Special situation stocks Special situation stocks

first_img Special situation stocks: Special situation stocks can thrive in even poor market conditions. This category includes: Companies unfairly punished by the market, including companies in loathed industries (like PCs) or companies undergoing restructuring. Companies poised to ride an emerging trend… like social media, robotics, big data, LED, etc. Companies that will benefit from government policy… like incentives encouraging adoption of electronic health records, clean air initiatives, etc. Recap: Big tech stocks appear richly valued and ripe for a pullback, but there are some good deals in foreign markets and with special situations. In 2013, stocks went up pretty much across the board. But the market is starting to look toppy, so don’t expect the same thing in the coming year. 2014… a year to be picky. Worst case: Markets start to fear that multiples are too high, and a selloff begins. Margin selling is triggered, which only adds fuel to the fire. In this scenario, the selloff would likely be greater than a normal 10-15% correction. If the best-case scenario plays out, we might miss out on some gains. However, because the risks are mounting, we need to forego some of those gains in exchange for restful nights. Since we think scenarios 2 and 3 are more likely, we recommend rebalancing your portfolio in this manner: raise your cash levels, take out market hedges, and limit your involvement in the stock market to “spearfishing” for mispriced deals. If the markets keep surging, those few mispriced deals will soar and more than make up for the cost of insurance and the lost opportunity of not being heavily allocated toward the stock market. If the market tanks, the mispriced deals shouldn’t get hit as hard as the high-fliers and could even be profitable. Plus, you’ll be positioned with cash to buy back into the market at post-correction prices. So where are these “mispriced deals”? Biotech: Think Small With the historic rise in the biotech indices, a casual observer might see no opportunities in the sector. But look closer and it’s clear that the major increase in biotech indices has been driven by large biotech companies with a handful of drugs that are expected to become blockbusters. In fact, it looks as though 2013’s FDA approvals will generate big sales down the road… But much of this anticipated performance is priced in to the big biotech stocks that dominate the biotech indices, like Biogen. Good luck finding significant value with any of these. Smaller biotechs, however, are one place where you can still find very reasonable, even cheap, valuations. The recent boom in new biotech issues and the unclogging of the FDA-approval backlog left too many companies for the Street to track. Many small biotechs don’t even hit the market’s radar until just before (or even after) big events. It’s a situation that savvy investors can exploit for sizable returns, like the 197% gain that Casey Extraordinary Technology recently booked on the insulin-inhaler manufacturer MannKind. If there is a general pullback, small cap biotechs will take a big hit, as institutional investors flee to safety to protect their quarterly bonuses. But for investors with a little patience, the right stocks will eventually pay off in spades. Specifically, we’re targeting small-cap biotechs with near-term catalysts (like a drug approval or results from significant human testing) and enough cash to weather an economic storm. Riding long-term biotechs through a big downturn can be incredibly painful, especially as those companies will struggle to raise the capital they need to stay in business. But well-funded companies with shorter runways to their “big events” will fare much better. In Casey Extraordinary Technology, we have a plethora of such companies, including: A molecular testing company whose “spherical DNA” testing platform has it launching half a dozen new tests a year, all of which are remarkable cost savers (the sepsis test saves an average of $21,000 per patient, according to two peer-reviewed studies just published). Nanotech pioneers with remarkable new biotargeted delivery systems that can carry thousands of times more payload than current tech, and do it safer, cheaper, and across immune system blockades that were previously impenetrable. All of these companies trade at low risk-adjusted multiples, have catalysts in the next year, or are just starting to ramp sales. If things go as planned, these companies should yield remarkable returns in the coming year. (If you’re interested in these types of targeted speculations, we offer a 90-day risk free trial. Click here for details.) Recap: Large-cap biotechs are overpriced and due for a correction, but there will be plenty of opportunities with small-cap biotechs in 2014. Look for companies with cash and catalysts. Big Tech: Look Abroad and at Special Situations Amazon, Google, Facebook, Hewlett Packard, Priceline, and several other big tech stocks soared in 2013. Will this momentum continue next year? We don’t think so. But that doesn’t mean you should avoid the large-cap tech stocks entirely. The key to success will be selectivity. At BIG TECH, we’re focusing on: Foreign stocks: The rush to US markets in recent years has left foreign markets with relatively low multiples. The big banks don’t want to risk their money as long as the Fed will guarantee it when kept in the US. But that veneer is starting to peel amid talk of stimulus tapering and concerns about high valuations on US stocks. Meanwhile, China’s Shanghai Composite is trading at a P/E of 8.3, half of US valuations. Growth markets like Southeast Asia, Latin America, and Africa are cheap too. Picking up a few large-cap stocks in those regions—especially those that provide stable services like telecom and e-commerce—can mean consistent earnings at bargain prices. We have a few of these companies in the BIG TECH portfolio and are looking to add more in the coming months, since a rush to safety in the wake of Fed tapering will likely include flight to global mega-cap stocks. Most likely case: Companies meet projected earnings but multiples cool. Under this scenario, prices pause as earnings catch up. With the major tech indices surging indiscriminately higher, those employing the dartboard strategy for picking stocks probably fared well in 2013. But will that strategy work in 2014? Or will the coming year require more caution? Of course, all prognostication begins with the same disclaimer: Beware of “black swans”—those unforeseen events that could pop up at any time and wreak havoc on the markets. But, assuming there is no nuclear war with China and Duchess Kate isn’t abducted by Muslim extremists, we believe the picture is shaping up clearly. A Stock-Picker’s Market With the markets near record highs and margin borrowing at never-before-seen levels, the probability of a selloff is high. Something as simple as a change in Fed policy could easily ruin the market’s appetite for risk and send stocks spiraling downward. In that case, overallocation to stocks in general, even the “safe” large caps, could burn investors. The way we see it, there are at least three possible scenarios: Best case: Federal stimulus, being the main thing moving the market, continues at an unabated rate (and possibly even an accelerated rate, especially if economic conditions deteriorate), and the market moves higher. An anticancer researcher whose “heat shock protein 90” inhibitor is quickly proving it can halt growth of multiple cancer types.last_img

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