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  • View From The Turret: Bulls Take the Offense 0 comments
    Aug 2, 2010 10:16 AM | about stocks: POT, IPI, MON, FSLR, SUNEQ, SOL, TSL, LDK, MGM
    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!

    Disclosure: positions in stocks mentioned
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