A holiday-shortened week combined with little news provided the backdrop for a light volume positive week with the major indexes posting 5% gains. Earnings season begins Monday July 12, starting off with Alcoa Inc. and followed by dozens of other companies. The S&P is bumping up against several technical resistance lines. After falling over 13% since the April highs, last week’s recovery pushed the SPX to 1077.
On the chart below, our trend line drawn through the April highs and June rebound-highs indicates that the SPX is right at trend-line resistance. The 50-day Moving Average also looms just above as another possible resistance area.
[Chart by Free Stock Charts]
The 14-day RSI at 42.4 remains below a more bullish 50, and the 12-26-9 MACD at -13.6 remains shy of a bullish signal line at zero. Factoring in the lack of volume in last week’s 5% rebound (and possible lack of conviction), the chart-evidence leads us to believe that the market isn’t ready to continue the uptrend in the short-term. Notice all four positive days last week had volume below the 50-day Moving Average. Greater declining volume on Thursday and Friday isn’t particularly encouraging.
Analysts are projecting that second-quarter earnings of S&P 500 companies rose 42 percent, according to S&Ps Silverblatt. Investors will again be watching the earnings and revenue figures along with guidance as concerns over a double-dip recession remain. The Dark Horse Hedge maintains a SHORT tilt in our Long/Short approach to achieving higher Alpha (return over benchmark return) and Sharpe Ratios (return for each unit of risk taken) with a low Beta (correlation to market move and direction--i.e. we’re striving for less correlation to market movement).
We will be watching the trend lines and technical signals this week to add new posititons. If the market struggles and can’t penetrate the trend line, we will likely recommend adding 2 SHORTS and 1 LONG position. In contrast, if the market reacts well to early earnings announcements and can break through the trend line, it is likely that the RSI and MACD will confirm a move through the 50-day Moving Average and provide reason to go to a BALANCED position by adding 2 LONGS.
We are continuing to hold our previously entered (July 1, 2010) short and long positions:
The St. Joe Company, JOE, short at $23.16
Sabrient rating: Strong sell
The St. Joe Company, together with its subsidiaries, operates as a real estate development company in Florida. The company operates in four segments: Residential Real Estate, Commercial Real Estate, Rural Land Sales, and Forestry.
As St. Joe’s is a major land owner and property developer in Northwest Florida, about 70% of St. Joe’s properties are within 15 miles of the “now imperiled coastline.” It doesn’t matter that they purchased 577,000 acres at a low price. The bottom line is that contractors have already found tar balls on St. Joe’s beaches and nobody wants that kind of beachfront property.
USG Corporation, USG, short at $12.08
Sabrient rating: Strong sell
USG Corporation, through its subsidiaries, engages in the manufacture and distribution of building materials primarily under SHEETROCK, DUROCK, and FIBEROCK brands worldwide.
On June 24, Moody’s Investors Services downgraded two credit ratings of building materials company USG Corp citing a dim outlook for the building sector. The ratings agency said that USG has low capacity usage rates at its gypsum manufacturing facilities. It believes that demand for gypsum board, used for walls and ceilings, and other building materials won’t be enough for USG to cover its intermediate term interest expenses.
USG has been losing money for several years and the losses are expected to continue for several more years. The bad news from the housing industry over the past week does nothing to improve the outlook for USG, and I think USG is more likely than not to continue to trend back toward its 2009 low, which was below $5.00 a share.
Houston American Energy Corp, HUSA, short at $9.86
Sabrient rating: Hold
Houston American Energy Corp. engages in the exploration, development, and production of natural gas, crude oil, and condensate. It primarily focuses on properties located in the United States. Last Monday (June 28), Sharesleuth.compublished an article about HUSA expressing a number of concerns, including concerns about the management team’s history, questionable valuations on the Columbian estimates, and significant ties to people with prior SEC troubles. From Sharesleuth.com:
A SPECTACULAR DEAL?
The gains are linked largely to Houston American’s deal last October for a 25 percent interest in a Colombian oil prospect controlled by SK Energy Co., one of Asia’s biggest producers, refiners and marketers.
Houston American said in an investor presentation and subsequent Securities and Exchange Commissionfiling that the prospect was estimated to hold anywhere from 1 billion to 4 billion barrels of “recoverable reserves.”
The latter figure exceeds the official proved and probable reserves for all of Colombia, and stands as one of the most audacious claims by any of the energy companies operating in that country…
Regardless of Sharesleuth’s allegations, the company is trading at 81x earnings in a business that its peers receive 22x valuations. All of this leads me to believe that HUSA is overvalued at $10/share.
AMAG Pharmaceuticals, Inc., AMAG, short at $34. 35
Sabrient rating: Strong sell
AMAG Pharmaceuticals, Inc., a biopharmaceutical company, engages in the development and commercialization of therapeutic iron compounds to treat iron deficiency anemia (IDA) in the United States, Europe, and Japan.
Applying Sabrient’s rating system, AMAG scores very poorly on several key rating measures. Specifically, a fundamentals score of 4.5 out of a possible 100 (industry average 52.1), measuring the company’s financial health, a balance sheet score of 39.2 out of 100 (industry average 68.8), measuring a company’s liquidity and debt issues, and a value score of 39 out of 100 (industry average 51.6), which measures the company’s stock price against its intrinsic value. These factors combine to suggest AMAG as a good short candidate.
Earnings and Revenue Update: For the quarter ended March 31, 2010, AMAG Pharmaceuticals reported earnings of $-23.1 million or $-1.15 per share compared with $-18.4 million or $-1.07 per share for the prior quarter and $-26.4 million or $-1.55 per share for the same quarter one year ago. Revenues were $13.3 million for the quarter ended March 31, 2010 compared with $13.1 million for the prior quarter and $1.0 million for the same quarter one year ago. Last twelve months’ earnings were $-5.06 per share compared with $-5.23 per share a year ago. Last twelve months’ revenues were $29.5 million compared with $2.3 million a year ago.
AMAG has the dubious distinction of being on the Top 10 highest short-interest companies at 30.2%. Analysts project a loss for the year of $3.88/share and $2.02/share in 2011 which is the “good” news. Estimates for the upcoming quarter have been revised downward from -$.76 to -$.97 in the last 30 days.
Xyratex Ltd, XRTX, long at $14.15
Sabrient rating: Strong buy
Xyratex Ltd provides modular enterprise-class data storage solutions and storage process technology. The company designs, develops, and manufactures enabling technology that supports storage and data communication networks.
Xyratex Ltd (XRTX) reported a quarterly profit that beat market estimates as it benefited from strong demand for its storage products. Net income for the second quarter ended May 31 was $43.7 million, or $1.39 a share, compared with a loss of $9.6 million, or 33 cents per share, a year earlier. Excluding items, earnings were $1.49 a share. Revenue rose 134 percent to $455.9 million.
Analysts expected earnings of $1.35 a share, excluding exceptional items, on revenue of $430.3 million, according to Thomson Reuters I/B/E/S. For the third quarter, the company forecast earnings of 87 cents to $1.16 a share, excluding items, on revenue of $385 million to $435 million.
Telecom Argentina S.A., TEO, long at $16.43
Sabrient rating: Strong buy
Telecom Argentina S.A., together with its subsidiaries, provides telephone services to residential and corporate customers in Argentina. It operates in two segments, Voice, Data, and Internet Services; and Wireless Telecommunication Services.
TEO operates at a 22.6% profit margin compared with the industry average of 2.95%. Additionally, the current P/E is 8.67 while the industry trades at a multiple of 15.95. Lastly the PPE (Projected P/E based on 5 year forecast) is .75 against the industry average of 1.55. So as a value purchase we are adding TEO at 1/2 the price of its peers. TEO’s earnings were up more than 30% for 2009 and are expected to be up nearly as much this year.