nice forward estimate.
Last, let's take a look at
, which has been beaten down too hard in the hedge fund mess.
For better or worse (for the investors in these hedge funds), it's unlikely that the master of risk management as far as investment banks are concerned would allow this event to morph into more than an isolated blip for its overall earnings. One of my favorite bloggers summarizes this nicely and I quote him here.
Peridot Capitalist Blog (July 5, 2007)
Whenever a good company falls upon hard times that could very well just be temporary, it pays for value investors to take a look and see if Wall Street has overly punished the stock. After the hedge fund blowups at Bear Stearns (BSC) recently (they made some bad bets in the mortgage market), BSC stock has retreated more than 30 points from its highs... Is the stock a bargain? Well, I compared it with the other big investment banking companies and I expected to see more of a discrepancy in the valuations than I found. The Big 5 -- Bear along with Goldman (GS), Lehman (LEH), Merrill (MER) and Morgan (MS) -- all trade right around 10 times forecasted earnings for 2007. As price-to-earnings multiples go, buyers of BSC aren't getting any discount compared with the likes of Goldman Sachs. That didn't exactly get me excited about bottom-fishing with Bear. I also looked at a ratio called price-to-tangible book value. This measure is the same as price-to-book, but ignores intangible assets that can't be easily and quickly valued. Book value is perhaps the most important valuation metric for banks given that the vast majority of their assets are liquid financial instruments and all banks pretty much do the same things business-wise, for the most part. On this measure Bear Stearns trades at a discount of 1.6 times net tangible assets. This compares with 3.1 times for Goldman and between 2.2 and 2.4 times for the other three major players in the industry. As you can see, investors are paying up for Goldman's superior track record and management. While Bear is cheaper, the stock would probably have to get down to 1.5 times book or less for me to really get excited about it as a contrarian play. That is not to say the discount won't narrow as the subprime(-lending) issues subside, but 1.6 times book isn't a price that I feel like I absolutely need to jump at. It's cheap, especially relative to the other brokers, but not ridiculously cheap by any means.
Some of the other stocks I describe in more detail in the
To find the snapbacks and potential breakouts on a regular basis, check out these Stockpickr portfolios, which I use iin my own research:
- Today's Hot List: This daily list is a must-view at midday each day to see what stocks are making the biggest moves and why.
- Always check the Biggest % Losers, a list of stocks that lost big the day before, because they can snap back hard. When you check this list on Stockpickr, you can see which stocks are owned by the quality hedge funds and mutual funds. Pay attention to those. They will be buying at the lower prices, so you should be also.
- Biotech Short Squeezes. Dendreon and others can often be found in this category.
- Top Insider Purchases and Buybacks.
- 52-Week Lows List: As with the list above, you must check this portfolio every day if you hope to find volatile stocks.
- Stocks Rising on Unusual Volume: These are stocks with the potential to break out.
- System Trades of the Day: These are trades triggering that day in various backtested trading systems we've developed at Stockpickr.
- Stocks With Unusual Options Activity: Unusual activity in these stocks the day before suggests that someone perhaps knows something.
- Latest Activist Situations: These are beaten-down stocks that hedge funds are accumulating shares of and demanding change for. Believe me, these hedge funds piggyback each other. And once they start rocking the boat, things happen quickly. This should be on the must-view list.
Now let's return to Dendreon, a controversial stock in last week's Rocket Stock's portfolio. Many people seemed to be upset that I recommended the biotech stock. I got emails telling me "a lot of people lost money on it at $17, so how could I recommend it?"
My ideal rocket stock exhibits these features:
- Greater-than-average volatility. These are stocks that I believe can be great for a stock-picking contest like TheStreet.com'sBeat the Street 2.0, where often double-digit gains in a week are necessary to keep a lead.
- Good short-term catalyst.
- Decent long-term play. Some of these stocks are definitely not long-term investments, but a stock can't go up unless there's at least some perception out there that it can be a good long-term investment.
Dendreon satisfied all of these requirements. Clearly, it has a great long-term volatility. That wasn't in question.
In terms of short-term catalyst: There was that article in
Clinical Cancer Research
, an academic journal, suggesting that overall survival rates went up for Provenge, a Denreon cancer drug. Not that many people knew about the article. With 50% of the float short and information being slowly released onto the market, I felt it was a great catalyst.
Is it a decent long-term play? Probably not. But how do you value a biotech play that won't have FDA approval for years? You have to look at these factors (for a short-term investment only):
- How much cash it has. Any financing could cause the stock to cave in half. Dendreon had already recently put its financing needs behind it, so this wasn't a worry.
- Odds of success. It's not looking good for Dendreon based on recent study results. The drug did not slow the progression of the disease. That's bad and is why the stock caved from its highs.
- Hope. Since there will not be new real news for some time on Dendreon, perception is everything. With 50% of the stock short, hope for better things to come can create strong updrafts. I'm surprised the stock didn't even go higher during the week.
This is the way I think about these situations.
Now, here's an example of where I've been wrong: NYSE Euronext. I first recommended the stock around $83, and now it's at $75 and change. At a very surface level it has several things going for it:
- Great investors. I'm a fan of Atticus Capital, one of its largest shareholders.
- Analysts expect the company's earnings to climb from $2.47 per share this year to $3.36 next year. With expected 35% growth and a forward P/E of 22, that's too cheap.
- Management is among the best out there. Its hard to bet against ex-Goldman guys.
- On a long-term basis, I believe financial innovation is going to be the primary U.S. export 50 years out. NYSE, with the acquisition of Euronext and other moves it's making, is one of the top consolidators out there. The market for financial innovations and new instruments to trade and hedge risk is never-ending.
The trade I recommended is 10% down and is not currently in the rocket stocks portfolio. However, I believe it's a good long-term buy here.
At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.
James Altucher is president of Stockpickr LLC, a wholly owned subsidiary of TheStreet.com and part of its network of Web properties, and a managing partner at Formula Capital, an alternative asset management firm that runs a fund of hedge funds. He is also a weekly columnist for
The Financial Times
and the author of
Trade Like a Hedge Fund
Trade Like Warren Buffett
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;
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