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22 May

Sunday May 22, 2016

by

Good afternoon. I hope you’re enjoying your weekend.

Let’s dig into the Swing & Long Term trading game plan for next week. But first, a quick recap of last week.

Aside from the 1.10% move higher to the NASDAQ, stocks were little changed this week, with the DJIA (-0.20%) and S&P 500 (+0.28%) bouncing higher at near their respective 52-week moving averages during the week.  The VIX closed slightly higher by Friday, printing comfortably below its 52-week average—a good sign.

During a 3.08% rally in the price of West Texas Intermediate Crude (WTIC) and weakness in the yen, traders didn’t witness the usual strong bid for stocks this week.  Prior to the opening bell Monday, comments made by Richmond Fed President, Jeffrey Lacker, initially spiked the major averages and plunged the VIX and gold price.

But Tuesday, the averages dropped sharply, erasing gains made Monday, with reports of a mysterious entity selling $2.3 billion of notional value of future contracts, all at one time, in the gold market.  Monday’s stock rally and gold market plunge appeared to me as a well-coordinated effort to ‘paint the tape’ in an attempt by the Fed to fool markets into believing a rate rise would actually be good for stock prices.  

It didn’t work, as the market continued the remainder of the week sluggish but better than I expected.  I think more weakness in stocks (S&P 500 below 2,000) may prompt the Fed to unleash another Fed member to suggest the duplicitous Fed will most likely stay on hold at the close of the June FOMC meeting.

My take is the Fed is intentionally being ambiguous and slippery about its real intentions, but will base policy decisions as they may relate to the strength of the US dollar on global markets, banks, US markets and emerging market sovereign debt, and not in response to economic metrics.  

Overall, I firmly believe the Fed will not risk ruining a continuation of the seven-year-long bull market in stocks or threaten a potentially contagious market disruption overseas.  

Let’s move on to my stock ideas for your weekend reading.  

This Week’s JBP Swing & Long Term Stock Ideas

To update my portfolio, no trades are open at this time; I’m waiting for the next opportunity to arise.  And as usual, I’ll email you immediately with an alert if something develops.  Here are the stocks that are on my mind.  Three are retreads, but I’ve updated my thoughts on these three and are worth the read.  The fourth is a new idea.

Cliffs Natural Resources (CLF)

Though the share price of Cliff Natural Resources (CLF) has dropped 42%, y-o-y, CLF has been among the top performers since the start of the year, up 84.8%.  As impressive as that performance is, CLF still trades at a paltry 2.49-times EBITDA and 0.28-times Price-to-Sales (P/S).  Even after the big run-up this year, the stock’s P/S metric reflects a massively depressed stock price when compared with the industry’s P/S mean of 6.2.

I believe the stock price reflects market fear that this company is slated for bankruptcy within the next three or four quarters.  The short interest is more than 37% of the stock’s float, which also reflects overly-negative sentiment about the company’s perceived chances of remaining solvent, especially following the “unnatural” sale of a significant stake in CLF by a terminated hedge fund.  Of course, this begot further selling.

This dire outlook suits me fine, however, in that, any surprise to the upside will be rife with fears among the shorts.  Under this scenario, any more news out of Washington regarding its targeted steel trade war with China (522% tariff) and Japan (71% tariff), along with any positive results these tariffs bring to any of the number of domestic iron ore producers may affect a nice rally in CLF.

And don’t forget about the pending review of a request to the U.S. Department of Commerce by the steel industry to impose tariffs on imported steel from Brazil, India, Korea, Russia, and United Kingdom.  The results of the review is expected to be announced some time in mid-July.

That’s what I’m looking at as one of the likely catalysts for a short-term shot-in-the-arm for CLF.  Longer-term, Washington’s protection of the domestic steel industry may certainly improve CLF’s EBITDA and, therefore, its stock price.

At $2.92, CLF trades above its 200-day moving average of $2.71 and below the base of support at $3.00, with an initial target of $3.60 and secondary target of $4.00 issued by me.  So, for now, the price is in the proverbial ‘no man’s land’.  I’ll keep you current on this stock and any trades I may make.   

Net 1 UEPS Technologies (UEPS)

As I wrote last week, I like what I see at Net 1.  The company’s strategic move to compliment its robust South African market and relatively untouched market opportunities in its no. 2 market of South Korea with its plans for rolling out payment services to India, Nigeria and Hong Kong suggest to me Net 1’s rapid growth may be coming back sooner than some may now believe.

And what I read Monday (May 16) by a very good analyst, Robert W. Baird’s David Koning, who reiterated a “Buy” rating on UEPS, helped me feel that more comfortable with this stock.  After trading as high as $21.48 in late Aug. 2015, softening sequential revenue prompted selling and a resulted in a protracted bear market for UEPS.

As the stock based at between $8.50 and $9.25 in March and early April, a surprise joint announcement on Apr. 11 by Net 1 and World Bank’s International Finance Corporation (IFC) that a deal had been struck between the two entities.  Included in the deal, IFC will purchase 18% interest in Net 1, a purchase price estimated to be worth US$107 million.  At the close of the deal, Net 1’s cash stockpile has now reached 60% of the company’s market capitalization.  The stock soared to as high as $12.33 on the news.

After the Apr. 11 news, UEPS immediately was added to my watch list, as I felt at the time (and still do) a purchase close to $10 would be a great entry point, as the chart shows a good potential for firm support at that level.  And last week got me closer to my objective of $10, as the stock dropped another $0.39 this week, to close at $10.45.

Besides the small news item about David Koning’s reiteration of his “Buy” rating on UEPS, no other news was released by the company or newswires about Net 1 or related events.  So, I remain patient with our objective at $10.

Aerojet Rocketdyne (AJRD)

Aerojet Rocketdyne (AJRD) is another stock I’m watching for its potential to regain lost valuation from back-to-back disappointing news regarding the a failed attempt to acquire United Launch Alliance (privately held) and the dropped contract with Orbital ATK (OA), which is estimated to set back Aerojet approximately 6% of 2016 revenue.  

Are these two stock-unfriendly news events worthy of a Price-to-Sales (P/S) of 0.64, when the industry average prints 2.06?

During Q1 2016, Aerojet increased revenue by 10.5%, to $355.3 million, while growing operating margin by 430 basis points, to 5.5%.  And the company showed a net profit of $0.08 per share, after losing money last year.

Though I expect AJRD to trade incrementally closer to two-times P/S than anywhere near where it trades now—just on a comparative basis—the contract with the U.S. Air Force to develop the AR1, the latest state-of-the-art liquid booster engine for the Vulcan rocket project, should boost revenue substantially in the future.  Aerojet has been awarded an initial grant of $115.3 million to complete the project, which is expected to be completed by 2019.  I estimate another $500 million (at least) to be appropriated by Congress to complete the AR1 project.

I know the AR1 is a backup to the Blue Origin’s BE-4 engine, but the apparent primary reason for the Air Force’s leanings toward the Blue Origin BE-4 engine as the first choice is due to the more advanced-stage development of the BE-4.  However, the decision of whether or not the AR1 will remain as a backup is still a wild card, though still a long shot at this point.  And if the decision doesn’t go Aerojet’s way, the AR1 may be available for retrofitting the Atlas V, and the development costs will have come mostly from the taxpayer (okay, maybe that’s a “boo” vote), to the tune of $616 million, with $188 million of the total development costs for the AR1 paid by Aerojet.  It’s a nice deal, if you can get it.

“This award from the U.S. government demonstrates its support of AR1 and recognizes the priority of assured access to space for our critical national security assets,” Eileen Drake, CEO of Aerojet Rocketdyne, said in a statement.

“The AR1 engine is the option with the least technical risk that allows the United States to quickly and efficiently transition off its use of Russian-supplied engines currently used on the Atlas V launch vehicle,” Drake added.

I don’t think investors have priced the potential of the AR1 outside of the Air Force contract to service the Vulcan.  In any event, I project AJRD as a $26.75 stock, a 35% discount to today’s $17.19 stock price.

I’ve noticed, too, that our objective of $17, as a point of accumulation, nears.  I’ll be watching closely if $17 is breached to the downside, and will alert you if/when I’ve taken a position in the stock as a long-term play.

Glu Mobile (GLUU)

One of my favorite stocks to trade is back on my radar screen: Glu Mobile (GLUU).  Since the disappointing guidance that came with the company’s earnings report, released May 4, the stock has steadily marched back 16.4% off the May 4 low of $2.13.  With support at $2.00, the action since the report has impressed me as a sign of strength at the low end of the $2.00 and $2.50 range.

First, I like GLUU because of its very low valuation when compared with Zynga (ZNGA) and Electronic Arts (EA).  At a Price-to-Sales (P/S) of 2.88 and 5.13, respectively, GLUU’s P/S of 1.40 seems laughable to me.  The stock barely trades above Book Value, and the cash position of the company $160 million represents nearly half the company’s valuation as a dismantled enterprise.

I’m not completely surprised at the swings in the price of GLUU; the industry is awash with blockbuster-to-bust plunges, which then morph into bust-to-blockbuster rallies.  The latest bust came from Katy Perry, the latest shot by Glu Mobile at another Kim Kardashian smash hit.  But what will tomorrow bring?  Here’s the lineup:

Britney Spears American Dream was just released Friday.  Gordon Ramsay Dash is scheduled for June. WeFire/Frontline Rivals slated for June/July. Nicki Swift debuts in Q3; Taylor Swift in Q4; and TBA Games in Q4.  We already know the popularity of WeFire/Frontline Rivals in Asia; it’s been in the Top-10 for weeks.

Each announcement by the company about a newly-signed contract with a celebrity invariably pops the stock, which gives us an incentive right there to play it.  But my point is that, any one of the above-mentioned titles could soar this stock, and with the price GLUU already at rather a deep discount to its competitors, the upside is quite substantial when compared with the downside risk.  Will another Kim Kardashian game come around?  Sure.  But even a fraction of revenue generated from that hit celebrity should move this stock north of $3.00 easily.

Therefore, I’m watching GLUU closely and will update you in future communiques, or maybe an email alert of a position I’ve taken.

Good luck trading!

Jason Bond

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1 Comment

  1. Moe

    JB, you went with SQ this week, just curious what you thinking with that trade cause it’s down quite a bit today and would like to see if i am on the same page.

    Thanks,

    Reply

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