3 Buys for Sketchy Times

05/10/2012 9:00 am EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

The market's fundamentals and techincals aren't looking too bright, but there are still opportunities, even as the clouds approach, writes Jack Adamo of Insiders Plus.

Last week, market breadth and volume turned substantially negative after having lost its upward momentum.

On Friday’s sell-off, NYSE advance/declines were 3.5:1 negative, and downside volume beat upside 6.6:1. The NASDAQ was even worse, with an A/D of 4:1 and downside volume swamping upside by 9:1. For the last 30 trading days (as of 5 May), NYSE down days to up days were approximately 3:2. On the NASDAQ composite, it was 2:1.

There was, however, no noticeable increase in overall volume compared to the first quarter. On its heaviest days, volume was still about a third less than it was on heavy days before the 2008 crash. I don’t know if that’s because so many investors have fled the market, or more trading is being done off the exchanges, or a combination of the two.

All the broad indices broke markedly below their 50-day moving averages. That is generally considered a warning worth watching, since it is the first noticeable sign of a breakdown in the market. Still, it’s a long way from this point to a bear market, so there’s nothing to confidently hang one’s hat on yet.

The same goes for sentiment readings. Market Vane figures (which are a week behind) are at 63% bullish, which generally leaves room for a move in either direction. They probably fell quite a bit last week, maybe into the mid-fifties.

Usually, they can go as low as the mid- to high forties before a correction turns around. However, that’s for a garden-variety correction. If we are facing a recession with a down-leg of a bear market, it could go lower and stay there longer.

But there are still some reasons for hope, as some of the earnings reports from our picks came in strong.

Eldorado Gold (EGO)
The miner reported a 10% rise in EPS on a 23.7% rise in revenues. The disproportion was due to a 12% increase in outstanding shares issued for the acquisition of European Goldfields Limited and expenses related to the acquisition, as well as higher income-tax expense.

Operating profit before these factors was 25% higher year-over-year and operating cash flow per share was 55% higher than earnings. The company’s balance sheet is also in great shape, with debt representing only 17% of total capitalization.

The shares are down 2.5% since we bought them in January. Buy Eldorado Gold up to $14.25.

Westpac Banking (WBK)
The Australian bank had a complicated half-year report. Operating earnings were up 5%, but net earnings were down 25%.

A lot of the difference had to do with a one-time tax benefit raising last year’s results, related to the acquisition of St. George’s Bank. But Westpac also took an asset impairment charge of A$145 million. I haven’t been able to dig up the specifics on that charge yet. Like many foreign companies, its interim reports are not very detailed.

But overall, things looked pretty good, considering the rough economic environment stemming from the slowdown in China and Southeast Asia in general. Customer deposit growth was excellent, rising A$32 billion, or 11%.

Westpac also continues to lead Australian banks in efficiency, with a cost-to-income ratio of 41.1%, significantly better than any bank in Australia—or any bank I know of anywhere for that matter. The bank also raised its interim dividend 3%, although that may be slightly more or less when translated into US Dollars for the ADRs we own.

We’re up 3.4% in a little over four months we’ve owned Westpac. This is another stock I’m hoping to load up on if the market goes sour. Buy Westpac Banking on pullbacks below $114.

Vector Group (VGR)
The company reported a loss of $7.7 million for the first quarter, compared to a profit of $19.4 million last year. However, this company’s earnings reports are filled with oddities due to the nature of its businesses.

Tobacco is fairly steady, and the current quarter showed a slight increase in earnings, despite a slight decrease in revenues. The real estate part of the business is extremely lumpy, since it is entirely opportunistic quarter to quarter. Deals are made when the timing looks right.

That also affects cash flow from investments significantly. Operating cash flows were $40.6 million, about seven  times last year’s comparable quarter. But new investments ate up a lot of that, so the dividend this quarter is only 4 cents compared to 38 cents last year.

Results from Vector will always be lumpy. Those of you who need your dividends to be predictable might want to move money elsewhere. The stock is down 1% since we bought it.

Over the long term, Vector has done extremely well. We will hold onto it unless I see a reason that story may change, or we find a better place to put the money.

Right now, I’m comfortable with the position. Vector Group is a buy up to $19.50.

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