Sunday, November 4, 2007

How to Make 75% in 3 Months

I bet you thought this was the start of a late night infomercial about how I can make you rich, right? Not so much. :)

But what I like to do is look at recent leaders of the stock market, and see what stocks are "winning" - many times one can find new ideas that way. Some might call this momentum, some might call it relative strength - I call it trying to figure out what others love that I am missing and than having a list of new names to go investigate for possible inclusion into my portfolio. I usually use a much lower threshold than 75% return, i.e. 30% up in the past half year and then throw on many other variables such as positive earnings growth, positive earnings (period), revenue growth, trading volume, et al.

What I've done just for kicks is look up stocks that have returned 75% in the past 3 months, traded at least 300,000 shares on average, with a stock price of at least $10 (to weed out the penny stock junk - although with the huge move by Chinese small cap stocks this past quarter I had to put more variables on this search) and broke it out by market cap.

For today, I looked at companies with >$10 Billion market cap; these are companies that would be considered large cap or the very top end of "mid cap" stocks - this should be a tiny list since companies of that size rarely make such massive moves. Even Google (GOOG) "only" made 41% last quarter. This returned 6 names, 5 of which I am very familiar with and the 6th which generated a new trading idea on themes I like; but a company I never heard of. By market cap:
  1. PetroChina (PTR) - $456B: +85%
  2. China Mobile (CHL) - $397B: +81%
  3. CNOOC (CEO) - $90B: +82%
  4. Mosaic (MOS) - $31B: +76%
  5. Mechel (MTL) - $11.6B: +105%
  6. Sunpower (SPWR) - $10.3B: +84%
Quite a list, the top 3 are large cap Chinese companies - the top 2 of which are mind blowing gains in market capitalization ($200 billion or the size of Google for the top 2 names in 90 days) - I've ranted on PetroChina here (as it stands perched to become the largest company - on paper - in the world), Mosaic has and continues to be a top holding in the fund and Sunpower is one of the US solar companies I found far too expensive to buy but it only continues to go up. So this brought up the mysterious Mechel (MTL). Running over to Yahoo Finance I find a Russian company that "through its subsidiaries, operates as a mining and steel company. The company engages in the production and sale of coking and steam coal concentrate, steam coal, iron ore concentrate, and ferronickel that are used in the production of steel."

If you've been reading the blog for any period of time, you know coal is a big favorite and iron is at a premium and has some pricing security due to 1 year contracts - so it offers more stability than other base metals. And here we have both these in 1 company? As Paris would say: "That's hot." Too bad I missed the last 105% run. But one to put on the radar, further analyze, and look for a pullback. While there is some political risk in investing in anything Russian, it's an interesting play. With estimates of $6.32 for 07 and $7.70 in 08, at $83 it trades at 13x this year's earnings and 11x next year's. Still dirt cheap in comparison to some of the better known mining companies trading at 14-15x this year's earnings. Granted there is some premium associated with being in more stable areas such as Australia or dare I say it "Brazil", but even after this amazing run the stock seems "cheap"? So while many investors love chasing these stories at 52 week highs, I would prefer to enter at a pullback level. On Thursday's severe market drop, Mechel pulled back to its 20 day moving average of $76, only to rebound by Friday to $83, so there was a nice opportunity for a quick 9% pop. But of course you'd have to know the stock existed to take advantage of it. Always a catch, eh? I'll be putting this one on my watch list and reading up.

Now if you would of been satisfied with a measly 35% return last quarter and still sticking to this group of 'quite large' companies of over $10 billion you had another 31 names, many very familiar to readers of this blog. By % return

55-65% return: HDFC Bank (HDB), China Life Insurance (LFC), Sterlite Industries (SLT), Kingross Gold (KGC), ICICI Bank (IBN), China Petroleum & Chemical (SNP), Millicom International Cellular (MICC), CVRD (RIO)

So in the above list we have my 3 main Indian stocks, 2 more large cap Chinese stocks, a gold stock, one of the "big 3" mining conglomerates, and one company I had not heard of Millicom International Cellular - a quick glance uncovers a European based company which provides cell phones to some of the back ends of the earth, smaller South American companies (not Brazil/Mexico) and parts of Africa. Hmmm... another interesting stock.

45-55% return: Research in Motion (RIMM), Intuitive Surgical (ISRG), Petrobras (PBR), Vimpel Communications (VIP), Wynn Resorts (WYNN), Monsanto (MON), Aluminum Corp of China (ACH), First Solar (FSLR), McDermott (MDR)

In the above list we have momentum favorites Research in Motion and Intuitive Surgical, Brazilian oil, a major Russian telecom, our Macau inspired gambling story, the "seed biotech" company Monsanto, fund holding Aluminum Corp of China, the other American solar company I found too expensive to buy, and an early (and again) top holding in the fund, infrastructure stock McDermott

35-45% return: Mastercard (MA), Consol Energy (CNX), Goldcorp (GG), Apple (AAPL), Companhia Siderugica (SID), Potash (POT), Google (GOOG), China Unicom (CHU), Sasol (SSL), Peabody Energy (BTU), BHP Billiton (BHP), Jacobs Engineering (JEC), Apollo Group (APL), Yahoo (YHOO)

In the above list we have what was a major fund holding in Mastercard, both of the fund's coal plays, another gold company, fund holding Apple, fund holding Potash, fund holding (until last week) Google, fund holding infrastructure play Jacobs Engineering, a recent addition last week Yahoo, and yet another Chinese company. The outliers in this group are South African energy company Sasol which has been a company I have looked at a few times over the years and always found interesting but never pulled the trigger, Apollo Group which is a for profit education company (not sure why it had such a nice quarter), and a name I was unfamiliar with Companhia Siderugica - apparently yet another Brazilian stock, this time a steel maker.

So upon review of this group, first I am happy I have held many of these names. Second it shows you can make good money in larger type stocks and you don't need to scurry through the small caps and hope for a home run in the midst of the inevitable strike outs. Third, it is going to be very hard to replicate the fund's first quarter, considering so many of my holdings already enjoyed quite massive runs in the last quarter. Fourth, I wish I had just bought and held many of these positions instead of lightening at all during the quarter. :)

But an interesting list, and an exercise I like to do a few times a year to develop new ideas and see what other investors are flocking to; and be able to see what I am missing. It is truly amazing how almost all of these are based off global (read China/India/Brazil/Russia) growth. Hence my worries about "where the heck will there be left to invest" if we do get a global slowdown in the coming 6-24 months period. I'll be digging into the few names in this list that I was not aware of, and if everything checks out fundamentally see if we can get a pullback nearer to support levels to entertain opening positions in some of them. On first glance, MTL and MICC interest me most out of the few that I had not heard of yet.

This is usually where I would put a snarky remark about how I wish I had this list 3 months ago, but in retrospect I *did* have most of the list 3 months ago - I just didn't realize how golden the list would turn out to be! "Trust yourself, young Skywalker...."

Long many above in fund; long Yahoo in personal account

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