Liverocket Performance Week 51 - Up 5.4%

This was a good week - I think we re-entered at a good point and with the right stocks for the next few months.

Yes we are clobbering all the markets at the moment, especially the Dow and S&P. But a lot of that comes from the way we avoided financial and home stocks (including tools, materials, etc).

EXPECTING VOLATILITY

As you will note, I am including Sell prices but not STOP prices. I expect some exuberance as earnings come out.

At the same time, I see everything unfolding against a background of overall market volatility as evidence mounts of US stagflation. These stocks should be immune from consumer demand slowdowns, but a broad market sell-off will happen a few times. I'd rather not get caught in that volatility until I have a solid strategy. Normally, I'd manage via a put/call coverage but my commitment to LiveRocket wsa to show that simple equity trading could beat the market. Which means we don't do options in this model.

If you are interested in doing something defensive consider either of these 2 approaches:

1. A trailing 5% STOP. The concept is that you may get stopped out and then buy back at a lower price - essentially adding more shares overall. This requires you to:

* Move your STOP price up as the Stock price trends up

* Be prepared to react quickly if you get STOPped out

2. Take 5% of your portfolio value and use on options. Use WFR as an example. It's now at $91. Let's say it will jump another 10% next month OR fall 10%: $82~$100

* The January $85 puts are $2.60. If WFR drops to $85, your stock loses $6 per share but the puts gain in value. The $6 loss is ~7% loss but a $1 gain in Put value is a 40% gain. Do the math to see what the breakeven point would be (how many contracts to cover the WFR asset value)

* Write covered calls. The January $100 calls are going for $2.20. That $2.20 is ~3% downside coverage. And you get the money today. Meanwhile, if the stock reaches $100, you lose the shares, but after adding 10%.

OVERBOUGHT OR BREAKOUT?

Many of these stocks have raced up recently. This is partly a correction to the recent overselling. Also, these stocks do seem headed for pre-earnings excitement. I think WFR and ATW in particular look to be trading high. But I also think that both are incredibly undervalued.

As an FYI, I am not looking to stay very long in AG, IMA or IO.

SPECIFIC COMMENTS

AG - This company continues to grow but exchange rates are squeezing margins. I expect price hikes shortly to offset the pressures.

ATW - All drillers are up recently. Bank of America raised the target to $112. Even at this price, ATW has a Forward P/E of 8. Well, considering the 60% growth trajectory they are on, that's crazy low. I continue to favor ATW because, as a smaller player, they should be the #1 acquisition target.

FWLT - Won a liquid natural gas contract in Australia.

IMA - Another week, another acquisition. They are assembling what has become a diagnostics powerhouse. They are on target for a billion dollar sales, but you have to consider the earnings impact of an acquisition binge: $1B in debt and dilution by adding 20% more shares in just 1 year. But the gross profits have moved up from 39.5% to 42.6%. As they digest recent acquisitions, I expect more write-downs as well as operational gains. But the EPS will continue to be poor because they now spend $100M+ annually on debt servicing.

Once IMA exceeds $1B in sales, I expect more funds to show interest. In the meantime, the stock price is stalling.

IO - Looking at the chart, you will notice that they are showing a steady move up. I don't like how they have set EPS expectations so broadly: $0.45~$0.60. That's a 30% swing. But when you look at 2008, you see 60% growth, so why quibble. That means the growth continues to outstrip the P/E.

MICC - we entered when they were beaten down hard, so is it worth stocking around? They just closed out $200M in bonds, saving ~$15M in interest costs, and that drove up the stock price.

My worries are:

* Accounts payable are surging faster than receivables

* The Year-over-year growth will be lower this quarter. This is driven by math: lastyear, MICC added 27% revenue sequentially. They would have to add $150M this quarter to stay consistent. That would double the rate they have been on for the last 3 quarters.

BUT, they added a few million more subscribers last quarter. ~10M subscriber months above last year's quarter should add ~$100M extra revenue. That's what they need. Add in more new subscribers and things are looking up.

MVL - They are exposed to Xmas holiday sales and I wonder how strong/weak those will be. But I am more focused on the IRON MAN movie. I watched trailers and it looks good. Additionally, the move into India follows recent testing of the waters with some Indian versions of Spiderman comic books, among others. These moves are nice, but I am in for the new movie business model.

NOV - This is worth reading

http://www.forbes.com/business/2007/12/20/best-managed-oil-biz-cz_ch_08platinum_1220varco.html

"Demand is soaring; two-thirds of drilling rigs worldwide were built more than 25 years ago and aren't up to the vital task of drilling into deeper and more complicated oil fields. In recent months, NOV has seen orders for five new floating rigs, at $300 million a pop--the kind that can drill five miles into the earth while floating in 5,000 feet of water. NOV can't build them fast enough. Its order backlog is a record $8 billion."

PCP - The stock has been in a trading range of sorts: hovering around $140. But look at the chart below: even though the highs are still stopping at $150, the lows keep moving higher. This spells breakout to me.

VIP - With a final commitment to buy GLDN, VIP is now the dominant mobile phone company for Russia and nearby CIS countries.

WFR - I think these guys are belatedly enjoying the solar panel sector's run up. That being said, I also suspect them of being heading for a pullback.