Last week, the market provided us with some thrills, and most investors lost some money as declining stocks outnumbered advancing issues by more than 4 to 1 on the
New York Stock Exchange
Nevertheless, my indicators really didn't signal any major changes one way or the other.
My longer-term indicators remain bullish.
The general sentiment of speculators and odd-lot investors remains negative and became even more negative last week.
Let's look at a chart of odd-lot activity; specifically, the following is a chart of odd-lot short sales divided by odd-lot purchases on the NYSE.
This is a five-year chart of weekly postings of this ratio, with the odd-lot short sales expressed as a percentage of odd-lot purchases in red. The
is in black. The green trend lines relate to the three-year average of this indicator and its standard deviation.
Back in early March, after the market suffered a rather severe short-term decline, this indicator spiked up to just below 38%, an extremely high level that forecast a market reversal to the upside.
Last week, the odd-lot short-seller was at it again and the ratio shot up to more than 35%. This is simply a confirmation that sentiment remains very negative and that a bullish long-term stance is still warranted.
My three intermediate-term indicators did not change last week despite the roller-coaster market. All three remain neutral.
The condition of all my indicators leads me to maintain my target cash position at 10%. The actual cash position of my IRA at the end of last week was 12.9%, a level I would like to reduce if I can come up with some new ideas to buy.
Last week, I sold my position in
New Frontier Media
( NOOF). The company reported quarterly earnings last week that were down from the same quarter last year.
It's an automatic sell signal for me when a company I own either reports down earnings or forecasts down earnings for future periods. The only exception would be if there were some truly extraordinary factors that came into play, causing earnings to decline on a temporary basis. My reference to earnings here actually refers to EBITDA (earnings before interest, taxes, depreciation and amortization).
I took a new position in
( JDAS). JDA specializes in software that manages a customer's supply chain. It has a particularly strong position with retail companies, including
Until recently, JDA had a rather unremarkable record, posting an average annual growth in sales of 5.4% over the last five years. In June of last year, though, the company completed its acquisition of Manugistics, a rival company in a similar business.
Since then, growth has been impressive. In the three reported quarters since the acquisition, revenue has increased sequentially by 69%. Revenue growth was even higher in the latest quarter, rising 89% over the previous quarter.
The Manugistics acquisition was certainly the major factor in the revenue increase but revenue was still up 13% without the acquisition. Earnings have been similarly impressive, with EBITDA increasing almost fivefold in the first quarter.
Valuation for JDA Software seems reasonable. The ratio of enterprise value to EBITDA is currently 13.5 for the company, compared with 15.6 for the median company in the business software industry.
Keep in mind that there will be one more quarter of large gains in EBITDA simply as the result of the acquisition.
And there is support for further growth, such as a large increase in new software deals signed in the first quarter. Earnings estimates for the full year of 2007 are currently running at $1.05 per share, which puts the price-to-earnings ratio on current year earnings at a very reasonable 18.2.
I lost money last week, as did most investors, but there was a bright spot.
announced a large stock buyback, and the stock was up 11.5% in a difficult environment.
The new Harry Potter book already looks like it is being well-received given the huge advance orders, but it is difficult to determine what valuation the market will give this company on the earnings surge that will result from the last book in this very successful series.
I like the fact that the company is being proactive in an attempt to increase shareholder value with the buyback.
The following table shows my current IRA holdings as of the end of last week:
Please note that due to factors including low market capitalization and/or insufficient public float, we consider American Dental Partners, Amerisafe, Cal-Maine Foods, Integramed America, Quadramed, Boots & Coots and New Frontier Media 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, Becton Dickinson, Buckeye Technologies, Cal-Maine Foods, CF Industries, Consolidated Graphics, O'Charleys, CGI Group, Integramed America, JDA Software, Kinetic Concepts, Layne Christensen, Methode Electronics, Quadramed, Scholastic, TBS International, Boots & Coots, W-H Energy Services, Warnaco Group, Crane Company, Gardner Denver, Nova Chemicals, PepsiAmericas and Teleflex, 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.