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Mercenary Trader (www.mercenarytrader.com) was created by traders, for traders. We are aggressive swing traders who routinely combine fundamentals, technicals and sentiment with deep awareness of global macro and rigorous analysis of individual equities. See all of our content, including free... More
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  • Assured Guaranty: Deep Value, Improving Prognosis
    As the market begins to show strength and both investors and traders begin putting capital back to work, I'm finding opportunity on two different fronts.

    1) Speculative positions which are heavily leveraged toward an economic rebound can get juiced higher quickly as institutional managers scramble to add beta to their portfolio.

    2) Value equities which have healthy long-term businesses but have become depressed after falling out of favor can also show tremendous short-term performance along with the potential to become longer-term core investments.

    As swing traders, we often focus on the more speculative positions that are quick to move (higher or lower) when market dynamics change.  But today I want to take a closer look at a stock that is trading at an exceptional value due to institutional investor's aversion to the industry this company operates in.

    Financial Insurers


    The names MBIA Inc. (NYSE:MBI) or Ambac Financial Group (ABK) bring back some pretty ugly memories for the LOLO (Leveraged Outright Long Only) investors - most of whom took a bath when these insurers hit the skids.

    The business model seemed pretty sound.  Just like any other insurance companies, financial insurers took in a regular premium to insure investors against losses.  In this case, the potential losses were from investments - usually fixed income products - and to a large degree these companies insured what we now know to be very risky Mortgage Backed Securities.

    To make a long (and painful) story short, stocks like AIG, MBI and ABK were trashed when the securities they insured took on water and the companies were saddled with huge losses.  In order to pay the claims, these companies had to raise additional capital and still don't have the balance sheet strength to underwrite new insurance business.

    But one company in the business managed to survive with its business intact - and today looks like an attractive trading and investment opportunity...

    Assured Guaranty - A Cut Above the Competition


    When competitors like AIG were making a mint collecting premiums for insuring toxic waste, Assured Guaranty (NYSE:AGO) was ridiculed for passing up the easy profits.  Management simply wouldn't play the mortgage insurance game because they believed the premiums charged by the industry didn't match with the risk insurers were taking...  Of course we know how the story ended.

    And so when most in the industry were teetering on the verge of bankruptcy, Assured Guaranty had plenty of capital to take advantage of the situation.  Ironically, AGO entered the mortgage insurance market at the bottom of the cycle, purchasing a struggling competitor and emerging as the only major insurer actually underwriting new business.

    At this point, the risks in mortgage securities are well known.  And since AGO is basically setting the price at which it is willing to take on risk, the company is being well compensated for its risk - and appears to have plenty of capital set aside for potential losses.

    Municipal Bond Risk

    Since AGO was not very involved in the mortgage security market, the company developed a specialty insuring Municipal Bonds - which has recently become a concern for investors.  Of course we know that states like Illinois and California are in deep trouble and may have a significantly hard time meeting their obligations.

    If states or other municipalities begin defaulting on their debt, AGO will likely have to step up and fulfill the obligations. Investors have liquidated positions due to this risk, pushing the stock down nearly 50% from the April high to the low point less than 2 months later.  Clearly the risks have been considered and at this point it looks like the fear has likely been overdone.

    Recent comments out of Washington indicate that there will likely be federal assistance for struggling states, and at the same time, many of the municipal obligations insured by AGO are misunderstood by the investing public...

    There are a number of municipal bonds insured by AGO which are characterized as "revenue bonds."  These bonds are used for very specific purposes such as building water treatment plants, and the bonds are backed by the water and sewer revenue from the municipality.  Of course this revenue stream is not immune to economic ebbs and flows, but at the same time citizens are more likely to pay their water or electric bill to keep the lights on - even if it means defaulting on the mortgage.

    AGO's risk with these bonds does not appear to be nearly as dangerous as traders believe, and now that we are seeing signs of a recovery - however weak that recovery may be - that risk is becoming less of an issue.

    Compelling Value and Attractive Trade


    Analysts (who you remember are pre-disposed to be overly conservative in this industry) are forecasting earnings for AGO of $2.76 per share this year and $3.89 for 2011.  Based just on this year's expected earnings, the stock is currently trading at less than six times earnings.  If you use 2011 earnings as a baseline, the stock becomes even less expensive at just over four times earnings.

    There is a significant argument to be made both for increased earnings estimates as well as multiple expansion.

    Of course, as Mercenary Traders we are looking for evidence of positive price action before committing our capital.
    AGO has participated in the July rally - gaining 18% during the month and tacking on additional gains so far in August.

    The stock is now above the 50 EMA and appears to be gaining institutional support.  The company announces earnings Thursday after the close and will host their conference call on Friday morning.  I'm expecting management to offer more evidence of their risk management skills and may look to use any volatility around the earnings report to work into a long position.


    Initially, I will want to use the price action to take a shorter-term swing trade position.  However with AGO representing a deep value and if the business dynamics continue to be healthy,
    I would consider maintaining a longer-term position, establishing more of an investment approach while still managing risk carefully.



    Disclosure: no positions
    Aug 03 11:57 AM | Link | Comment!
  • View From The Turret: Bulls Take the Offense
    Welcome to a brand new month of trading!

    As institutional managers enter a new reporting period and search for ways to generate alpha, it appears the bulls are taking the offense at least for the time being.

    While economic reports have been uncovering disturbing declines in growth and poor employment trends, investors are choosing instead to focus on corporate earnings which have been relatively stable.  As Jack mentioned in the Weekender, weak economic reports may still be supporting confidence in the bull camp because of the influence the data will have on policy decisions.

    Regardless of the reasoning, the price action appears to favor rising prices and while I am still keeping a bit of short exposure on in under-performing sectors and specific stocks, Jack and I are working on building out more long exposure this week.

    The key for our trading will be picking the right entry spots where we can reasonably manage risk while still shooting for outsized returns.  There are a few key sectors which are already showing evidence of attracting capital flows, and we will be buying strength rather than trying to pick bottoms in negatively trending issues.

    So let's take a look at some of the sectors and individual stocks that are setting up for attractive trades this week.

    Agriculture Revitalized...


    Over the last few weeks we have seen a sharp increase in the agriculture space.  The bullish story isn't new by any stretch of the imagination.  World population growth and a relatively fixed supply of farmland makes for a long-term positive backdrop.  Of course, stocks in this sector can fall in and out of favor based on short-term capital flows, inventory reports, political shifts and plenty of other variables.

    Last week we took a position in Potash Corp. (NYSE:POT) as it broke out of a short-term consolidation and ramped through the 200 EMA.  Industry pricing appears to be on the rebound and that is good news for profit margins as well as the volume that POT is able to move on a quarterly basis.




    Intrepid Potash (NYSE:IPI) is a smaller and potentially more nimble competitor.  The company will be reporting earnings Thursday before the market opens.  At this point, analysts have pegged POT as the leader with more subdued growth expected for IPI.

    However, if IPI manages to impress with stronger growth and more importantly positive guidance,  the stock could retake the 200 EMA and become much more attractive.


    Besides the fertilizer companies, seed manufacturer Monsanto Co. (NYSE:MON) is looking interesting having rallied nearly 30% off the lows and now sitting in a minor consolidation pattern.  The company operates with an August fiscal year end so it will be some time before we receive a full accounting from management.  But industry trends could certainly drive this stock higher.

    One area of concern is valuation
    .  Monsanto is currently trading at 23x this year's expected earnings.  That's not cheap for an agriculture stock, but considering the cross currents in emerging markets, expectations for next year's earnings could fluctuate significantly if China or India were to increase their seed demand even by a small percentage.



    Solar Pullback May Attract Buyers

    Last week I mentioned that the solar sector had hit a speed bump as First Solar Inc. (NASDAQ:FSLR) and MEMC Electornic Materials (WFR) disappointed investors.  But while these two names were certainly a drag on the sector, several stocks in this industry appear to be experiencing a healthy pullback.

    There was an interesting piece of news on Friday as Bloomberg reported new developments in Spain's stimulus program.  Nothing is final yet, but it appears that some of the solar stimulus cuts may not be as severe as previously expected - benefiting companies with existing plants already operating under existing government agreements.

    ReneSola Ltd. (NYSE:SOL)
    met resistance near $8.00 and has pulled back slightly to the 20 EMA.  That could prove to be a short-term support area and I wouldn't be surprised to see SOL break through $8.00 this week before reporting earnings next Monday morning.

    At this point the stock is trading with a single-digit earnings multiple and could see multiple expansion if industry developments help to boost demand.



    I already mentioned Trina Solar (NYSE:TSL) in last week's piece as an attractive value with an improving technical picture.

    More speculative traders may want to consider LDK Solar (NYSE:LDK) which is still in the early stages of a turnaround.  Risk is a bit higher in this name due to a heavy debt load.  But the company is coming out of a horrible 2009 and if it is able to turn earnings around as analysts expect, the resulting rise in its stock price could be tremendous.

    LDK strikes me as an asymmetric trade opportunity with the potential for a large triple digit percentage move higher over the next few months.  Of course the risk is that the company will stagger under the debt load and investors could lose 20% to 30% in very short order. If I get involved with LDK, my position size will take the risk into account, and I would likely consider scaling into the position as fundamental data improves.



    Still Potential for Weakness

    The market indices have turned more constructive and this morning the futures are indicating a higher open.  But that doesn't mean we are out of the woods.  In fact, Jack and I have talked about how a late summer rally could set the table for an exceptional short opportunity heading into the fall months.

    With that said, I'm still keeping my short list handy and even maintaining short exposure in particularly weak names.

    MGM Resorts International (NYSE:MGM)
    can't seem to get out of its own way, and a recent rally on relatively light volume has simply touched the negative trend line.  With a debt to equity ratio greater than 300%, it is difficult to see how traders will develop much confidence in this name, and I'm inclined to consider shooting for more short profits in this name after closing out my position earlier in July.



    Retail names remain on my watch list as well - with particular attention towards the middle class outlets.  A widening gaps between those who are thriving in the current environment and those who are under pressure could result in more business for discount chains but less spending for mid-range discretionary purchases.

    There are  a number of consumer patterns I want to research further, but changes in consumer patterns could provide a number of trade opportunities from both the short and the long side of the trading ledger.

    Hit em hard this week and don't forget that there is only one side to the market.  It's not the bull side, not the bear side, but the right side.

    As they say, "bears get slaughtered, bulls get slaughtered, but Mercenaries eat well
    ."

    Ok, that's a paraphrase but you get the point...  Good trading!
    MM


    Disclosure: positions in stocks mentioned
    Aug 02 10:16 AM | Link | Comment!
  • Solar Roundup: Speed Bump or Roadblock?
    Solar stocks are off sharply this morning following a disappointing earnings report from industry leaders First Solar Inc. (NASDAQ:FSLR) and MEMC Electronic Materials (WFR).  Despite a quick rebound in the overall market, the solar sector has remained under pressure - raising questions about the longevity of the sector's rebound...

    Last night after the close, WFR announced that full year earnings will be below the level management had previously targeted.   Revenue will actually be quite strong, but pricing trends are continuing to pressure margins.

    In contrast, FSLR actually raised its EPS guidance for the full year.  Still, the Q2 earnings report showed an increase in revenue with a corresponding decline in earnings as profit margins were crimped.

    Over the last couple of months, the solar sector had begun showing signs of a rebound as many of the leaders were showing signs of more stable profit, and investors began to see hope beyond the immediate challenges related to cuts in European stimulus programs.  This week's weakness calls the young rebound into question, so today I want to take a closer look at the group leaders to determine whether this is a simple setback or a more serious problem.

    MEMC Electronic Materials (WFR)


    WFR is currently the red-headed step child of solar stocks.  In fact, with a number of customers outside of the solar market, there is some argument that WFR shouldn't even be considered a part of the solar sector.  However, many traders will make industry decisions based off WFR's outlook so it is important to have a bead on the fundamentals in this bellwether.

    Looking more carefully at the company's Q2 presentation, it appears that the weakness in their solar business was driven by lower revenue - and more importantly by some delays in particular projects in the SunEdison solar unit.  The weakness at least initially appears to be more of a company specific issue - and not a reflection of the broad solar industry.

    Since WFR is diversified into several different business lines, I would steer away from using the stock as a proxy for solar - and obviously with the negative price action, WFR is off limits from a long-position perspective until there is some evidence of support.



    First Solar Inc. (FSLR)

    For the most part, the FSLR earnings report was very attractive.  The company actually beat analyst expectations, reporting earnings of $1.84 per share versus consensus views at $1.61.  Revenue came in above expectations as well and 11.8% over last year's reported revenue.

    Management also increased guidance for the full year
    - pegging EPS at $7.00 to $7.40 per share which appears favorable to the consensus expectations for $7.12 per share.  The Q2 presentation was impressive with a number of new projects announced and significant technology advancements in the works.  Since FSLR is known for its cutting edge technology, it is important for the company to remain at the front of the R&D curve.

    As we can see in the chart below, FSLR has exited the negative trend it experienced for the majority of 2009.  Uncertainty in Europe caused the sharp drop in May and June, but it appears that investors are now focusing on opportunities in China, the US and other growth markets for the company.

    If FSLR passes the test and finds support at the confluence of moving averages between $125 and $135, I will be interested in buying and holding through a break above $140 and $150.  Fundamentally, the company's earnings could support a significant ramp in the stock price - assuming new contracts are signed and revenue and earnings continue to grow.



    Trina Solar Ltd. (NYSE:TSL)


    Trina Solar will announce Q2 earnings on August 16.  The company has already put together two quarters of strong growth coming out of the economic slump, and shareholders are buying into the growth story.

    Analysts are expecting quarterly earnings to increase 33% over last year's numbers on revenue that should be more than 120% above Q2, 2009.  After the FSLR and WFR reports, there is less likelihood that investors will be negatively surprised with Trina's report.  In fact, if management is able to raise guidance, we could see the opposite effect as short-term traders have already trimmed their positions.

    I'll be watching for TSL to begin to rebound from this most recent leg lower.  f the stock is able to find support between $20 and $21, I would likely take a starter position relatively quickly and then consider adding to the position if the earnings report is good and the stock clears resistance near $24 and $27.



    Canadian Solar (NASDAQ:CSIQ)

    Canadian Solar is still in the process of shaking off the effects of an SEC investigation.  At issue is the period in which revenue was reported which at first blush is a relatively minor issue.  If CSIQ emerges with just a slap on the wrist, the stock would likely react very positively.  On the other hand, I believe much of the negative issues raised in the investigation are already priced into the stock.

    Based on the company's earnings and sales growth, as well the strength of its customers, fundamental investors could easily justify paying twice the current stock price and still consider the stock to be a strong value.  This leads to an asymmetric return profile where the potential gains dwarf the risk associated with a declining stock price.

    The company announces earnings next week (August 2) and I will be very interested to hear whether management has anything to say about the investigation.  More importantly, it will be important for investors to see growth in revenue and relatively stable profit margins.

    I'm not involved in the stock yet, but may consider purchasing on a quick rebound back above the 50 EMA.



    When looking at the decline in solar stocks over the past week, keep in mind that the industry is still one of the best performing sectors for the month of July.  There is plenty of turbulence as uncertainties are weighed and discussed, but if traders are turning over a new speculative leaf, the solar industry is likely to benefit significantly.


    Disclosure: No positions in stocks mentioned
    Jul 30 1:17 PM | Link | Comment!
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