The Market Direction…

Sunday morning I found myself in the family room pedaling furiously on my spinning cycle while watching John Steinbeck’s classic film adapted novel, The Grapes of Wrath, with a young Henry Fonda and slew of other Hollywood stars cutting their teeth to make a name for themselves. For the record, it is both one of my favorite novels and movies as it deals with a period in American modern economic history that chronicled the desperate times of the dust bowl and economic depression.

As I invested myself emotionally into the story and physically into my bike, I could not help but draw some parallels to today’s financial crisis:

1. cataclysmic events that trigger and facilitate enormous transfers/evaporation of wealth
2. the advent of new technologies and innovations altering demographic landscapes
3. exploitation of economically disadvantaged people by special interests business groups which are often aided by the apathy or legislative participation of government accomplices
4. the willingness of so many to accept injustice without much protestation or in some instances prone to misguided anger.

Now, I will be amongst the first to proudly acknowledge America’s social and economic progress during the post-depression era. Besides, investment ideas, which I shall eventually get to, and not critical comparisons between the past and the present is the purpose of this article, so I will refrain from doing such.

However, somewhere between my cinematic indulgence and adrenalin surged workout, I did draw some inspiration from the movie and the speeches of Ma Joad and Tom Joad. In fact, they actually helped to put things into perspective for me. Here is Ma Joad’s below:

AL: Whatsa matter, Ma? Gettin’ scared?

MA: No. Ain’t ever gonna be scared no more.

(After a pause)I was, though. For a while I thought we was beat–*good* an’ beat. Looked like we didn’t have nothin’ in the worl’ but enemies–wasn’t nobody frien’ly anymore. It made me feel bad an’ scared too–like we was lost… an’ nobody cared.

 

AL: Watch me pass that Chevvy.

 

PA: You the one that keeps us goin’, Ma. I ain’t no good any more, an’ I know it. Seems like I spen’ all my time these days a-thinkin’ how it use’ta be–thinkin’ of home–an’ I ain’t never gonna see it no more.

 

MA: Woman can change better’n a man. Man lives in jerks–baby born, or somebody dies, that’s a jerk–gets a farm, or loses one, an’ that’s a jerk. With a woman it’s all one flow, like a
stream, little eddies, little waterfalls, but the river it goes right on. Woman looks at it like that.

 

AL: Look at that ol’ coffeepot steam!

 

PA: Maybe, but we shore takin’ a beatin’.

MA:(chuckling): I know. Maybe that makes us tough. Rich fellas come up an’ they die, an’ their kids ain’t no good, an’ they die out. But we keep a-comin’. We’re the people that live. Can’t nobody wipe us out. Can’t nobody lick us. We’ll go on forever, Pa.

We’re the people.

I chewed on her words for a while and revisited my impressions from Apple’s quarterly report last week. I remember marveling at how this company seemed to be somewhat impervious to this recession. I also remember Apple being down and out in the decade of the 1990’s, (Don’t worry, this report is not about Apple. Everyone already knows or should know the Apple story by now.) But like Ma Joad, I believe that one must "keep a-comin’…" and if you are an investor then it is important to identify those companies that just "keep a-comin’…" no matter what.

And of course there is Tom Joad’s infamous "I’ll be there" speech:

"…I’ll be all around in the dark. I’ll be ever’-where - wherever you can look. Wherever there’s a fight so hungry people can eat, I’ll be there. Wherever there’s a cop beatin’ up a guy, I’ll be there. I’ll be in the way guys yell when they’re mad - I’ll be in the way kids laugh when they’re hungry an’ they know supper’s ready. An’ when the people are eatin’ the stuff they raise, and livin’ in the houses they build - I’ll be there, too."

With sincere humility, I certainly do not regard myself as the reincarnation of Tom Joad, but I do honor the spirit of the man (even if he is an idealized fictitious character) and good-willed intentions of his words. Therefore, in the spirit of altruism and the democratization of financial data and research, I share this short list of stocks that I believe to have a sufficient quantity of the tough stuff to "keep a-comin’…" no matter what.

While they may not share AAPL’s business model, they do share a consistency in delivering strong sales and earnings results. First, we identify companies with positive sales and earnings surprises that have exceeded consensus estimates by at least 5% for the last two reported quarters. On an annual basis, they must also produce positive earnings over the past 2 consecutive fiscal years and positive sales growth during the previous 3 consecutive fiscal years. Last but not least, the companies can rate no lower than neutral (i.e. C on a scale of A to E) on Hillbent’s proprietary grading system. In this environment, none of these are an easy feat to accomplish. From a universe of 3000 companies (includingADRs ) with a minimum average daily volume of 100k, the results yielded only 10 companies.

Here are the 10 companies for reader’s reference. As always, I encourage further research and due diligence as the list is merely a starting point and not intended for specific recommendations or regarded as an entire portfolio. Anyone who wishes to obtain a premium version of the report which entails more in-depth analysis and commentary may contact market-condition at hillbent dot com.

Well the movie ended and so did this report that I wrote in my head while riding my bike. The screen was originally inspired from Apple’s quarterly results last week but formulated while watching The Grapes of Wrath.

The challenges and obstacles to future economic growth in America are legitimate, but there will be viable investment opportunities on U.S. exchanges for domestic and international securities. I am optimistic that the next 50 years will propel America to even greater levels of progress. Whether we will remain the world’s largest economy in the future is not nearly as important as remaining one of the strongest.

Whether you are a bull or bear, it is time to stop worrying about what has been lost or permanently changed. Just keep a-comin’ and when you get there you just might find the ghost of Tom Joad. I will be there for my children and my children’s children and their children. That’s America and we are the people! Until then, here’s a little bit of Rage Against the Machine for more inspiration:

*Disclosures: Hillbent does not provide individualized market advice. The information we publish regards companies in which we believe our readers may be interested and our reports reflect our sincere opinions. Nevertheless, they are not intended to be personalized recommendations to buy, hold, or sell securities. Investments in the securities markets, and especially in options, are speculative and involve substantial risk. Each individual investor should determine their respective appropriate level of risk. It is recommended that you seek personal advice from your professional investment advisor and conduct further independent due diligence research before acting on information published in any of our reports. Most of our information is derived directly from information published by the companies on which we report and/or from other sources we deem to be reliable, without our independent verification.

Therefore, we cannot assure the completeness or accuracy of information contained within these reports and we do not in any way warrant or guarantee the success of any action which you take in reliance on our statements.

Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

>>>Market Growth>>> Perfect World (PWRD) is an online game developer and operator in China and is regarded as a bellweather for China’s online gaming export industry. It exports games to approximately 60 countries and has licensed them in 11 countries to leading operators. Domestically, China has over 338 million of its people using the internet.

Fundamentally, Hillbent assigns a proprietary grade of "A" to PWRD, with "A" being the strongest on a scale of "A" to "E". The stock trades @ only 15.5 PE and @ 0.4 PEG and is projected to grow its 2009 earnings and sales at respective rates of 25% and 20%. IBD ranks its industry group # 31 out of more than 200 groups.

On Monday, PWRD appeared on the radar of one of Hillbent’s technical analysis screens for which strong volume is a key prerequisite. Volume was up +125% vs. average volume and up +258% vs. last Friday’s volume to signal fresh buying demand for its shares. However, caution should be heeded as the shares are trading at the upper range of its channel and up @ +21% over the last 5 trading sessions on @ +31% increase in aggregate 5 day volume. I would anticipate and prefer a pullback and some price consolidation.

In summary, investors patient enough to wait for a pull-back to the at least the $31-$32 range will be presented with a tremendous buying opportunity. Otherwise, tight stops or the selling of out of the money naked or covered puts are recommended for those who insist upon having immediate exposure to this growth monster.

*Disclosures: Hillbent does not provide individualized market advice. The information we publish regards companies in which we believe our readers may be interested and our reports reflect our sincere opinions. Nevertheless, they are not intended to be personalized recommendations to buy, hold, or sell securities. Investments in the securities markets, and especially in options, are speculative and involve substantial risk. Each individual investor should determine their respective appropriate level of risk. It is recommended that you seek personal advice from your professional investment advisor and conduct further independent due diligence research before acting on information published in any of our reports. Most of our information is derived directly from information published by the companies on which we report and/or from other sources we deem to be reliable, without our independent verification.

Therefore, we cannot assure the completeness or accuracy of information contained within these reports and we do not in any way warrant or guarantee the success of any action which you take in reliance on our statements.

Regarding guest commentaries and contributing authors, note that Hillbent.com does not officially endorse the commentaries of any contributors and the sole purpose of providing such content of for the convenience of our readers and to further assist their research efforts.

Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

>>>Technial Analysis>>> Emerging markets wireless telephone services provider, Millicom Int’l SA (MICC) displayed strong price action despite a negative performance this week from its parent index, the Nasdaq 100.

 

MICC successfully tested support at its 200 day moving average, i.e. 40 week moving average) and went on to take out last week’s high and close in the upper end of its trading range with a bullish hammer candlestick pattern.

 

One caveat is that although this week’s volume was comparable to last week’s trading, it remains below its 20 week average volume.

 

Sporting a 4.8% dividend yield and offering investors exposure to growth in emerging market economies makes MICC worthy of further investigation.

 

Here’s an excerpt of the CEO’s comments from the first quarter 2009 conference call:

Mikael Grahne, the newly appointed CEO of Millicom, commented: "We continued to show strong management control in Q1 09, delivering improvements in key areas. In the financial area, we firstly achieved a strong margin of 44.5% as the result of cost controls and favorable product mix. Secondly, free cash flow for Q1 09 was positive at $48 million representing 6% of revenues. In Q1 09 we were also successful in raising close to $200 million of debt financing.

"In the operational area, there were three key improvements. Firstly, revenues from Value Added Services (VAS) were up by 45% for Q1 09 versus Q1 08 in local currency. Secondly, pre-paid churn was down by 0.6 percentage points for the Group from Q4 08. Thirdly, our market share was up by 1% in both Central America and Africa and, on a weighted basis at group level, our market share was stable."These key indicators give us confidence in the outlook despite the unfavorable economic environment. Across our markets we have seen deterioration in the environment which has led to some changes in consumer behaviour. We are responding with continued innovation around revenue generation, cost optimization and affordability. Revenues for the group grew by 9% in local currency although the overall results have been impacted by foreign exchange movements."We have taken the decision to carry out a strategic review of our Asian assets, which could lead to a full or partial divestment of our business in the region."Despite the adverse economic environment, we continue to be confident in the medium and long term prospects for Millicom. With overall penetration in our markets of some 41%, there is a substantial growth opportunity and by being an innovative, cost efficient operator, we believe we will continue to outperform our competitors over time. We are on target to maintain our current EBITDA margin for 2009, we are on track to be free cash flow positive for the first time in 2009 and we have revised our capex forecast to approximately $850 million for the full year."

 

The stock closed @ 53.92 on Friday (05-15-2009) and if it were to retrace at least 38% of its last down-leg, its next target would be @ 62.33 for @ 18% potential capital appreciation return (excluding dividends).(see Chart below).

 

 

 

 

*Disclosures: Hillbent does not provide individualized market advice. The information we publish regards companies in which we believe our readers may be interested and our reports reflect our sincere opinions. Nevertheless, they are not intended to be personalized recommendations to buy, hold, or sell securities. Investments in the securities markets, and especially in options, are speculative and involve substantial risk. Each individual investor should determine their respective appropriate level of risk. It is recommended that you seek personal advice from your professional investment advisor and conduct further independent due diligence research before acting on information published in any of our reports. Most of our information is derived directly from information published by the companies on which we report and/or from other sources we deem to be reliable, without our independent verification.

Therefore, we cannot assure the completeness or accuracy of information contained within these reports and we do not in any way warrant or guarantee the success of any action which you take in reliance on our statements.

Regarding guest commentaries and contributing authors, note that Hillbent.com does not officially endorse the commentaries of any contributors and the sole purpose of providing such content of for the convenience of our readers and to further assist their research efforts.

Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

>>>Market Growth & Technical Alert>>> There is always a bull market going on somewhere and today’s feature could offer more than the Wall Street’s punk returns as of lately. Smith & Wesson (SWHC) has appeared on Hillbent’s 5 day new high radar for the last 2 trading sessions, including today, despite the market’s recent sell-off. SWHC closed up +8.13% on volume 315% greater than its average daily volume.

Many are familiar with Smith & Wesson as it has been around for at least 150 years and is one of the world’s leading manufacturers of high quality handguns, law enforcement products, firearm safety and security products. As manufacturing goes, this is one industry (defense products & services) that America will never give up or outsource, so expect the company to be around a while longer. Trust me on this one folks. Otherwise, just scratch your head and think about for it a minute or two and I am confident that you will reach agreement with me.

Fundamentally, the company is sound and earns Hillbent’s proprietary composite grade of "A". Over the past 5 years, the company has grown its sales and earnings at respective growth rates of 17% and 15%. Zacks estimates show that the company will grow EPS at +160% for 1Q 2009 and -32.95% for FY 2009 and 96.+71% FY 2010. Going forward, Reuters News reports that the company plans to double its revenue over the next 3-5 years by entering the rifle and long gun markets and via acquisitions that are projected to add $100mm to the top line.

This one is worth further investigation for investors seeking both personal and portfolio protection in a company that seems quite capable of dodging bullets in the investment war better known as the subprime credit bear market. For any short sellers, listen up: "Do you feel lucky, punk? Go ahead… make my day…"

By J. Clinton Hill, Editor and Market Direction Strategist @ Hillbent.com

Author’s Disclosures: None

*Disclosures: Hillbent does not provide individualized market advice. The information we publish regards companies in which we believe our readers may be interested and our reports reflect our sincere opinions. Nevertheless, they are not intended to be personalized recommendations to buy, hold, or sell securities. Investments in the securities markets, and especially in options, are speculative and involve substantial risk. Each individual investor should determine their respective appropriate level of risk. It is recommended that you seek personal advice from your professional investment advisor and conduct further independent due diligence research before acting on information published in any of our reports. Most of our information is derived directly from information published by the companies on which we report and/or from other sources we deem to be reliable, without our independent verification.

Therefore, we cannot assure the completeness or accuracy of information contained within these reports and we do not in any way warrant or guarantee the success of any action which you take in reliance on our statements.

Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

>>>Market Growth>>> (This is the first in a 3 part series of articles dealing with small cap companies that are well positioned to survive the fundamental changes that have impacted the primary drivers of growth in the recently ended business cycle.)

The stock market, being true to form, served as a reliable leading indicator when it peaked in October 2007 to signal a recession. It took NBER (National Bureau of Economic Research) over a year to reach a similar conclusion when it reported that the economy had peaked in December 2007. Small businesses, i.e. companies employing fewer than 500 employees, are certainly sharing the pain as they represent 99.7% of all employer firms. However, it is small cap stocks that historically tend to outperform the stock market, our ever so reliable leading indicator, whenever it decides to inform that a recession has ended.

Now, every business economic cycle is driven by its own set of catalysts. The demographic force of baby boomers, over-expansion of credit, demand for productivity enhancing technology, and lower tax rates drove this one. No knows for certain which themes will drive the next cycle, but examining the market’s reaction to the demise of these above catalysts may provide clues and help rehabilitate portfolios until then.  This first in a series of articles will focus on an individual small cap company that is uniquely positioned to capitalize on the demographic forces that continue to evolve and drive the U.S. economy.

Regardless of market conditions and the credit crisis, the financial media barely mentions that as more baby boomers move along the time line, the outlay of cash flow used to managed their lives will be increasingly redirected towards health maintenance and treatment services. It is only logical that responsible reallocation of assets occurs. However, Wall Street and its greed may have beaten Main Street to the punch on this one. Even without the financial crisis, this demographic fact alone is enough to trigger a seismic shift from growth and riskier assets such as equities into more conservative income producing assets.

Life goes on and as time changes, the needs and priorities of the people who exist in it also change. Another demographic fact is that as people grow older, they involuntarily join a majority which represents the core base of hospital and health care patient populations.

Besides this, the various phases of the economic business cycle (i.e. expansion, peak, recession, and trough) have no influence on the quantity of physical illness. Because of this, one company that is relatively immune from periods of economic malaise and contracting any of the symptoms infecting most corporate balance sheets is Meridian Bioscience.

Meridian Bioscience- (Ticker: VIVO; Industry: Medical Products; Market Cap: $952mm; Avg Volume: 381k) Meridian is a life sciences company that produces, markets and distributes diagnostic test kits that are used in early detection of viral, gastrointestinal, and respiratory infections. Their competitive edge is the simplicity of use and speedy results of its core products which are a viable alternative to more time consuming and costlier traditional blood work. Instead, hospitals can use nasal, throat or stool swabs.

In terms of financial stability, this is not your father’s small cap. The company is very solid. In a tight credit environment, it is in the enviable position of having zero debt combined with strong cash flow growth. Its current cash flow per share is $0.86 vs. $0.72 (2007) and $0.52 (5 year average). With an estimated 19.82% earnings growth for the current year and average 21% earnings growth projected over the next 3 -5 years, the company should be able to maintain its steady increase of cash flow and organically grow its business.

Revenue sources are also stable. Over 80% of its sales are derived from diagnostic testing for infectious diseases and is represented by a customer base that includes acute-care hospitals, outpatient clinics and large laboratory outfits, e.g. Quest Diagnostics and Laboratory Corp. of America. Because so many infections are contracted from hospitals, the federal government has threatened to penalize those with high infection rates, thus creating an added incentive for its core customers to continue using its products. Its larger life sciences customers are Abbott Laboratories and Siemens, two blue chip large caps healthy enough to survive the recession. Rounding out its customer base is the National Institute of Health which awarded Meridian’s life science unit a contract worth @ $12.2mm in exchange for producing up to 10 experimental vaccines per year from newly discovered molecules.

Even more promising are its future growth prospects and opportunities. In late November 2008, the FDA approved two of its flue viral tests: TRU FLU and TRU RSV. CEO, John Kraeutler stated "the production of vaccines and injectable drugs is a small specialty area of our business," and indicated that Meridian is scaling up drugs for biotech firms. In the areas of molecular testing, it is developing a new molecular diagnostic test technology licensed from Eiken Chemical in Japan that would be used to target and measure DNA or RNA. CEO, Kraeutler, regards this technology as a strategic driver for future organic growth. If this is not enough, then it also has plans to grow its existing international revenue from 33% to 50% of total sales over the next three years in Europe, Japan, and China.

On a valuation basis, the stock is cheap. Although valuation metrics have contracted in the current market environment, it is mainly due to downward revisions of earnings by analysts. This is simply not the case with Meridian as its growth prospects remain solid and the nature of its business is not severely impacted by the recession. It current PE is @ 33 while its Forward PE is 22.5. On a historical basis, it trades at a 23% discount to its 5 year average PE. Investors also get growth at a reasonable price as the PEG (Price-to-Earnings Growth ratio) is only 1.27.

Technically, as of the writing of this report (12-10-2008), its stock is trading in a consolidation pattern and attempting to build support near its 50 day moving average. The short-term/daily trend is up; the intermediate/weekly trend is lateral; and the long-term/primary trend is down. Intermediate support levels are at 22.50 and 21.65 while resistance levels are 26.30 and 27.50. Year-to-date the stock is down -21.48% but on a relative basis, it has outperformed the S&P 500 by 28.33% during the same period.

In summary, Meridian Bioscience is well positioned to maximize value for its shareholders as it focuses on the aging populations within the U.S., Europe, Japan, and China. Its strong balance sheet should afford it the flexibility to pursue and adapt to market opportunities as they arise in an industry that is relatively immune from the subprime virus affecting the global economy. Lastly, its relative strength more or less confirms the above, despite the tsunami-like deleveraging from risky assets that has wiped out just about any form of wealth that stands in its path. Immunize your portfolio with this one and remain Hillbent for phase 2’s followup…

By J Clinton Hill
Market Direction Analyst
Hillbent.com