Although I am an investor by nature, many of my closest friends and associates are stock and option traders, so I am exposed to that side of our business on a daily basis. When talking with traders during the day, I seem to always hear the same names and indices as trading candidates. I believe this a huge mistake, as you are playing a game of pass-the-burning-match, and considerable firepower in the form of capital and intellect is aligned against you.
When it comes to trading, there is considerable merit to practicing the art of inversion. Almost all traders are chasing the hot stocks that are making new highs. I suspect that this creates a real opportunity for traders to apply their technical patterns and statistical data to the less exciting stocks on the new-low list. In the past few months, I have noted that many of the stocks that are making new lows have experienced huge tradable bounces as buying pressure has returned to the shares.
Many stocks on the new-low list are headed for the garbage pile. The list includes cash-starved biotechs, air-filled Chinese fabrications and over-leveraged dinosaurs galore. These stocks offer substantial opportunities for short-side traders.
However, there are also plenty of solid companies that are experiencing temporary difficulties or which are stuck in unloved sectors that may have the potential for fantastic long-side trades. When I look at the list of stocks trading near new lows, I seem some interesting, well-known names that could provide traders with more profitable inventory.
One such stock is Hewlett-Packard (HPQ). A lot of money has gone into Hewlett looking for a bottom in the past few years. Some of the smartest value guys on the planet, including Seth Klarman and Michael Price, have been buying the stock this year as the price has continued to decline. The sellers have had their way with this stock, as it has fallen near the 2005 lows. At some point one has to believe that this $100-billion-plus revenue giant will succeed in its restructuring and turnaround efforts. A pickup in the economy that lifts computer and printer sales would help to cover some of the company's blemishes.
Another potential trading opportunity would be the semiconductor company Atmel (ATML). The company is a market leader in microcontrollers for touchscreens. The shares have been downgraded on fears of weaker demand for its products and increasing competition from Asian microcontroller semiconductor companies. However, the company has shown some strength in new orders, and the backlog has been increasing so far this year.
Atmel should also see stronger demand once Microsoft's (MSFT) releases Windows 8 later this year. Atmel exceeded analysts' estimates last quarter, and margins have been improving. The company believes it has seen the bottom of the demand cycle for its products, and this bodes well for the share price. Atmel has backed its belief with cash, as it has been steadily buying back shares as the stock price has declined. Traders would do well to note that the last time the stock bounced off a long-term bottom, the shares tripled in a relatively short period of time.
One stock that is making new lows and should be on everyone's list as a trading candidate is Carbo Ceramics (CRR). I mentioned this stock a few weeks ago as true undiscovered growth stock. Everyone and their brother on Wall Street has rushed to downgrade this stock in the face of weaker natural gas prices and competition from China that has lowered pricing. Drilling activity in the unconventional gas fields has slowed down substantially this year, and this has also hit the stock price in recent weeks.
No matter how the ongoing energy debate shapes up, hydrofracking in the shale fields for oil and gas is going to be part of the energy picture for many years to come if we really want to develop energy independence. When drilling activity resumes, Carbo will be a major beneficiary of this drilling activity and become a growth leader.
I am not a trader by nature, but I do spend a fair amount of time considering how to survive and thrive in the markets. Traders would do well to look for opportunities in the less crowded segments of the market and avoid trading the same names everyone else is chasing. Looking for reversion to the mean among the stocks on the new-low list would seem to be one practical and profitable way to achieve this goal.