Stocks Holding Up Despite a Big Down Dow 387 Day (Aug. 9, 2007)

The Dow Jones went down 387 points today, for a loss of 2.83% to end at 13270.68. But despite this big drop, there are stocks which went up today.

Here are a few of those stocks on my screen that went up despite a big drop in the market.

1. Leucadia (LUK): (Up 6% today)

Leucadia (LUK) is a company that many call a mini Berkshire Hathaway (BRK.B), Warren Buffet's Company. Management is excellent, led by Guru Investor Ian Cumming and Joseph Steinberg. In 1978, Cumming and Steinberg banded together to take control of the company for $100,000 of their own money and $1.2 million from others to grow it to a $10 Billion company today. Both are still active in the company and as of 2007, Mr. Cumming is 65 and Mr. Steinberg is 63 years old.

Leucadia is a holding company that uses a deep value investing approach, buying distressed companies at discount prices, and sell them for profits.

In a shareholder letter, Mr. Cumming and Mr. Steinberg say:

"We tend to be buyers of assets and companies that are troubled or out of favor and as a result are selling substantially below the values which we believe there are. From time to time, we sell parts of these operations when prices in the market reach what we believe to be advantageous levels. While we are not perfect in executing this strategy, we are proud of our long term record…. We believe we are conservative in our accounting practices and policies and that our balance sheet is conservatively stated. To mutilate a hackneyed phrase, we are old dogs and we can't learn new tricks-we believe the ones we learned over the last 30 years continue to work just fine."

The company's stock has gone up recently on good volume and is now very near its all time high. In March 2007, they announced a stock buy-back program.

2. Hansen Natural (HANS): (Up 1.43% today)

Hansen Natural is a $4.3 Billion Drink Company that specializes in the specialty Energy Drink Business. They have a forward PE of 23.44, a 5 year estimated growth rate of 28.59%, for a good PEG of 0.81 (less than 1 is good).

Hansen Natural (HANS) recently announced very good results, and JP Morgan analyst Dara Mohsenian said that catalysts include "improved distribution, contributions from the new Java Monster coffee drink, market share gains, entry into the on-premise market and international growth." Mohsenian also says that strong earnings growth "puts Hansen in a solid position to implement 16-ounce price increases if it chooses, which could be a very significant earnings per share driver" in an Associated Press article.


3. Central European Distribution Corporation (CEDC): (Up 2.51% today)

CEDC is a Polish Vodka producer and importer of other alcoholic and non-alcoholic beverages. The company is a $1.77 Billion company, with a Forward PE of 20.94, a five year estimated growth rate of 17.5% for a reasonable PEG of 1.19.

4. Middleby (MIDD): (Up 5.34% today)

Middleby is a $1.2 Billion company that designs, manufactures and sells cooking equipment and related products. The company has a forward PE of 21.06, a five year estimated growth rate of 18.5%, for a reasonable PEG of 1.13. It recently announced record earnings.

5. Allscripts Healthcare Solutions (MDRX): (Up 4% today)

Allscripts is a $1.44 Billion company that provides clinical software and connectivity and information systems for physicians. It has a forward PE of 32.07, a five year estimated growth rate of 30.44 for a reasonable PEG of 1.05. The company recently announced earnings.

6. Peabody Energy (BTU): (Up 3.17% today)

Peabody Energy is a $12.25 Billion US based Coal Company with a forward PE of 15.06, a five year estimated growth rate of 16.6% for a PEG of 0.91. The Coal sector has been beaten up recently, but a recent US Department of Energy report suggesting coal demand should increase this year is helping stocks in this sector.

7. Sirf Technologies (SIRF): (Up 4.28% today)

Sirf Technologies makes chips for the global positioning market. This $1 Billion company has a forward PE of 15, a five year estimated growth rate of 26.86% for a good PEG of 0.55 (less than 1 is cheap). The company has missed its quarter recently, and the stock is near its 52 week lows.

8. Stanley (SXE): (Up 2.61% today)

Stanley is a $500 Million company that makes information technology systems for the US defense and federal civilian government agencies. Forward PE is 19.11, five year estimated growth of 21.57%, for a good PEG of 0.89. On July 18, 2007, Navy announces a $23.1 Million Deal, where Stanley is one of the four military contractors which won the award.

9. Level 3 Communications (LVLT): (Up 4.87% today)

Level 3 is an $8.23 Billion company that is in the communications business in North America and in Europe. Among many telecom services, Level 3 also is in the fiber optic networking area.


Companies which show strength during big down days are companies you should watch out as they may lead the way when the market does come back.

(Do beware of short squeeze rallies though.)

Informal Thoughts: Portfolio moves (August 8, 2007)

I'm going to start a new segment where I casually mention my thoughts regarding making moves in my portfolio(s) without worrying too much about organization.

I'm currently thinking of selling Shanda Interactive (SNDA). While I believe in growth in online gaming in China, I already have The9 Limited (NCTY), which is another Chinese Online Gaming Play. Shanda dropped 7.3% today on a strong up day. I see Shanda up 2.9% in after-hours.

But I'm thinking of rotating into other areas.

Some possibilities:

1. Add more to America Movil (AMX). Emerging Market Telecom has been doing great. I already have an overweight on America Movil and Emerging Market Telecom. Should I continue adding to it?

2. Add more Leucadia (LUK). Leucadia is an excellent company that many people call the mini-Berkshire Hathaway. It has excellent management, and recently jumped 7% on good volume to all-time highs. I've been holding on to this, and this company looks like a very long term holding. I'm not a deep value investor, so I'm giving the reins to the great management of Leucadia. I think this company will do very well.

3. Add more ABB (ABB). This is Swiss Infrastructure play is reasonably valued with respect to growth, near its all time high, and is part of the great Infrastructure Bull Market which is benefitting from great global growth.

4. Buy Finisar (FNSR). This is a speculative $4 stock that had been on a bullish ascending triangle pattern. While it has suffered from possible Nasdaq delisting, this stock may benefit from Cisco's (CSCO) good numbers as Cisco accounted for 22% of Finisar's sales last year. The stock jumped 11.88% today in a strong market and also because of an analyst upgrade. This stock is in the networking/optical networking area.


Running a Screen

In order to find more ideas, I'm also ran a stock screen:

1. Stocks with Forward PE < 20


2. Stocks with 5 year growth rate > 20


3. Stocks over their 200 day moving average

This screen is similar but less restrictive than my Cheap Growth Ready to Breakout Screen.

I saw several oil services stocks like National Oilwell Varco (NOV), but I didn't feel like adding to this because I already had Ensco (ESV), an oil driller.

AMX showed up on the list again, and so did ABB.

Rio Tinto (RTP) showed up on the list, but I already had Freeport McMoran (FCX).

I see Telekomunikasi (TLK), but I already was overweighted in emerging market telecom. I see Vimpel (VIP), a Russian Wireless Telecom company, but do I really want another emerging market telecom?

I see Public Service Enterprise Group (PEG), but I don't feel like getting into the utilities sector (I already have a utility).

I see Cummins (CMI), a company which "engages in the design, manufacture, distribution, and servicing of diesel and natural gas engines, electric power generation systems, and engine-related component products worldwide." That's a possibility.

I see Satyam Computer Services (SAY), which an Indian outsourcing company. But do I want another Indian company? I already have an Indian company. But this may be worth a look.

One company that fascinates me in this list is Harris (HRS). They operate in four segments: "Government Communications Systems, RF Communications, Microwave Communications, and Broadcast Communications." The stock is also near its 52 week highs. This company is less levered to the US Credit Crunch, and its customers include the military and government who need this technology.

There's Gildan Activewear (GIL), which looks to have a great PEG, and BE Aerospace (BEAV), a beneficiary of the boom in aerospace. I also see Transdigm Group (TDG), which I already own and is part of the boom in aerospace.

There are many other companies in the list, but I think I have more than enough choices right now.

S&P 500 To Remain in Trading Range? (August 7, 2007)

We've had quite some volatility recently. The Bollinger Band width of the S&P 500 ($SPX) is at a very high 156! I don't expect this kind of volatility to sustain itself. I estimate that the Bollinger Band Width will decrease, and the overall volatility will decrease for a while.

This means that the $SPX will most likely end up in a trading range, giving the market time to consolidate. On the low end, we can set 1427 as the support. On the upper end, we can set resistance to around 1492. This coincides with multiple attempts of the $SPX to break through it. It also is the 50% re-tracement from the recent July 2007 correction. If we have a stronger rally, we may reach the 61.8% retracement of the July 2007 correction of 1507.

From there, we could either break resistance and breakout of the trading range, or break support, and breakout to the downside.

Today's Chart of S&P 500 ($SPX)

The Chinese Online Gaming Boom

There's a boom in the video and computer gaming market. Gamestop (GME) the game retailer, has seen its stock soar thanks to the current video game cycle. Recently, Microsoft (MSFT), Sony (SNE), and Nintendo (NTDOY.pk) have released major next generation gaming consoles (Microsoft Xbox 360, Sony Playstation 3, and Nintendo Wii). Gaming software manufacturers such as Electronic Arts (ERTS) and Activision (ATVI) also benefit from this cycle. Even companies like Nvidia Corporation (NVDA), which offer programmable graphic processor technologies needed by game players, benefit.

However, the most intriguing and high growth area of this industry is the growth in online gaming, especially in China.

Online Gaming revenue in China, according to Wu Shulin, deputy Director of China's General Administration of Press and Publication (GAPP), was $1.04 Billion at the end of 2006, and is expected to grow to $3.9 Billion by 2010. The Chinese economy is booming, the middle class is growing, and internet access, especially through internet cafes is growing, trends that are helping the gaming boom in China.

According to the US based market research company International Data Corporation (IDC), there are an estimated 31 million people playing games online in China. Many people, especially those between the ages of 18 and 30, can be seen in packed internet cafes playing online games till the early hours.

There are three main Chinese companies that can benefit from this trend:

1. The9 Limited (NCTY) is a $1.3 Billion Chinese company, with a forward PE of 17.5, a five year estimated growth rate of 25%, for a Price Earnings to Growth Rate (PEG) of 0.7, very cheap (less than 1 is cheap). The company has virtually no debt.

The Company primarily engages in the development of massively multiplayer online role playing games (MMORPGs) for Chinese online game players.

The9 also has the rights to bring Western games such as Blizzard Entertainment's very popular World of Warcraft Multiplayer Online Role Playing game to China. World of Warcraft in the West is part of Pop Culture as evidenced by being prominently featured in Comedy Central's (VIA.B) "South Park" show in an Emmy nominated episode about World of Warcraft. World of Warcraft is the most popular western MMORPG in Asia and the third most popular in China with peak concurrent users numbering 688,000 and revenues of $36.1 million in late 2006.

The9 also implemented a pay-for-time system in the game, differing from the monthly subscription method in other territories.

Electronic Arts (ERTS), the US electronic software producer, will own 15% of The9. As part of the deal, The9 will gain exclusive publishing rights for EA Sports FIFA Online.

2. Shanda Interactive (SNDA) is a $2 Billion Chinese company with a forward PE of 16.84, a five year estimated growth rate of 26.9% for a PEG of 0.62, again, very cheap (PEG less than 1.0 is cheap).

Shanda Interactive engages in development and operation of online games in China including Massively Multiplayer Online Role Playing Games and Online Casual Games such as chess. Shanda maintains a large number of popular games produced by Western, Chinese, and Korean companies, with the Chinese and Korean games being the most popular.

In a recent China online gaming survey conducted by Piper Jaffray, 55 percent of respondents said they prefer Shanda's business model, in which users can play games for free and are charged to purchase virtual items within games. Shanda also tied with competitor The9 as the company in its market that offers the best games.

3. NetEase (NTES) is a $2.04 Billion Chinese company with a forward PE of 13, a five year estimated growth rate of 15% for a PEG of 0.86. the company has a low Total Debt to Equity Ratio of only 0.217.

The company has an online games business that focuses on massively multiplayer online role playing games by selling prepaid point cards to the end user. These cards could be distributed through wholesalers, internet cafes, supermarkets and other venues.

Netease manages Fantasy Westward Journey, the most popular online game in China in terms of Peak Concurrent Users.

The company also has a wide array of internet services outside of its online games business.


Online gaming in China has a bright future. Electronic Arts (ERTS) 15% stake in Chinese online Gaming Company The9 is evidence that US companies believe in the great growth in the Chinese Online Gaming Market. Why not follow Electronic Arts lead and invest in the growth area of the gaming industry: Chinese Online Gaming.

S&P 500 Chart Update after Big Drop Today (August 3, 2007)

On August 2, 2007, I said that the S&P 500 Index ($SPX) would bounce to at least 1484, a 38.2% retracement from the all time highs of 1556 on July 2007, to the recent bottom of 1440 late July 2007. However, the $SPX couldn't even bounce to the 38.2% retracement level. This is a sign of a very weak market.

I also said that after the bounce, the $SPX would re-test lows from 1437-1440, and we have to see how the $SPX behaves, whether it forms a double bottom, or break through support.

Today, August 3, 2007, the $SPX went down 2.66% to end at 1433.06. We have our answer: the $SPX fails the re-test of the lows. And support (1437-1440) is now overhead resistance.

Breaking the 1437 level is also not positive, since 1437 is a 61.8% retracement from the March 2007 lows of 1364 to the recent highs of 1556. I would have liked to see the 1437 line hold, but it didn't.

Next support areas are horizontal support at 1410, 1372 and 1362.

The $SPX is currently very oversold, with only 16.40% S&P 500 stocks above the 50 day moving average. Typically, numbers under 20% signals that we are near or at the bottom. Of course, oversold markets can remain irrational and continue to be more oversold. Next support level is 1410.

There are wild cards in the market. The Fed could cut rates, and impact the $SPX positively.

Also, there are sectors which are working better than others.

Perspective from 2 Year View


If we look at the 2 Year view, we can get a better perspective. We can set up a Fibonacci grid from the October 2005 lows to the July 2007 highs (Fibonacci means that certain numbers, such as 38.2%, 61.8%, and 50% occur very often in nature. And this can be applied to stock charts as well. This can aid in determining resistance and support levels). If we look at the 38.2% retracement, we find 1411, which coincides almost exactly to the 1410 level mentioned above when looking at the 6 month chart above. When we look at the 50% retracement, we find 1365, which coincides almost exactly to the 1362 level above when looking at the 6 month chart above. This is a good sign that the support resistance levels mentioned in the 6 month and 2 year charts are valid. (Valid means they are valid, but it doesn't mean that the support levels will always hold. Support levels can be breached, or stocks or indices could bounce at support levels).



Today's 6 month Chart of $SPX

Today's 2 year Chart of $SPX

Updates to $SPX resistance level for rally (Aug. 2, 2007)

The Wednesday, August 1, intraday reversal of $SPX after hitting a low of 1439 combined with very oversold conditions are some reasons why we might get a more sustained rally.

Based on Fibonacci retracements from the recent highs (1555) to the recent low of 1439, the rally might go up to either 38.2% retracement, 50% retracement, or 61.8% retracement which would be 1484, 1497, or 1511 if the rally is really powerful. 1497 seems like a reasonable resistance level in the $SPX.

As I mentioned earlier, I expect a re-test of the $SPX lows from around 1437-1440.

From there:
1. $SPX could bounce off support and form a good double bottom.
2. $SPX could break through support and start new leg down.

This is a partner piece to the previous chart analysis.

Today's Chart

Updated Possible $SPX Scenario (July 31, 2007)

The global markets seem to be selling off at a good rate, and the U.S. futures are down big. This could be an important day.

There is an updated $SPX (S&P 500 Index) chart above.

I expect some sort of a bottom at around 1437, which is the 61.8% retracement of the most recent year long run. This also coincides with horizontal support at around 1437-1440, so this would be a good support area. This might be a final capitulation.

Many different indicators such as the number of S&P 500 stocks above 50 day moving average are very low (18% right now), which suggests we are at, or near, at least a medium term bottom.

I then expect a bounce to the 50% to 38.2% retracement area from 1459 to 1482. 1482 might more likely target.

Since V-bottoms are not stable, I expect the market to re-test its lows of around 1437. At that point, $SPX could:
1. Form a double bottom as support holds.
2. Start a new leg down, which would be bearish.

The market may move very quickly and hit 1437 intraday, and even work its way close to the 50% retracement of 1459 all within a day.

This scenario is very similar to a scenario I came up with on June 7, 2007.
The June 7, 2007 Possible ABC Correction Scenario.

Today's Chart