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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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Let the Selling Bring These Stocks In |
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The last several days have been interesting to say the least. So far this week, we’ve seen multiple days with 80%+ down volume and decliners outnumbering advancers by upwards of 6:1. Now, I’m not about to get all technical, but those numbers imply there may be some very skittish people on the long side who are ready to call positions in on any change of heart. With essentially everything getting hit over the last week, what is the practical course of action to take? You can do a few things, of course. One obvious action if you are worried about capital preservation is to hedge your positions, perhaps by selling covered calls or purchasing a short or ultra-short ETF. Similarly, you could also sell some long positions and invest in some combination of bonds or cash equivalents. Given what I see as the exceptionally narrow equity risk premium in the market, cash isn’t a bad place for risk-averse investors to be. On the other hand, you can also take this selling in stride and view it as the natural course of the market, which swings between overbought and oversold. The last several days have resulted in some real axing of share prices, so there are some stocks which have suddenly become, say, 10% cheaper - not a bad proposition for investors who have some extra cash available to buy shares. What names should you be looking at? Here are two to start, and for each additional down day, I am going to add one more. The first comes in an industry that is at the center of the storm and could hardly be more unloved: housing. The second is almost as good in those terms: credit. Let’s start with a company like USG. Shares are down 12% this week on more housing-related concern, but I think that train of thought overlooks the fact that USG has built an exceptionally strong brand (Sheetrock) that is an integral part of not just homebuilding, but also interior renovations - from which USG derives upwards of 1/3 of its business. Are people going to stop buying and fixing homes? Doubtful. Are they going to require USG’s products? Yes. Do I think the market for USG shares are going to be flooded by a wave of panic selling driven by large shareholders? Warren Buffett probably isn’t going to divest his 20% stake in the company on a whim. Even better, USG was just downgraded to a sell by a research firm. With shares having underperformed by 15% since their initiation at “neutral,” this seems like an excellent case of closing the barn door after the cattle leave. USG is a buy at $40, whether housing is good or bad. Primus Guaranty (PRS) is a small financial shop run by some brilliantly people. Their business is selling (acting as a counterparty) to credit default swaps (CDS) and other risk-transfer instruments. Primus is essentially an insurer against bankruptcy protection, and they have a AAA credit rating, the highest possible. PRS is down 20% in the last five trading days, and the stock slipped even further to under $9.00 in after-hours trading today. The CDS market has seen exceptionally tight spreads in the previous few months, which has cramped Primus’ ability to profit and resulted in the sale of fewer swaps. This has hurt the stock because of the near-term loss, but in reality there is nothing wrong with that course of action - management was simply being diligent and being certain not to offer insurance too cheaply. Now that spreads are widening - giving Primus a chance to make more money - the stock is being punished for one of two reasons I can divine: Given that insiders at Primus own nearly 40% of the company, and have even been buying more shares of late, I find it hard to believe that Primus is on the brink of several substantial credit events. Shares currently trade under tangible net book value as well; look for the stock to rebound into the low-to-mid teens when sanity returns. |