Small-Caps to Big Techs

07/02/2014 10:00 am EST

Focus: STOCKS

Kevin Kennedy

Publisher, Coolcat Explosive Small Cap Growth Stock Report

Kevin Kennedy, editor of the Coolcat Report, discusses his momentum-based investing strategy and highlights a variety of his current favorite ideas, from emerging and frontier markets, energy and fracking, and education and technology.

Steven Halpern:  Our guest today is Kevin Kennedy, whose Coolcat Report ranked as the second best performer among the hundreds of newsletters followed by the Hulbert Financial Digest with a 15-year overall gain of 557%.  Congratulations on an outstanding record, and thank you for joining us today.

Kevin Kennedy:  Thank you, Steve.

Steven Halpern:  Your underlying strategy follows what you called the three M’s, market timing, momentum, and money management.  Let’s walk through these three factors.  First, could you explain your market timing focus?

Kevin Kennedy:  Sure.  I think the basic thing about the stock market is stocks aren’t going to really make much progress unless the market as a whole is making progress. 

Sure, you can see a few exceptions to the rule when the bears are prowling and markets aren’t strong, but a strong market will raise all the stocks up at the same time and give them a lot better chance to succeed.  You saw this just as recently as the dip recently in March and April. 

NASDAQ made a nice high in March, everything was going rosy and then, all of a sudden, all your momentum high-fliers, your Facebook, and your social media, and solar stocks, etc., really came off their highs.  Bottom-line, you need a good market. 

I focus on the NASDAQ, because that represents the smaller growth stock-type focus that I have, and I look at the 50- and 200-day moving averages, recent price performance, and just want to know that the market is in sync with the direction I’m going.

Steven Halpern:  Okay, so your second M then is momentum.  What specifically are you looking for there?

Kevin Kennedy:  Well, when you’ve got a strong market, the best way to take advantage of it is with strong performing stock.  I’m looking for stocks that are making new highs, new 52-week highs, that have high relative price strength, and have done well in the last six months in terms of their price performance. 

They’re showing good volume, particularly on their strong days and on their breakouts to new high ground. They’ve got good news happening, their earnings are improving, analyst ratings are increasing, their estimates are going up, and things like that. 

Basically, those are the type of stocks that are going to continue to go higher.  It’s like a straight-A student.  You expect that student to continue to get good grades, and it’s pretty much the same thing in the stock market.

Steven Halpern:  Finally, you emphasize money management.  Could you expand on that?

Kevin Kennedy:  Sure.  Once the market’s in gear and you’ve got the right stocks, even if you have the right stocks, sometimes they don’t work out for you.  You might have bad timing, the market might go south on you right as soon as you add a particular stock, so you need some buy-and-sell rules to put it all into place. 

Basically, again, I’m looking for strong stocks, but not typically after they’ve made a new high.  I’m looking for them to pull back a little bit, even if it’s 5% or 10%, if it’s in a more of a severe market correction, then I’m going to really look for them to be undercutting their 50-day moving average, similar to what the market would be doing. 

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Stops. Again, you need some kind of strategy to bail if you’re wrong and also to take profits on the way up.  If you’re fortunate enough to have a stock that doubles, I like to take some, sell of half of it or a little bit less, to take some profit, lock in some profit and then, basically, have some trailing stops that are rising and lock-in gains.

All parties come to an end.  Sometimes you can have a stock that lasts two or three years before it seriously breaks down.  I pretty much use a stop below the six-month low, or if it has a lower low in the meantime in the last two or three months, and that keeps you out of trouble and also, like I said, locks in some gains.

Steven Halpern:  With that as background, let’s look at some individual positions you like.  One of your newsletters is the Coolcat ETF Report, and in the ETF arena, you like the iShares Brazil (EWZ) as well as the more diversified iShares Frontier Markets ETF (FM).  Could you share your thoughts on these global ideas?

Kevin Kennedy:  Sure.  Starting with Brazil, which, obviously, is gaining a lot of excitement with the World Cup going on there.  Last year, it wasn’t doing too well, and, actually, last three years, it lost 37% with value, 21% of that in November, December, and January alone, but it’s bounced back pretty strong since then. 

Brazil is an ETF legend.  It made an 11-fold gain in the five years after 2003 and recovered pretty strongly from the 2008-2009 recession, but then, like I said, it’s been kind of a lagger.  It’s been strong in the last three or four months and bouncing from 38% to roughly the 50% area, and it’s one of the leaders.  Obviously, it’s a strong economy. 

Frontier Markets, you have a lot of people saying that you should have some exposure to Emerging Markets, and Frontier Markets are markets so small they don’t even rank as Emerging Markets. 

I’m talking about countries like Nigeria, Argentina, Kuwait, and Qatar.  They’re solid little economies, but they’re obviously not like the US, or even Brazil or China.  They’re not the dominant countries, but there’s a lot of, naturally, opportunities in those countries as well. 

Most of the FM, which is iShares Frontier Markets, most of the index is financial plays, and you find that a lot in some of the smaller countries.  Their central bank or their leading bank is, generally speaking, the largest stock on the exchange.  Anyway, FM is up 31% in the past year, and it’s been chugging along pretty nicely, so it’s a good play. 

Steven Halpern:  Now among small caps, you recently recommended Sprague Resources (SRLP) as well as Strayer Education (STRA).  Could you tell us a little about these holdings?

Kevin Kennedy:  Sure.  Sprague is an interesting company.  It’s an oil and gas refining and a marketing company with a pretty strong presence in the northeast US.  They sold almost 4 billion gallons of refined products in the last three years, so that’s most of their business. 

They also sell natural gas, and they have another division in their company where they sell asphalt in bulk and just some stuff that comes in handy in those cold winters up in the northeast.  It’s an interesting company. 

The market caps only about $500, million, but they have almost $5 billion in sales, pay a 7% dividend, they’re profitable, earnings are expected to more than double this year, and it’s pulled back here a little bit.  It’s about 10% off its high, so it’s well placed.  Obviously, the energy sector has been doing very well. 

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Strayer’s in a different situation.  The for-profit college stock group has really gotten hammered, particularly the last they had topped out in 2010.  Strayer has always been a leader, pretty much a ten-bagger during the decade of 2000 and 2010, so their revenues have surged more than eight-fold.

But, since then, they’ve struggled as the government’s taking on the college stocks, and they’re concerned about student loan defaults and issues like that.  Strayer, though, has addressed its challenges, it’s moved to close some campuses, taken some restructuring charges, cut spending to shave a lot of money, and it used to pay a dividend, halted that, so the stocks really responded well. 

It’s up 52% this year after it fell more than 80% in the previous four years.  I basically see this as, there’s a lot of companies like Corinthian Colleges, which are looking like they want to die or, at least, be sold as the government puts the target on them, but Strayer looks like it’s dodging a lot of the government scrutiny, and it’s probably one of a handful of potential strong survivors in that sector.

Steven Halpern:  Now, in the mid-cap range, you’ve embellished on a company called Hi-Crush Partners (HCLP).  What’s the story here? 

Kevin Kennedy:  Hi-Crush Partners, they produce high quality monocrystalline sand, which is used in fracking, and fracking, obviously, is growing enormously, particularly in some of the key shales around the country.  These guys have a big reserve of what they call Northern White Sand up in Wisconsin, and so they’re well-positioned. 

It’s like they are to fracking what a knife is to a chef.  They’ve been a new high machine since the end of 2012, almost tripled last year, and they’re up another 55% this year.  Revenues are jumping every quarter, their earnings are rising, and it’s not that expensive of a stock.  It’s one of those stocks that seems to be in the right place at the right time.

Steven Halpern:  We only have a minute but, before we leave, I did want to touch on your Coolcat Technology Report where you point to some recommendations like Apple (AAPL) and Facebook (FB), which stand out a bit among your generally smaller and mid-cap names.  Could you tell us a little about these big cap plays?

Kevin Kennedy:  Yeah, and like you said, I think sometimes we tend to focus more on the undercovered stocks, but we do have a portfolio that focuses on NASDAQ 100 stocks, and obviously, Facebook has been a leader there. 

Maybe a little late in the game, the stock went up 175% in the last year, but it’s had a few pull backs, and it’s obviously a leader.  It broke out huge last July.  Its earnings are growing, and I think it’s a solid component to any big cap tech portfolio. 

Same with Apple, obviously.  They stumbled a little bit following the death of Steve Jobs, but they’ve bounced back strongly here to new highs, the announcement that they split their shares, plus they’ve obviously got new phone cycles coming in, but they’ve got some new products that seem to have recaptured their spirit of innovation, so they look solid going forward.

Steven Halpern:  Well, we really appreciate you taking the time today.  Thanks for joining us. 

Kevin Kennedy:  Thank you, Steve. 

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