Finally, Some Action for Stock-Pickers

At long last, the European community has arranged a bailout that has been accepted by the Greek government and which may buy it enough time to complete the illusory and elusive firewall against sovereign debt default. Once LTRO 2.0 (or 3.0) is in place, the powers that be will then feel comfortable enough to give the Greeks an inauspicious boot out of the euro currency, should that country fail to comply with the onerous terms of its current indentured servitude. Under current circumstances, it is difficult to imagine a Greek government that could reform the existing rotten political infrastructure and which would be remotely capable of strict compliance with the new plan. So the ball is back in the equity bulls' hands, at the same time that market sentiment is once again running on the frothy side. Over this past weekend, nearly every important financial publication acknowledged the new-found bullishness, and a few even rolled out strategists who hinted that a new bull market had been born. That may be possible, but a pause is almost guaranteed when the strategists suggest that a stampede is in progress. AAII Bull/Bear Bloomberg View Chart » View in New Window » Perhaps another push toward 1370 in the S&P 500 will transpire over the next month, but it will still be met with enthusiastic selling, and the current leg does not guarantee new highs for the bull market that was launched in March 2009. The market has significant overhead resistance to work through, and even many newly converted bulls feel that 1400-1425 will likely mark the top of the current move higher. On a technical basis, the monthly cloud chart is showing signs of fatigue in an area of resistance, with the conversion line falling dangerously close to the baseline. A crossover would be viewed as bearish. Monthly S&P 500 Cash Bloomberg View Chart » View in New Window » On a positive note, we continue to see the market rotate internally, even as the averages are walked slowly higher. For bottom-up stock-pickers who are entirely fed up with the extremely high equity correlation over the past several quarters, a sea change appears at hand. Although there still appears to be an indiscriminate bid under high-priced, high-growth issues such as Chipotle Mexican Grill (CMG), Buffalo Wild Wings (BWLD), and Salesforce.com (CRM), many other issues appear to be trading as much on idiosyncratic information as on macro drivers and other top-down noise. Every so often, I like to check into Gotham Asset Management's Magic Formula Investing stock screener to see what Joel Greenblatt's investment formula turns up. Joel wrote the famous investment book The Little Book That Beats the Market, in which he describes his value-based approach to buying stocks that have high earnings yields and return on capital. Given the recent run-up in stocks and my desire to selectively increase my net long position, I peruse the list that his approach generates and then apply my own screens to identify potential long candidates. Tops on the list is SanDisk (SNDK), a global leader in flash storage products. The company has a trailing P/E of under 12x and a forward P/E under 10x, and it has seen its revenue surge in the Asia-Pacific region in recent years, even as sales have slowed markedly in the U.S. and Europe. The company's cash and marketable securities portfolio is greater than its total debt. Earnings have been lackluster in recent quarters, but that has clearly been expressed through the poor stock performance. On a purely technical basis, the stock is testing both the recent trendline and the 30-week moving average. This is certainly a good place to probe the long side, especially as shares are 15% below their recent highs. SNDK Weekly Bloomberg View Chart » View in New Window » Investors looking for yield should put out a basket for Raytheon (RTN), another stock that hits Greenblatt's screen. Since it has a trailing P/E of 8.7x and a forward estimate of 9.3X, expectations are quite muted for this leading defense company. But since it has a sparkling balance sheet and a price-to-sales ratio of 0.70x, that 3.5% current dividend yield looks awful tasty. On a very short-term basis, the shares look vulnerable for a sell-off of another 7% to 10%, and I will be a buyer between $46 and $44 per share. RTN Daily Bloomberg View Chart » View in New Window » One last stock that models very cheap and has an interesting technical configuration is Forest Labs (FRX). This company is a leading manufacturer of both branded and generic prescription drugs, in addition to over-the-counter products. Although it doesn't pay any dividends, it currently fetches a miserly 7.7x trailing earnings. Its blockbuster drug Lexapro came off patent protection in September 2011, so expectations are very low for Forest. It recently experienced a bronze cross (my lingo for when the 50-day moving average crosses the 90-day). The stock looks buyable from here on down to the recent low of $28.47. It has several drugs in phase III and IV clinical trials. FRX Daily Bloomberg View Chart » View in New Window » Please remember that the Magic Formula is a longer-term investing approach; shares are recommended to be held for at least 12 months. But the three stocks mentioned above look to be influenced much more by firm-specific and industry-specific issues rather than by risk-on/risk-off market antics. On further weakness, they all appear attractive.

Finally, Some Action for Stock-Pickers

These three stocks are likely to move on company-specific news rather than macro antics.

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