DARK HORSE HEDGE – Can’t Get No Satisfaction

DARK HORSE HEDGE – Can’t Get No Satisfaction

Courtesy of Scott Brown at Sabrient and Ilene at PSW 

Phil Davis put the “He’s tellin’ me more and more, About some useless information” into perspective Tuesday when he wrote:

Nice market take-down by the Journal this morning, who led off with an article questioning the EU stress tests saying: "From this point of view, it is not surprising that the doubts raised about the validity of the stress tests are weighing on the Euro and also on other risk-correlated currencies."  Then, to make sure no one misses the article, they run another headline for the US markets that says "Concerns Over EU Banks Hit Euro" in which they quote themselves:

"New concerns about the ability of European banks to weather the financial crisis came after the WSJ story highlighted once again the weaknesses of the stress tests. The report helped to widen the bond spreads on peripheral debtors and knocked European stock markets lower as another wave of euro zone jitters hit the market."

Phil continued: “think about the “nature” of this story.  There is nothing NEW in this NEWs, is there? It’s the kind of article that could be written any time someone wants to push the markets.  Even the data they are using is from back on 3/31 – they didn’t even bother to update their facts for Q2!”  

Sure enough by Wednesday, 24 hours later, the headlines countered: “Stocks resume rally as European debt worries ease.”

It is worth noting the day-to-day manipulations of the market on old useless information.  Today the market is reacting to slightly positive labor improvements and improved trade gap data.  Historically September has been one of the worst months for equities and so we proceed with caution.  Our market tilting indicators are pointing to a balanced position after giving time for the hysteresis to confirm the cross of the 50 day MA and 12-26-9 crossover.  There are many good value purchases available in the market at these levels and so we are recommending adding one long to the DHH portfolio (7.5% of portfolio) on Thursday, September 9, 2010.  

Buy Axis Capital Group (AXS) at the market Thursday, September 9, 2010 

AXS is the #1 rated long stock by Sabrient’s VCU ranking system and provides a strong VALUE stock in this market.  The 13 analysts who follow AXS project +$.80 for the September quarter and +$1.20 for the December quarter and more importantly +$4.27 for 2011.  These forecasts on the heels of AXS soundly beating estimates the last 4 quarters give us confidence in recommending AXS at this time.  Axis Capital is trading at a P/E of 8.09 versus the sector which trades at 17.24 and the S&P 500 average of 12.21 and even provides a dividend yield of 2.7%.  

From Sabrient’s Rating Report:

AXIS Capital Holdings Limited, through its subsidiaries, provides various insurance and reinsurance products to insureds and reinsureds worldwide. It operates in two segments, Insurance and Reinsurance.

Earnings and Revenue Update: For the quarter ended June 30, 2010, Axis Capital reported earnings of $204.9 million or $1.51 per share compared with $111.8 million or $0.79 per share for the prior quarter and $159.2 million or $1.06 per share for the same quarter one year ago. Revenues were $842.4 million for the quarter ended June 30, 2010 compared with $817.6 million for the prior quarter and $781.1 million for the same quarter one year ago. Last twelve months’ earnings were $3.45 per share compared with $0.93 per share a year ago. Last twelve months’ revenues were $3.0 billion compared with $2.7 billion a year ago.

Sabrient Analysis

AXS is rated a Strong Buy for its outstanding profile as a value stock, combined with strong growth attributes.

• Value: Sabrient rates AXS as one of the strongest value stocks in the market with a Sabrient Value Score of 95.0. At its current price, AXS offers excellent value based on last year’s results and projected earnings. This makes the stock a prime candidate for the value-minded investor.
• Growth: A Sabrient Growth Score of 72.3 suggests the stock has good potential as a growth stock.
• Momentum: AXS shows average momentum with a score of 63.1 for the Sabrient Momentum Score. This is a composite measure of price, earnings and group momentum.
• Timeliness: AXS has a Sabrient Timeliness Score of 54.0. This is a composite measure of short-term and long-term price performance and long-term group performance.

Our DHH virtual portfolio is now essentially balanced with 8 short positions and eleven long positions.  Four of the eleven long positions have covered calls written against them and thus do not offer much upside potential.  Eight of our long positions have been hedged with sold calls (GME, WDC, XRTX, FRX) or have been initiated using Phil’s Buy/Write Strategy (GCI, IM, WFR, VECO). 

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