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Rajiv Tarigopula
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I have been interested and involved in the equity and fixed-income securities markets over the last decade. Value investing on fundamental performance metrics appeals to me greatly, as does leveraging these returns using options strategies. I believe that smart money sells options. I graduated... More
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  • Another Look At S&P 500 Sector Valuations: Time For A Healthcare Play?

    Much has been made lately of the relative valuations of various sectors in light of the last week's market highs (NYSEARCA:SPY). However, the contention that "we're not likely to get too much more extended in the very near term" should probably be taken with a grain of salt, or at least in the context of quantitative metrics other than simply moving averages of different periods.

    In fact, if we take a look at other momentum metrics such as the commonly used Relative Strength Index, or RSI, then we might reach some drastically different conclusions regarding these relative sector valuations. Below are 21 graphs I have produced of two companies' sector-oriented exchange-traded funds (NYSEARCA:IDU) (NYSEARCA:IYC) (NYSEARCA:IYE) (NYSEARCA:IYF) (NYSEARCA:IYH) (NYSEARCA:IYJ) (NYSEARCA:IYK) (NYSEARCA:IYM) (NYSEARCA:IYW) (NYSEARCA:IYZ) (NYSEARCA:XLY) (NYSEARCA:XLP) (NYSEARCA:XLE) (NYSEARCA:XLF) (NYSEARCA:XLV) (NYSEARCA:XLI) (NYSEARCA:XLB) (NYSEARCA:XLK) (NYSEARCA:XLU) as well as the long-term Treasury ETF (NYSEARCA:TLT) and the SPDR Gold Trust (NYSEARCA:GLD). After examining them, it appears that the healthcare sector is primed to follow this year's recent broad market rally.

    If we look at the healthcare sector more specifically from a fundamental perspective, I find drug delivery (NASDAQ:PETS) (CBRX) (NASDAQ:ACUR), long-term care facilities (NYSE:FVE) (NYSE:SKH) (NASDAQ:ENSG), medical practitioners (NASDAQ:LCAV), and hospitals (NYSEMKT:SSY) (NYSE:SEM) (NYSE:CCM) to be among the more undervalued segments of the sector, with generic drugs and drug manufacturers, biotechnology, and diagnostic substance companies coming in at the most overvalued from a price/earnings ratio perspective. Among the more promising segments, I especially like hospitals right now for their improving net profit margins and lower price to free cash flows. Long-term care facilities have seen a lot of action this last year, with notorious Sunrise Senior Living (formerly SRZ ticker symbol) being bought out in late 2012.

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    In the final analysis, it appears that the healthcare sector (represented by the XLV and IYH ETFs) is relatively undervalued, and that the rest may be approaching the tops of their momentum swings from an RSI-based perspective, at least. Greenway Medical Technologies, Inc. (NYSE:GWAY) is one industry player that announces earnings tomorrow and may be a stock to watch. The long-term Treasury ETF also looks like it is relatively undervalued when it comes to a momentum-based trading perspective. However, take this all with a grain of salt, though; with QE-infinity continuing for the medium-term, though, it looks as if all such traditional trading metrics may need to be re-examined.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in IYH, XLV, TLT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    May 06 4:50 AM | Link | Comment!
  • Double Digit Premiums In U.S. Merger Arbitrage Plays: Part 3

    For investors willing to stomach a bit more risk, there are some potentially high-return opportunities available in merger arbitrage in these volatile markets. In Part 1 and Part 2, I took a look at five potentially high-return trade ideas with M&A deals at different stages of the game. Here's a closer look at another with a closing premium in the double digits:

    JPS Industries Inc (OTCPK:JPST), a Greenville, South Carolina-based specialty industrial manufacturer, has received an unsolicited bid from Steel Partners Holdings LP (NYSE:SPLP), announced on September 21, 2011. The value of this deal stands at $85.13 million, with an announced premium of 96.4% and a current premium of just over 39%. JPST is currently trading for $5.75/share, and SPLP intends to acquire the target at a deal price of $8/share in this all-cash transaction. The target's financial adviser is Houlihan Lokey, and the target's legal adviser is Fried Frank Harris Shriver & Jacobson. Taking a look at JPS Industries' financials, 2010 Q3 revenue was $54.44 million USD, with net income of $500,000 and EBITDA of $4.89 million. Total assets on the balance sheet are $160.99 million, with $89.87 million in liabilities and $71.12 in shareholders' equity in the same reporting period.

    For further analysis by potential traders on this M&A deal, target peers include privately held Johns Manville Corporation, privately held Denali Incorporated, and Hexcel Corp. (NYSE:HXL). Investors should keep in mind that this is a very low-volume equity, with volume in the triple digits.

    As stated in previous iterations of this series, any investors seeking such lucrative plays in merger arbitrage should realize that there is good reason the market hasn't fully priced in the offer per share into the price of targets' equity shares. Take into account the probability of the deal not gaining regulatory or government approval, management and company boards not approving the deal, or a whole host of other factors: these can all contribute to downside risk on these equities. In short, do your own due diligence before diving into one of these with hard-earned capital. Good luck - more to come.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Aug 01 4:39 PM | Link | Comment!
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