“Who is left to buy” is a rhetorical question of course. But for those not understanding the implications of rampant bullish sentiment, its a quick and easy explanation.
Investor Sentiment is an inverse indicator. The greater the positive sentiment the higher the risk and odds of a market pullback. Peaks in sentiment don’t have to mean the rally will come to an end but it usually implies there will be at least a pause. And, more frequently a sell-off great enough to instill fear back into the market place. As the saying goes: “If this was easy, everyone could do it.”
Adding to the list of extreme sentiment indicators is the National Association of Active Investment Managers. According to Sentimentrader.com the average manager is now 94.6% exposed to stocks along with a very low standard deviation which means there’s a whole lotta group think goin on.
There there is the Investors Intelligence (add joke here) Bearish Percentage: 15% That is a level only achieved three times since since 2008 and in each case there was a moderate pullback.
Brad Pappas
No positions
Not since 2009 have I purchased an Inverse Exchange Traded fund but with this absurd volatility I see the opportunity for a trade in the SDS at $24.71.
We may have been up 500 points in the afternoon but nothing is resolved and the Presidents press conference was as politically biased as ever, not what we need. I still think this is part of the bottoming process assuming a bottom is in place which is in doubt.
Long SDS
Brad
With the economy fluctuating between a glass half full one week and bone dry the next we continue to focus on Value and special situations based upon our equity model. For all practical purposes its impossible to predict where the economy will be in a year, but we do know that this period in our history corporations have rock solid with frequent over capitalized balance sheets (lots of cash, little debt) while the consumer continues to de-leverage from decades of over consumption (which will take years).
Value continues to be exploited in the markets as one of our long term holdings Sports Supply Group has been acquired by private equity firm ONCAP LP, shareholders will be receiving cash in lieu of stock. This marks the third holding of ours in 2010 that has either been acquired, subject of a hostile takeover or considering sale of the company. Asset rich companies make attractive targets since the cash on the books is quantifiable and frequently the underlying business can be acquired for little or nothing. Frequently these companies are the targets for Value investors who love nothing more than predictable and boring companies in sleepy industries with hairless balance sheets.
Present market weakness has pressured the price of Audiovox symbol VOXX to an excellent entry point here at $6.55. VOXX has approximately $330 million in current assets and $118 million in total liabilities which net to $212 million but the market value is $148 million. The $64 million dollar difference with 18.5 million shares outstanding or $3.45 per share is a rock solid Margin of Safety to the patient investor willing to wait for the value to move in excess of the balance sheet. The stock holds the potential for a 50% or more rate of return assuming the balance sheet remains intact.
VOXX has been around since 1965 and makes some of the coolest audio equipment in the world but it isn’t always profitable. Earning expectations for 2010 are in the .35 per share range but the estimate is from only one analyst.
Products are marketed under the Audiovox brand name along with other brands such as Acoustic Research, Advent, RCA, Jenson, Road Gear and Spikemaster.
One aspect that caught our eye was the list of investors who own significant stakes in VOXX: Seth Klarman of Baupost Group, George Soros and Irving Kahn.
We expect owning shares of VOXX to be a long term investment, investors should have a multiyear expectation. It is the type of stock that you could rest easy when you go on that multi-year sabbatical to the Amazon.
Others may want to wring their hands with the potential for deflation, however with investor angst so high at the moment reflects that much of the deflation debate may be baked in the cake of the market for the interim, hence the potential for significant values is quite good.
Be careful out there.
Brad Pappas
Long VOXX
Over the past few months we’ve spent a fair amount of time determining what value this blog could add to its readers. We’ve essentially boiled down our conclusions to the point where we could identify with many outstanding financial blogs that espoused old school investing in regards to value, balance sheets and growth, we could not find any that merged with the ideals of socially responsible or green investing. That is when the light bulb turned on as this is the type of analysis performed daily.
Being an investment adviser in the Boulder Colorado area would seem ideal since the area is chock full of alternative energy companies but with 20 years in the industry we also are very aware that the vast majority of these firms will not exist in their current form in just 3 or 5 years from now. As a rule of thumb the strength of their balance sheet in light of sales or a weak economy (and weak fossil fuel prices) will determine their inevitable success or failure, not sales, hype or even great technology.
Case in point regarding solar stocks: Reuters is reporting that a parliamentary mediation solution in Germany may reduce the amount of subsidy cuts in solar. Solar has been weak across the board with the expected cuts coming from Europe due to their financial crisis. Hence, why we’ve been avoiding the sector for over a year with the understanding that if a company cannot generate its own revenues without subsidies despite the lofty projections for worldwide revenue estimates, then the investment will likely be a loser.
In the interim we’re assembling a list of solar stocks and searching for those falling to extreme values (Price to Net current asset value) where risk should be minimal.
Ultimately, we think that the European mess will get worse and the domino effect of proposed subsidy cuts are inevitable hence solar stocks with significant European exposure are trades not investments at this juncture.
Markets are quite overbought in the short term and we don’t believe now is a good time to be adding new money to equities as the window of opportunity appears closed for the near term. The ideal time would have been a couple of weeks ago when fear approached extreme levels not seen since last March.
On the bright side, the weak Philly Fed data would have poleaxed the markets had it been released 2-3 weeks ago, whereas today it only creates mild selling. This leads me to suggest that a slowing economy is now baked in the cake.
