THE DARK HORSE HEDGE

July 13, 2010

241

THE DARK HORSE HEDGE

Silhouette of Horses Jumping a Steeplchase

By Scott Brown of Sabrient and Ilene of PSW

I’ve been down on the bottom of the world full of lies
I ain’t lookin’ for nothin’ in anyone’s eyes
Sometimes my burden is more than I can bear
It’s not dark yet but it’s gettin’ there.
[Bob Dylan]

Seeing no compelling reason to be more bullish on this uninspiring market, we are maintaining our 67% short tilt (weighing) with three new positions to enter this morning.

For reference, we started this virtual portfolio with $100,000 in cash and we allocated $90,000 for intermediate to long-term positions, and $10,000 for occasional swing trading positions. To date, we are short four stocks and long two. Today, we are going to add two more short positions and one more long position.

We are aiming to be hedged in our market exposure by being long stocks with the greatest potential to rise and short stocks with the greatest potential to decline. To identify these winner and loser stocks, we use Sabrient’s Value Change Up (VCU) assessment system. Sabrient’s VCU system is a multi-factor quantitative ranking system that scores over 2,000 stocks and allows us to enter LONG positions in the best ranking stocks and SHORT positions in worst ranking stocks. This method enables us to achieve greater Alpha (return over market return) and Sharpe Ratios, while maintaining a near zero Beta for Absolute Return.

Because we are working towards 12 long and 12 short positions, and starting with $90,000 to invest in this strategy, we allocate $7,500 for each long and short position (90,000/12 = $7,500). (The extra cash generated by short positions is not counted in this calculation.)

Apartment Investment and Management Co. (AIV)

SHORT AIV at the open on 7/13/10

Apartment Investment and Management Co. is rated a STRONG SELL by Sabrient and is ranked #5 at the bottom of the VCU strategy. AIV scores poorly in VALUE score of 6.4 out of a possible 100 which is a measure of the relationship between a company’s stock price and its intrinsic value. Additionally, AIV scores below industry averages in both BALANCE SHEET score of 29.8 versus the industry average of 37.3 (possible range is 0 to 100) and FUNDAMENTAL SCORE of 12 compared with an industry average of 37.3 (possible range of 0 to 100). AIV announces earnings on July 30, 2010 and the 17 analysts following this company have an average projection of +$.33. AIV has disappointed four consecutive quarters and we believe the dubious streak of misses will continue.

Sun Trust Bank (STI)

SHORT STI at the open 7/13/10

Sun Trust Bank is rated a STRONG SELL by Sabrient and is ranked #3 at the bottom of the VCU strategy. Earnings (or lack thereof) will be announced July 22, 2010 and 29 analysts project a range of -$.06 (on the best side) to -$.46 (on the worst side) with a consensus of -$.34. Price to Sales of 3.49 is significantly higher than the industry average of 2.88 and further convinces us that it is overvalued at this price. STI also has a Fundamental score of 32.1 compared with the industry average of 53.8 and the S&P 500 score of 70.1 which is a measure of a company’s financial health, including its balance sheet, cash flow, revenue and earnings quality.

Westerm Digital Corp. (WDC)

BUY LONG WDC at the open 7/13/10

Western Digital Corp. is rated a STRONG BUY by Sabrient and is ranked #1 at the top of the VCU strategy. Much like XRTX which we already hold in the virtual portfolio, WDC has a VALUE score of 100. The second half of the year is seasonally the stronger half for hard drives. Even if the market goes lower we are buying WDC at a tremendous value. The 23 analysts project a quarterly profit of $1.39. The forward P/E for WDC is 5.22 so the downside risk is negligible compared with the upside if WDC performs as expected.

Previously entered positions:

SHORTS:

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.

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.

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.com published 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.

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.

LONGS:

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.

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.

For more, visit the DHH archives, here. This virtual portfolio was started on July 1, 2010 and is in the process of being developed.