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Looking for cheap stocks? Consider
investing in the depressed US
Small Cap sector.
As contrarian investors we are always on
the lookout for value. When we say value we mean those stocks that are beaten down and depressed.
After all, value must be found amongst that which nobody else wants.
In order to find these diamonds in the
rough, we use a number of screens / techniques. Amongst them are:
- The CBS Marketwatch industry scanner - used to find the
worst performing industries.
- Back page of
the Economist - ranks global markets by return in local currency and US
Dollars (we look for the worst performer).
- Ranking the
worst performing commodities or bonds and then looking for stocks that are exposed to
them.
- Ranking
returns by market cap i.e. large, mid, small or micro and finding the
area of capitalization that has performed the worst.
Gazing into the wide expanse of the
stock universe we find that in Dollar terms, the US market hase
been amongst the worst performer globally (Dow +9%
year-on-year). This is most likely due to chronic
weakness in the US Dollar instead of the stock
market
itself.
Drilling down even further we find that
the wost performing sector by market capitalization
has been small caps. Logically, small caps are hardest hit by a weakening
economy.
Chart 1: Russell small cap index bottoming against the Dow; Dow rebounding
(below)
After today's spectacular bounce by the Dow (green circle), coming back from
critical support, we reiterate our overall bullishness on the stock market. As
we explained in The 100 Dollar Bill drop we
believe stocks are about to embark on their next bullish leg fueled by more liquidity injections and rate cuts. Thus
begging the question, where should we put our money?
Traditionally we favor
the Gold and Oil sectors because
we believe they are in massive bull markets. But as contrarians we note the US small caps
offer tremendous value as they bottom against large caps (chart 1 - MACD and
RSI divergences at price lows - green lines).
Drilling down even further, the CBS Marketwatch
Industry screener shows the 10 Worst Performing
Industries over the last 3 months as:
- DJ US
Mortgage Finance Index -31.03%
- DJ US Home
Construction Index -24.68%
- DJ US
Consumer Electronics Index -20.85%
- DJ US Real
Estate Holding & Develop... -16.06%
- DJ US Transportation Services Index -15.03%
- DJ US
Business Training & Employment... -14.32%
- DJ US
Clothing & Accessories Index -13.19%
- DJ US
Specialty Finance Index -12.97%
- DJ US Home
Improvement Retailers In... -12.84%
- DJ US Mobile Telecommunications
Ind... -12.50%
2 sectors we are looking to for the next
small cap winners are Business Training & Employment and Mobile Telecommunications.
In comparison to other industries they are the least affected by ongoing
credit problems.
The above approach forms a good basis
from which to build a diversified portfolio and take advantage of the next
round of monetary inflation.
More commentary and stock picks follow for subscribers…
Click here: http://blog.goldandoilstocks.com
_______________________________________________________________________
This article is intended solely for information
purposes. The opinions are those of the author
only. Please conduct further research and consult your financial advisor
before making any investment/trading decision. No responsibility can be
accepted for losses that may result as a consequence of trading on the basis
of this analysis.
Information
contained herein is obtained from sources believed to be reliable, but its
accuracy cannot be guaranteed. It is not intended to constitute individual investment
advice and is not designed to meet your personal financial situation. The
opinions expressed herein are those of the author
and are subject to change without notice. The information herein may become
outdated and there is no obligation to update any such information. The author, 24hGold, entities in which they have an
interest, family and associates may from time to time have positions in the
securities or commodities discussed. No part of this publication can be
reproduced without the written consent of the author.
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