5 CHARTS THAT WILL HAVE YOU SAILING THROUGH THE DREADFUL LEMON SKY IN THE WEEKS AHEAD
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PORTFOLIO UPDATE: IT’S ALL IN THE DETAILS
On Monday, I tweeted the following: SGGH is Signature Group, which was an NOL shell, with approximately $900 million in NOLs. The NOL part is great, but it's not the reason I bought into the company here. On Friday, the company announced their first acquisition, paying $525 million for the world's largest independent aluminum recycler. Before getting into the micro view of the SGGH, let's talk about the timing of this announcement. I don't think they could have timed the announcement of the acquisition at a worse time for fetching any kind of premium or gaining any kind of new interest from investors. In other words, the 20%+ reaction on the first day that has now been reduced to about a 10% upside premium for the shares post-announcement does not reflect the new reality, capabilities or potential for this company going forward. The market of Q3 and Q4 2014 is incapable of factoring in premiums to anything with a market cap below $500 million. Invariably, a pessimistic view has been given to small companies unless they present clear, straightforward data that requires very little in the way of analytic interpretation. This is what occurs during negative cycles in the micro/small-cap space. Nobody cares. And that is exactly where the opportunity for 200, 300, 500 or even 1000 percent upside in names resides. The simple act of Wall Street being in a drunken, depressive malaise that creates a black hole for proper pricing of tangible, positive fundamental changes in these companies is where the opportunity lies. So let's look at SGGH and the new form they have taken with this acquisition: First point: Recycled aluminum is a growth industry not because individuals are going to be increasing their consumption of Dr. Pepper, but rather, automobile manufacturers are being held to a higher standard of fuel efficiency. As such, they need a lighter material that doesn't compromise strength or safety. Tesla uses aluminum frames. The new Ford F-150 is the first Ford model to use an aluminum frame. Toyota is increasing use of aluminum in their automobiles. You get the picture. It is a sustainable trend in automobile manufacturing. Recycled aluminum is preferred as aluminum can be recycled without compromising quality. There is no need to have "virgin" material. Aluminum sheet deliveries to auto makers are forecast to rise from 504 million pounds in 2014 to 2.7 billion pounds by 2018. Second point: SGGH is paying $525 million for a company with approximately $75 million in EBITDA in 2014. The high point of their EBITDA was $105 million in 2011 on revenues of approximately $1.6 billion. This...
HERE IS THE SUPPORT LEVEL THAT MATTERS MOST FOR THE MARKET GOING FORWARD
In my continuing lust for a market that has become increasingly plague ridden according to popular perception, I would like to present the following chart showing a key level of support that the market responded to in a dignified manner during today's trading. This dignified response to such an important area of support is yet another clue, in addition to recent small-cap outperformance, that the undercurrent of the market is bullish in its intent. Not many people can see it in the midst of the noise. But that is what bottoms are made of. In the chart below, I reference this article from exactly one year ago today titled "The Resistance Level That Matters The Most For The Bullish Case Going Forward." The resistance level of exactly a year ago is the support level of present day. The market is a poet. click chart to...
HERE IS WHY THE S&P HITS NEW HIGHS BY YEAR END
You know the market has hurt investors when the analysis becomes a plethora of "maybes," "coulds," and "should bes." The days of putting yourself out there for all to see has been replaced with putting yourself out there to make sure you aren't humiliated by being wrong. I don't believe in such timidity in analysis. With that said, I will offer the following proclamation: The markets will end 2014 at new highs after making a low in October. I base this on two pieces of analysis that nobody is talking about: 1. The 200 day moving average being broken for the first time in something like 500 trading days. This is a record. It's a tremendous record, in fact. The record should end this week as the S&P is an inch away from breaking the 200 day MA to the downside. First, let's talk about what the record signifies. The fact that persistence on the bid for the markets has been so relentless to not allow the S&P a decent pullback for nearly 500 days is NOT bearish. It is a testament to the strength of this bull market. Strength that will not subside from the first "real" pullback of this bull market. That bid will return with the force of a million bearded dwarfs into the seasonally favorable period of November-December. Let's look at past data dating back to 1990 with respect to previous "record" runs above the 200 day MA: A. The second longest run after the present one was from 1995-1996. The break of the 200 day MA took place in July. Just a couple months later the S&P was 10% higher. A couple years later it was close to 100% higher. B. The 3rd and 4th longest runs took place in the 50s and 60s. Too far back to have any relevance. However, the fifth longest run took place from Oct 92-Mar 94. After the S&P 500 broke its 200 day MA in March 1994 it declined by roughly 5%. That was the low...for the decade. C. The 7th longest run took place from Aug 96 - Oct 97. The break of the 200 day MA was a one day event here. 6 months later the S&P was higher by 30%. 2. Speaking of 1994, there is an interesting correlation occurring in the Russell with respect to that year. See chart below: click chart to enlarge There are other reasons, as well. Such as leadership, earnings, interest rates, the Dollar, oil prices, valuations etc. But I want to keep this focused. Those speaking of...
4 CHARTS THAT WILL RESCUE YOU FROM THE JAWS OF MEDIOCRITY IN THE WEEK AHEAD
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CLIENT LETTER: THE SIGNIFICANT OPPORTUNITY BEING ALLOWED IN SMALL-CAP STOCKS
What follows is a section from the “Looking Ahead” portion of my monthly letter to investors at T11. I have created an email list that sends this report out at the beginning of each month to those interested. The full report contains commentary about the general markets and individual positions held in managed portfolios, as well as overall performance. To be added to the list email me at mail@T11Capital.com The Macro Small company investing has taken on a malicious slant in 2014. In what has become a prosperous time for the S&P, Dow and Nasdaq, the Russell 2000 has been stuck in the mud for a significant portion of the year, elegantly reminding investors that Wall Street takes joy in changing locks to doors that investors become all too familiar in passing through with great ease. For a good deal of the year we managed to avoid any correlation to small-cap indices as our holdings functioned independently of the averages. However, in Q3 it became apparent that our holdings were not immune. The immunity was not compromised by any company specific events. In nearly every case, our names are simply in a mode of “wait and see” what happens with respect to developing special situations. Rather, the holdings that occupy the portfolios have become victimized by a distinct environment of disinterest. The cyclical nature of disinterest that exists in the small-cap world is not just a micro phenomenon that causes bids to trickle lower as trading thins out over a period of time. It also speaks to a more macro issue of general investor disinterest in equities. At the core of illiquidity in companies with market caps under $500 million is the simple reality that there is not enough interest in the markets and therefore, not enough capital to spread itself into issues that require a deeper process of discovery. What does that disinterest signify in a broader sense and how does it influence the markets in the years to follow? Let's look at some statistics going back to 1980. The first study will look at periods of disinterest in the Russell 2000 as defined by a Russell that is either positive or negative by no greater than 3%. Essentially a sideways trading range, similar to what we have experienced in 2014: Periods of Disinterest (Russell +/- 3% for year) What Happens to S&P 500 in Following Year? What Happens to Russell in Following Year? 1981 +2.03% 1982 +21.55% 1982 +24.95% 1994 -1.82% 1995 +37.58% 1995 +28.45% 1998 -2.85% 1999 +21.04% 1999 +21.26% 2007 – 1.57% 2008 -37% 2008 -33.79% The second study will focus on periods of small-cap...