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Winners & Losers & Why: FRED, NDN, PDC, ATW, MTH, LNN, SPF

|Includes:ATW, CAA, FRED, LNN, Meritage Homes Corporation (MTH), NDN, PES

Standard Pacific, Meritage Homes, 99 Cents Only Stores and Fred's are up. Atwood Oceanics, Pioneer Drilling, and Lindsay Corporation are down.

What's hot and what's not within the world of small caps? More importantly, are any of these stocks something you need to own or specifically avoid for the foreseeable future? Homebuilders like Standard Pacific Corp. (SPF) and Meritage Homes Corporation (NYSE:MTH) are the big winners, while construction and farm machinery stocks - effectively Lindsay Corporation (NYSE:LNN) when focusing on the small cap universe - are the deepest in the hole. 

Oil and gas drillers Atwood Oceanics Inc. (NYSE:ATW) and Pioneer Drilling Co. (PDC) are scraping the bottom of the barrel as well, while general merchandise retailers 99 Cents Only Stores (NYSE:NDN) and Fred's Inc. (NASDAQ:FRED) are today's bullish runner's up.

Here's a closer look at what you need to know about each.

Is there any real question why small cap homebuilder stocks like Standard Pacific (SPF) and Meritage Homes Corporation (MTH) are up an average of 4.0% today? The Commerce department reported that home sales were up 9.6% last month... the fourth consecutive monthly increase. The current pace is now 30% better than January's rate.

Nevertheless, we still contend that the rally from the homebuilding sector's stocks - though understandable - is also overextended. Though improving, the rate of home sales is still 70% below the peak from four years ago. Some builders will survive, but the supply is simply too great; we may never need as many builders as we were utilizing in 2005.

As for Standard Pacific and Meritage Homes, both charts looked overbought prior to today, so the problem was augmented with today's moves.

Not that earnings are required for a stock to move higher, considering analysts don't expect either company to turn a profit next year despite the strengthening real estate numbers just suggests avoiding SPF and MTH despite the rally.... there's a lot of disappointment potential building up.

Construction and farm machinery small cap stocks are lower by an average of 2.4%; most of the loss has stemmed from the 5.0% dip from Lindsay Corporation (LNN). There was no news or prompt - it was just time for investors to head for the doors.

Odds are that LNN shares simply got over-extended with the recent move to $47.00. Traders, cognizant of the fact that Lindsay Corporation's numbers for the past twelve months were mediocre - and the numbers for the next twelve months were expected to be even less compelling - likely decided it was time to take the money and run.


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Small cap drillers are having a tough go of it today as well; the S&P 600 Small Cap Driller Index is off by 2.9%, led by Atwood Oceanics (ATW) and Pioneer Drilling (PDC). As with the homebuilders, there's no company-specific news driving the stocks - the weakness largely reflects diminished demand for oil. 

The U.S. inventory of crude rose by 200K barrels last week - a stark contrast to the decline from a week ago. Gasoline stockpiles fell by 1.7 million barrels last week though, so the 'weak demand' argument doesn't hold water.

Atwood Oceanics and Pioneer Drilling owners need not worry about the action today. The downtrend is only apt to last until the next relative announcement shakes up the price of oil, perhaps in the other direction again. The bigger oil trend means much more, which is still a bullish one for drillers.

And finally, small cap discount department stores like 99 Cents Only Stores (NDN) and Fred's Inc. (FRED) are up an average of 2.9% today. The smaller names in the arena have bigger brother Dollar Tree (NASDAQ:DLTR) to thank for that; Dollar Tree doubled its Q2 profit on a 12% increase in revenue. Yes, it bodes well for all the players in the discount space, but it's not like 99 Cents Only Stores needed the help.... the company swung back to a profit last quarter on a 23% improvement in the top line.

Fred's reports earnings on Thursday. Analysts expect a profit of 13 cents per share, and those analysts have been right on target for the last four quarters.

Ironically, shares of NDN and FRED both look a little expensive at current values and projected results - the result of being one of only a few 'safe havens' in a nasty recession. This may be a group to avoid until share prices are reeled in.... though Fred's may be an exception if earnings show progress and promise.

If you'd like to know when or if we issue trading alerts specifically for MTH, LNN, SPF, FRED, NDN, PDC, or ATW, then be sure to subscribe to our free e-newsletter. It's delivered two to three times per week.