Thinking Speculative in a Risk-On Market

 | May 14, 2013 | 10:00 AM EDT
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The current policies of the Federal Reserve to ensure interest rates stay at historical lows and to push investors into risk assets are having some interesting impacts.

High-yield bonds (also known as junk bonds) now yield what risk-free 10-year treasuries did five years ago. Another item that caught my eye Monday was that the 25 most heavily shorted stocks in the S&P 1500 -- based on percentage of float -- have returned almost 7% so far in May so far. This is almost three times the overall return of the rest of the market.

I am not confident the Federal Reserve will be able to unwind its unprecedented largesse without hitting major bumps in the road. However, as Chuck Prince of Citigroup once famously said:  "As long as the music is playing, you've got to get up and dance."

With that in mind we will embrace this risk-on market for the moment by highlighting two of the most speculative equities that are currently in my own portfolio. Both are down substantially from where they were trading in late 2011.

GT Advanced Technologies (GTAT) provides polysilicon production technology and multicrystalline ingot growth systems for the solar industry worldwide. I last wrote about GTAT back in May 2012. It was trading at $4 a share at the time and it still trades at $4 a share. The other $4 stock I highlighted within that article, Power-One (PWER), had a happier fate, receiving a buyout at more than a 55% premium recently. I hope for a similar performance from GTAT now that the environment for solar stocks has improved markedly so far in 2013.

The prospects for GTAT are expected to improve significantly in FY2014. After falling more than 25% this fiscal year, revenue growth is expected to return next year with projected 8% sales gains. The company has managed to stay profitable despite declining sales. The company's balance sheet has 20% of its market capitalization in net cash. Subtracting this cash, GTAT is selling at 9x FY2014's projected earnings. The stock traded north of $15 a share less than two years ago.

Zynga (ZNGA) is a social gaming concern with both desktop and mobile platforms. Like many of the "social media" IPO's that came to market in 2011 and early 2012, Zynga is trading way below its IPO price. However, the company has almost half of its market capitalization in net cash on its balance sheet.  Zynga's sales projections mirror GTAT's almost exactly (down 25% this year, up 7% next).

Zynga should post a small loss this year and break even in 2014, according to analysts. This position is a highly speculative play that the company can successfully transition to mobile, possibly even in the area of online gambling. The stock reached $14 a share soon after its IPO in December 2011. ZNGA has regained some momentum over the last six months, moving from just over $2 a share to its current price of around $3.50.

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