The Bright Side of Life

 | Nov 23, 2012 | 12:00 PM EST  | Comments
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Stock quotes in this article:

ainv

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seac

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anf

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rsh

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spls

As I worked my way into a food and football coma yesterday I did spend a little time talking markets and stocks with some folks.

An associate pointed out to me that although I have often referred to the downward changes in Value Line rankings, I had never written about the upward changes in the ranking system. I have to confess I am guilty as charged. I look at the positive changes, but not as deeply as the downgrades. Value Line is based on momentum and trends in earnings and stock price and I do not usually pay much attention to momentum stock picking efforts. Momentum turning negative has always been of higher interest since it helps avoid potential problems.

But it seems to be worthwhile this morning to take a look at areas of improvement in various stocks and sector. One point of note is that as much as the leading retailers are slowing prospects for the battered sector, losers are showing some signs of improvement. Stocks that have been out of favor that received a one notch improvement in their rankings include some of my real dogs of the past year including Radio Shack (RSH) and Staples (SPLS), A continued improvement in the fundamentals and stock prices of those two would be a welcome boost to the portfolio.

Abercrombie and Fitch (ANF) also saw its ranking improve a notch after posting its first year-over-year earnings growth in some time. The stock price got a huge lift as earnings solidly beat expectations and there was a bit of a short squeeze in the shares of the unloved retailer. As our own Brian Sozzi recently pointed out, it is highly unlikely that the chain suddenly recaptured the volatile teen market, so I would be hesitant about chasing this stock higher.

I also see that shares of SeaChange International (SEAC) were upgraded to a ranking that indicates it should perform in line with the market over the year. The stock has suffered as the company has remade itself into software by divesting the server and media businesses. As the managers of the Algonquin Funds pointed out to us last year, this is the key to unlocking the real value of the company. The software allows cable companies, telcos and mobile providers to provide video services to their customers. The server and media business had very low margins and were a drag on the earnings potential of the company. While there could be short-term earnings shortfalls the company should see its next generation of high-margin software products become a growth engine for the next several years.

My current favorite unconventional income stock was also upgraded this week by the venerable research service. Apollo Investment (AINV) continues to perform well in an uncertain economy. The business development company reported a solid quarter recently, with gains in net income and net asset value. Apollo has been taking advantage of the strength in the credit markets to exit some positions and reposition the portfolio in more promising investments. In the last six months they have sold more than $300 million in securities and repositioned into 22 new companies. About $286 million of investments were repaid over the period and they completely exited positions in 15 companies. As the high-yield market has seen the return of covenant lite and PIK bonds, Apollo's management has been focusing on secured loans and avoiding the higher credit risk of unsecured lending. The switch from unsecured to secured lending caused portfolio yields to decline slightly, but the shareholder payout remained at $0.20. At today's price the shares yield 10%. Apollo still trades at a discount to asset value and is a solid addition to portfolios in search of yield.

I still think the downgrades are more useful information as in uncertain markets like we currently face the best offense is a strong defense. But it is heartwarming to see that some of our depressed and cheap stocks are showing signs of a turnaround in prospects.

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