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By Maj Soueidan

Here we go again, the market turmoil is back. It’s certainly both an amazing and mentally challenging time, as not even two years have passed since the 2008 debacle.

Putting it into perspective, financial markets have rocked from March 2009 lows, so last week's pullback was healthy and will give us the chance to lock and load.

While the market has already recovered its losses from last week’s breakdown, there are many microcap names that have yet to fully recover. Overall, I think that investors may actually flock to the US stock universe as the rest of world deals with its own issues. It is not a matter of “if”, but “when.”

Sure, there is fear caused by recent memory, but those who missed the first market run face the possibility of being given another chance to vindicate themselves. That is my half glass full approach, which is admittedly my weakness.

My glass-half-empty view is motivated by the 2008 events. It is amazing how eerily similarly the European crisis is playing out. First, the sub-prime mess was only 2% of the mortgage market and "contained," just like Greece was originally dismissed. Then we got our two month bounce, after which a bigger problem arose. Next, we got the US bailout package passed and the market still went down.

As of now, the market is responding favorably to the approval of the European one trillion dollar bailout package. Only time will tell if the positive market response will continue.

There is no doubt that market pessimists will still predict a Greece default. Even where there is no problem, lack of confidence from the players in the credit markets can eventually create a problem. Not to mention that the media is pasting videos of the Greece streets like it is the end of the world, hoping we crave the coverage in their sick quest for blockbuster ratings.

Luckily, differences between the current crisis and 2008 can assure us that if the correction resumes, it will not be as deep as 2008 since most economic indicators point to a stronger than expected economic recovery.

However, some strategists, including Jim Cramer, have commented that the DOW could retreat to 8500. Just these words of fear of could instill panic, creating a self-fulfilling prophecy. Still, even though we may not go to 6500, 8500 is bad enough. I would bet that investors suffered the most portfolio damage during the DOW’s descent from about 11,000 in September 2008 to the lows of October 2008 that were near 8,100 .

To reference recent comments made by many market analysts a few weeks ago, they said that you should buy into the market gyrations caused by Greece’s turmoil, essentially downplaying the country’s woes. Last week some of this sentiment was totally reversed when it was inferred that even with a bailout move, the European crisis will not come to pass until Greece defaults. Now they are riding the bull again. This is the nonsense that drives the novice investor crazy.

Combine all this with the negative fallout from China’s current monetary tightening moves, and the landscape takes on an added level of complexity. Personally, I believe that the media is exaggerating the China issue, as the government is taking the appropriate steps to ensure long-term growth. Unfortunately, investor psychology is a driver of markets, taking precedence over realities.

Although I am still very bullish on China, the recent events have convinced me to increase my portfolio weight to include more United States equities, an exercise my team had begun on November 4, 2009 .

Strategy

Abandoning the market entirely has never been my style. But one must be selective right now and be cognizant of risk. I feel that increasing exposure to US equities can reduce overall portfolio risk while maintaining above average returns. I will use market pull backs to nimbly execute this strategy. Just to be clear, I am still very bullish on China as shares pull back.

Focus

The following is exactly what I and my team have done:

  1. Select China names that have yet to run and likely see no need to dilute via equity offerings.
  2. Select China names that have yet to run, even if they have raised funds that will be immediately accretive to EPS.
  3. Select China names that have pulled back for no logical reason
  4. Focus heavily on strong US names that we feel are leading the economic recovery charge; reduce volatility, while not sacrificing returns.
  5. Make of list of US stocks that have beat the street and issued bullish commentary.
  6. Make a list of US stocks that may have slightly missed analyst estimates, yet growth is still robust.

As you peruse such a list in the coming weeks, please note that if the European crisis were to spiral out of control, strong company commentary that I use to justify some of my decisions may hold less weight.

Recent Highlights on GeoInvesting

In our diversification efforts, we identified a handful of US companies to include in our portfolios.

  • Rehabcare Group Inc (NYSE:RHB)


RHB reported exceptional 2010 first quarter EPS of $0.50, exceeding analyst estimates by 20%. After being up big on the day that results were released, RHB had pulled back with the market from a high of $34.88. We are speculating that RHB can quickly reclaim its 52 week high if the market is strong.

  • Teradyne Inc (NYSE:TER)

On April 21, 2010, TER reported 2010 first quarter EPS of $0.33, exceeding estimates by 43.5%, but the stock has pulled back sharply from its high of $13.37 despite very bullish commentary. On May 5, 2010, we coded TER a GeoSpecial at $11.99.

  • Motorcar Parts America (NASDAQ:MPAA)

On May 3, 2010, MPAA issued preliminary fiscal 2010 results that call for revenues to come in at around $37 million versus an estimate of $34.6 million. We like MPAA as a play on the consumer trend to delay purchase of new cars during a weak economy in a recession. Its products are sold to automotive retail outlets and the professional repair market throughout the United States

2011 EPS growth is expected to come in at 15%, but we feel this could be conservative as the company has been exceeding estimates in recent quarters. The stock is selling at a P/E of 15. Please note that subpar revenue growth may limit P/E expansion. But investors may see reason to take company shares to at least its book value of $8.34.

  • Hawk Corp (HWK)

The company crushed estimates by 95.7% on May 4, 2010, when it reported 2010 first quarter EPS of $0.45. The stock has finally reacted to this news this morning. EPS is expected to grow 37% to $1.03 in 2010 followed by 45.6% in 2011. We are banking that the stock can attain a P/E multiple of 25 vs 20 now. Also encouraging is that HWK is buying back stock even as the stock is near its 52 week high. Please note that the company will face a challenging EPS comparison in its third quarter after an easy comparison in the upcoming second quarter.

  • Marathon Oil Corp (NYSE:MRO)

While we rarely consider oil and gas companies for our portfolios, MRO has grabbed our attention. The company reported 2010 first quarter EPS of $0.44 crushing estimates by 83.4%. Comments indicate that expenses related to maintenance activities are now behind the company, indicating that growth could accelerate going forward. Even before these results MRO was expected to report 2010 EPS of $3.14 followed by $4.81 in 2011 compared to $1.67 in 2009. We feel it is reasonable that the stock could trade at a P/E multiple of 15 on 2010 EPS estimates.

  • Super Micro Computer (NASDAQ:SMCI) and Career Education Corp (NASDAQ:CECO)

These are two companies who have reported strong EPS results, and whose share price performance has not responded appropriately, possibly since they were basically on target with analyst estimates.

SMCI's 3rd quarter 2010 EPS grew 250.0%, yet the stock was pummeled. In addition to just meeting analyst estimates, we believe that the problem could be for two reasons:

- EPS guidance for its next quarter is one penny shy of estimates.
- The company has commented it is not issuing guidance for 2011 yet.

Regardless, comments were strong.

We are banking that the stock will eventually retrace its fall from $19.55 per share. Analyst estimates have SMCI 2010 EPS growing 40.7% to $1.14. We feel that it is not too much to ask investors to take shares to a P/E of 15 on this estimate.

CECO's shares trade at a P/E of 17, despite posting EPS growth of 140% for its first quarter 2010 which came in at $0.66. Analyst estimates have 2010 EPS growing 89% to $2.75 and 21.5%.in2011 to $3.34. The company is also buying back stock.

is our newest GeoBargain.

Other US stocks already added to our portfolios:

Aceto Corp (NASDAQ:ACET)
Ricks Cabaret Intl Inc (NASDAQ:RICK)
Technical Communications (NASDAQ:TCCO)
Alpha Natural Resources (NYSE:ANR)
Integrated Silicon Sol (NASDAQ:ISSI)

Other US stocks we are tracking, but have not yet made an ultimate decision on include:

Medquist, Inc. (PINK:MEDQ.PK) - We need to assess the impact of a recent acquisition.
Compass Diversified Holdings (NYSE:CODI) - We need assess whether analyst estimates include a recent stock offering.
Tandy Leather Factory (NASDAQ:TLF) - We need to assess if EPS growth can accelerate.
Sutron Corp (NASDAQ:STRN) - There is a record back log, but company has a record of sporadic quarters. We need to assess if this is still the case.
Lannett Inc (NYSE:LCI) - We are keeping a close vigil on this generic drug firm, as EPS growth is expected to accelerate in fiscal June 2011. LCI was one of our big winners several years ago.
Kraton Polymers (NYSE:KRA)- We need to calculate 2009 non-GAAP EPS to assess 2010 growth rate. Yet the initial findings seem very compelling.

Please note we have not yet interviewed any United States companies mentioned.

As far as China goes we currently like the following stocks.

Telestone Technologies (NASDAQ:TSTC) - Stock has pulled back sharply from its high of $24.96. Although we still are concerned that company will offer shares soon.
Soko Fitness & Spa Group (OTC:SOKF) - Recent fund raising activities should accelerate growth. Still, the stock has yet to run.
New Energy Systems Group (OTC:NEWN) - The company provided strong guidance, and doesn't have any current need to raise capital. However, the company needs to up-list in order to attract consistent investor interest.
China Energy Corp (OTC:CHGY) - Shares have pulled back since the company reported strong first quarter results. Investors may have unjustly punished the stock since EPS were sequentially less than fourth quarter 209 results. We are mildly concerned that the company may have to tap the equity market.

Disclosure: Author long TER, MPAA, SMCI, LB, ACET, RICK, TCCO.OB, ISSI, KRA, TSTC, SOKF.OB, NEWN.OB and CHGY.OB

Source: Why You Should Diversify With U.S. Stocks