The worst enemy of this market, in my opinion, is investor complacency. Unfortunately, there are now a few signs that investors are becoming convinced that the market can only go up and that any small correction is a buying opportunity, and that's a sign for you to tread carefully in this market.
Interviews with money managers on
yield almost universally bullish opinions, and most people, including me, are happy with the returns of their portfolios this year.
These are anecdotal observations and, so far, my long-term indicators have not shown any real deterioration. They remain bullish but, if the good times continue for a while longer, the outlook could become more problematic.
My intermediate-term indicators have, in fact, shown some weakness after the strength last week. Two of the three indicators remain neutral, but the third has now slipped into negative territory. Let's look at its chart now.
This is a chart of the ratio of volume in individual puts to individual calls on the CBOE, expressed as a 10-week moving average. This ratio appears in red with the
in black. The green trend lines relate to the three-year average of this indicator and its standard deviations.
This is a contrary indicator that goes positive when speculators take extreme negative positions and vice versa. This indicator turned very bullish after the correction in late February/early March.
Now, though, it has continued to deteriorate and slipped into negative territory last week.
When my intermediate-term indicators begin to turn bearish, I start to take a more defensive position.
Accordingly, I have raised my target cash position to 15%. The actual cash position in my IRA at the end of last week was 11.5%. While I will not attempt to sell just to raise cash, I will hold additional cash if I sell a stock for some other reason.
S&P 500 VS. CBOE PUT/CALL
Sales and Purchases
Last week was a busy one for me in trading for my IRA, and it also included the day to rebalance my monthly five-stock screen. This screen has performed quite well over the last several months and is basically the same as my regular screening system, except it substitutes a requirement that volume must be increasing instead of the high-relative-strength requirement. I do require, though, that the stock price be close to its 52-week high.
So last week I sold
( PAS) and
Lions Gate Entertainment
. These five stocks will be held for one month, and then this portion of the portfolio will be rebalanced again.
In regular trading last week, I eliminated my position in
. I had held this stock for seven months, and it no longer appeared on my screening system as a buy.
I took a new position in
. While technically a research services company, PAREXEL is tied into the health services sector. The company provides services like contract research, consulting and medical communications to the pharmaceutical, biotechnology and medical device industries.
While the company's growth in sales has not been spectacular at only 10% on average for the last five years, more recent growth trends are much better. In fiscal 2006 (ending June), the company's revenue increased 13%, and so far in fiscal 2007, revenue is up 21%. The company has issued a projection for 2008, calling for a revenue increase of 17%. Earnings have grown faster than sales, with EPS increasing 72% this fiscal year to date and projected by the company to increase 23% in fiscal 2008.
These growth projections seem well-supported by an increasing backlog that, as of quarter-end March 31, 2007, was up 10.4% from the December quarter and up 46.9% from the same quarter one year ago. This is a record backlog that reflects growth across all business segments.
The company maintains a strong financial position with no long-term debt.In terms of valuation, PAREXEL currently sells at an enterprise value/EBITDA ratio of 12.2 on the basis of latest 12-month reported results. This compares with other companies in the medical field and in the research business that command an EV/EBITDA ratio around 15 times. Given the growth prospects of this company and the industry that it serves, I see no reason why this company's valuation should not attain more normal levels.
The Portfolio Update
The following table shows the current list of holdings in my IRA as of June 15, 2007:
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'Charleys, 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.
At the time of publication, Moore was long American Dental Partners, Apria Healthcare, Ameriprise Financial, Amerisafe, Buckeye Technologies, Cal-Maine Foods, CF Industries, Consolidated Graphics, O'Charleys, CGI Group, Integramed America, JDA Software, Kinetic Concepts, Layne Christensen, Methode Electronics, PAREXEL Int'l, Quadramed, Scholastic, TBS International, Boots & Coots, W-H Energy Services, Warnaco Group, Century Aluminum, DRS Technologies, Keystone Automotive, Lions Gate Entertainment and URS Corp., 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;
to send him an email.