Cash is king

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The market continues to correct. As a result, growth stocks are taking it in the neck, as is usual when panic sets in. While there are many things to worry about such as lackluster employment growth domestically and Europe going to hell in a hand basket, long term investors can take advantage of this sell off to get into good companies.

Timing a bottom is notoriously difficult, but I am not a proponent of simply averaging in. I think the use of technicals can improve the odds of buying at a decent price.

As for me, I am more than 50% in cash but looking to buy because rallies happen fast and furiously. Over the long term, this dip should prove to be a blip on the radar screen.

Rogue traders

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Reflecting on the trading scandal at $JPM from a few weeks ago, and the trading scandals of the past, the following lessons jump out at me:

-the financial industry is full of risk takers and that has not changed in hundreds of years
-they cannot adequately police themselves, no matter how good their risk management
-traders think they are playing with “house money” which results in egregious risk taking
-big investment banking CEOs wouldn’t be good ship captains because they aren’t willing to take full responsibility
-even the best investment banks are vulnerable, perhaps more vulnerable
-bigger isn’t always better
-hedging is not always a good thing
-Wall Street is broken

Peet’s Coffee ($PEET) is way overvalued

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I love Peet’s coffee.  I attribute the company to hooking me on java and I’m thankful every day for it!  But as an investment, this one screams caution.  Peets is guiding the market to about 14% EPS growth for 2012, which is respectable enough.  The problem, however, is that the stock is trading at a 53 P/E.  We used to own this company but the slow growth was the reason we dumped it.

I think the stock has a ways down to go.  Caribou Coffee ($CBOU) may be a better/cheaper bet if you’re jonesing for a coffee stock, although its growth is in question as well.

Peet's

First Cash Financial Services ($FCFS)

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By the numbers, publicly-held pawn shop companies are doing extremely well.  Earnings and revenues are steadily growing as they consolidate a highly fragmented industry.  One of my favorites is First Cash Financial Services.

The company is highly profitable, throws off a tremendous amount of free cashflow and has zero long-term debt.  The company also has relatively small exposure to Pay Day loans because it has been actively divesting itself of this business.  Currently, only 10% of its revenues are from these types of consumer loans.  The vast majority of revenues are from merchandise sales and pawn loans, a very traditional business.  The company is a play on Mexico as well, with more than 50% of its revenues coming from its operations from south of the border.

The big question is whether the regulators will kill the golden goose.  The Pay Day lending business is in trouble for sure, but the Feds no longer seem to be targeting pawn lending.  An attempt in 2009 to legislate limitations on the pawn industry failed in Congress.  The U.S Consumer Finance Protection Bureau (CFPB) is the next biggest threat.  Its Fall 2011 statement of regulatory priorities, however, does not include regulation of pawn loans.

The only question mark for me is what the Mexican feds plan to do.  $FCFS’s most recent 10-K states that the Mexican version of the CFPB is considering issuing some new regulations that could hurt the pawn loan industry in Mexico.  I’ll look into this, but for now, $FCFS looks like an interesting stock for the long term.

Disclosure:  I, or my affiliates, are long $FCFS.

More thoughts on the technicals

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Not much has changed since my last post.  The S&P is now in a support zone and this would be a reasonable time to buy.  I would wait, however, for some confirmation of a reversal back to the upside (e.g. a green candle or the Stochastics going into oversold territory and indicating a rebound.)

Looking at the other side of things, any bears out there are taking a big risk trying to short here with all the bullish traders defending the 1340 line in the sand.  If the sellers over power the buyers and cause the market to decline below 1340, then this would create a “double top” technical pattern.  Many more traders will likely then jump on the band wagon and sell.  This is going to get interesting very soon.

For now, I’m sitting on my hands.

Time to Bail or Load Up?

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As we can see on the weekly chart of the S&P 500, for the last 8 weeks the market has been in a range, trading between 1360 and 1420.  Over the course of the last few months, the market has been in an uptrend as denoted by the rising exponential moving averages (the blue lines).  The close of the market below the 10 week EMA line is a warning, but unless the S&P 500 drops below either 1340 or the 20 week EMA, the current rally remains intact.  The circle denotes an area where I will be looking to buy.

The bears among us would point to the fact that the Stochastics indicator has now dropped below the overbought zone and that this has the markings of a “double top.”  Fair enough.

The reality is that nobody knows what’s going to happen next (despite all the confident sounding technicians out there).  If you’re a long term investor like I am, then this is a potential buying opportunity and you should look for the market to level out in order to load up on discounted equities.

If you’re a trader, you may think that this is a good time to short, but I would argue that you’re a couple of days too late.  The green candle with the big upper shadow 4 days ago and the hammer 3 days ago were the days to make your move.

 

At this point the smart play is to buy as the market approaches support at 1360, assuming a short term reversal pattern (back to the upside) reveals itself.  If the S&P500 continues below 1360, then short.  In either case, you’ve got a nice line in the sand to use as a stop.

Keep the Faith

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Earnings seasons are very stressful for many investors.  Stocks become extremely volatile as investors try to predict a company’s financial performance for the most recent quarter.  Often, stocks rise or fall with violent ferocity as company beat or fail to meet expectations.  It is a vicious game.  Since I invest in growth stocks, I’ve seen my fair share of big gains and big drops.  A stock can jump 17% in one day or plummet 15% based on some short term projections and a lot of emotion.

It can be a psychological roller-coaster for even the best of us.  Yet the best investors are able to manage their emotions, stay focused on the fundamentals of a company and maintain a long-term focus.  There’s a passage in Peter Lynch’s book “One Up on Wall Street” that is a gem of wisdom:

Consistent winners also resign themselves to the fact that they’ll occasionally be dealt three aces and bet the limit, only to lose to a hidden royal flush. They accept their fate and go on to the next hand, confident that their basic method will reward them over time. People who succeed in the stock market also accept periodic losses, setbacks, and
unexpected occurrences.  Calamitous drops do not scare them out of the game.  If they’ve done the proper homework on H & R Block and bought the stock, and suddenly the government simplifies the tax code (an unlikely prospect, granted) and Block’s business deteriorates, they accept the bad break and start looking for the next stock. They realize
the stock market is not pure science, and not like chess, where the superior position always wins. If seven out of ten of my stocks perform as expected, then I’m delighted. If six out of ten of my stocks perform as expected, then I’m thankful. Six out of ten is all it takes to produce an enviable record on Wall Street.