10 Small Caps Flashing Buy Signs

09/01/2011 7:00 am EST


Michael Lee

President, Michael Lee Wealth Advising

A number of solid ideas have popped up on the small-cap screens lately, says Michael Lee, who’s also watching some large- and mid-caps for technical buy signals. He also tells MoneyShow.com’s Kate Stalter about some of his favorite ETFs.

Kate Stalter: We’re speaking today with Michael Lee. He’s the president of Michael Lee Wealth Advising. Give us your impressions of where the strength currently lies in the market, and what you think individual investors need to be doing right now.

Michael Lee: Well, as so many stocks seemed to have fallen off of a cliff in August, it’s interesting for me to look for value stocks that may have found some price consolidation or support.

When looking for value stocks, I tend to stick with mid- to large-cap stocks, or sometimes ETFs. Looking at stocks that are oversold and are possibly crossing back above their respective 20-day simple moving averages, are stocks like Pepsi (PEP), Caterpillar (CAT), WellPoint (WLP). I only like WellPoint if it stays above its $50 support level.

Also AmeriGroup (AGP), as long as it stays above $45, and I actually like SodaStream International (SODA) if it stays about $35.

I would note also that I always take a stock’s fundamentals into consideration when going for value stocks. I try to stay with investments that are less volatile, hence the ETF suggestions, actually.

As for stocks, I look for those with low price to sales, low price to earnings, low price to book, etc. I also maintain a smartphone app called StockAdvisor, that I use to send stock recommendations to my users.

The job of attempting to predict price performance, especially in these markets, has been pretty rough. But over the past month, the difference between a good recommendation and bad one could just be timing, as little as 24 hours. What was a great pick yesterday may be a horrible pick today.

Because of this, with these recommendations I give, I also try to include strategy. I think that’s really important: Knowing when to buy, when not to buy, specific profit targets, where to protect from loss, etc.

I always try to emphasis the strategy and knowledge of technical and fundamental analysis. An overall understanding of the market is far more important than any stock pick or recommendation or movement.

You know the saying, “Give a man a fish and he’ll eat for a day; teach a man to fish and he’ll eat for a lifetime.” I really believe this advice applies to investing, especially when we see market volatility like we have this past month.

Also knowing what tools you can use to protect yourself, I think, is key. One of my favorite tools is trailing stop loss orders to protect from loss.

Anyway, this is where the focus of my business lies, in helping people understand that no matter where the markets are and how solid the recommendation may be, it’s a must to learn and know how to make your own investment decisions and know when to get in and when to get out.

Again, if we look at the recent market turbulence, it’s been fast and sometimes brutal. And like I alluded to, the game of prediction can really only go so far.

I think you really need the solid knowledge of support levels, and the tools available—technical analysis, fundamental analysis, etc. I think this kind of knowledge can really put you on the right side of a trade more times than not. More importantly, as I mentioned, it can save you from significant losses like the ones I’m sure many investors endured recently.

If we talk about support levels real quick, I think with these indicators proving to be less reliable in turbulent markets, I personally have relied heavily on using trailing stop-loss orders, as I mentioned, as well as indicators like volume, price performance, and support levels.

If you can chart a stock and see that it has never broken above a certain price, that may be a good price to sell. Inversely, if that stock breaks above and stays above that resistance ceiling, this may be a good time to buy.

The opposite of course works with support floors. Buy if the stock bounces off the support, and sell or don’t buy if the stock falls through its support floor. Knowing how to judge these support and resistance levels is essential, in my opinion.


Kate Stalter: You’ve mentioned, of course, all of the market volatility that has absolutely scared a lot of investors, and a lot of people have suffered in that lately, you’re right. What are some stocks or strategies that individual investors should absolutely avoid at this juncture?

Michael Lee: You know, it’s hard for me to say absolutely avoid. Again, the whole predicting. I think that gold is a great example.

It’s no secret that it is a great long-term investment, you can’t deny that. Of course, average returns are nowhere near those that we’ve seen this month, but it’s still a smart long-term investment.

I think when we look at the short- to mid-term, I am personally wary of gold, as well as related precious-metal ETFs, like Spyder Gold Trust (GLD). That’s one that I follow, and one that I believe is going to be hitting resistance soon, or can be hitting resistance soon. I can see gold plateau or fall as equities and oil rises.

I am actually also wary of growth stocks. I think that some of these growth stocks have kind of outlined a resistance ceiling with the recent market sell-off.

I’ll use Apple (AAPL) as an example. I love Apple, and I’m glad the stock stayed strong after Jobs left, but I’m concerned about its possible $400 resistance level.

I’m an eternal optimist and want to think that since it didn’t fall after Jobs retired that it will continue to climb—especially with the iPhone 5 coming—but I wouldn’t be surprised at all if this stock bounced off of that $400 resistance level and headed south again.

I think this same caution should be taken with many growth stocks that showed a possible resistance ceiling during the recent market sell-off and are now creeping up on that ceiling.

But there again, even if you disagree and think that Apple is going to keep climbing, if you’re in the stock or going to enter the position, I think it’d be a great idea, as I always do, to set a trailing stop of maybe 7% to 10% behind the stock. This way, no matter who is right, you know you’re still protected.

But back to the point, I also really try to avoid stocks that have recently broken below and have stayed below any type of support level. I don’t really have any of those to mention, but an example of this can be a specific price point that the stock previously used as support.

This could also be stocks that are overbought, especially stocks that have recently crossed below their respective 20-day or 50-day simple moving averages to the downside.

Kate Stalter: Okay, great observations, thank you. Tell us a little bit about some overall strategies, or words of wisdom you might have for investors to navigate these difficult markets lately.

Michael Lee: Investing in education, in my opinion, has always been important and especially now. I think people are learning that, and I, as well, am always learning that.

You get into a stock, and if you don’t have an idea or strategy of when you’re going to leave the stock, then I personally think you’re in trouble no matter what. So again, protecting from loss is a big thing, no matter what the markets are, but especially of course in volatile markets like this.

Right now, I’m confident in going along with equities. I will say that when the market tumbled, I got out and stayed in cash. I actually looked for grassroots investments, local businesses and local ventures, things like that, and they seemed to be a lot more stable and yielded better returns than the stock market, definitely.

But, now that sell-off seems to be over, I think, on a broader spectrum, and going with the value strategy mentioned earlier, I think value stocks are a good idea.

Some potential, I think, and diversity can be found in ETFs. I don’t go too much into the ETFs, but some ETFs that I really like right now are the ProShares Russell 2000 (URTY), Direction Daily Small Cap (TNA), and ProShares Mid Cap 400 (UMDD).

Two of my favorite ETFs, when I go into ETFs, are Vanguard Total Market (VTI) and iShares S&P Small Cap 600 (IGR).

For other ideas, I tend to gravitate towards the health-care sector, and some health-care stocks to look at—a couple of which I’m in—are WellPoint (WLP), which I mentioned earlier, United Health (UNH), Cigna (CI), AmeriGroup (AGP), and Metropolitan Health Networks (MDF).

I also want to mention that I use a screen that I found successful, that targets companies with solid recent price performance. I use this screen to find potential growth stocks that haven’t yet hit resistance, going along with the adage “the trend is your friend.”

I also use this same screen to try and find up-and-coming smaller-cap stocks as well. Zagg (ZAGG) is a great example of a stock that came up in that screen earlier this year, and has since yielded great returns for me.

As for stocks that currently show up on that screen: Oncothyreon (ONTY), Culp Industries (CFI), Pharmacyclics (PCYC), Ariad Pharmaceuticals (ARIA), Domino’s Pizza (DPZ). Caribou Coffee (CBOU) is one that showed up yesterday, and that stock is actually up significantly today, August 30. Actually a lot of coffee stocks are doing well.

Also, RTI Biologics (RTIX), Express One (XPO), and Advance America (AEA). I like Advance America, but only if it breaks above its $9 resistance level.

Lastly, I’m not all a big IPO guy. I actually have an article out recently explaining why, but I have a wildcard kind of pick in Pandora (P).

On a fundamental level, the stock is really isn’t pretty at all, but investors don’t seem to want to let it slip below $12, and I can see it possibly dropping and retesting that $12 price point in the near future. If it does retest that and if it’s able to stay above that $12 level, it could be a good one to buy on the way up.

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