Investment Capitalist

With global overnight markets (Hang Seng, Topix, Nikkei, Singapore) in near free-fall as the US markets are closed, US markets will open significantly lower on Tuesday. The question is whether or not any opportunistic buyers will put in bids to allow for an orderly open. With the specialists all but ancient history, now would be the time when we need their involvement the most. But absent that, there are going to be tremendous opportunities for selective buys on key stocks. I have been eying the blue chip financial stocks, banks, brokerages, money managers and some energy related stocks for several days and have been waiting for an exhaustion sell-off. This exhaustion is probably close by as I imagine the Fed will be forced to move in an emergency session. With markets oversold worldwide, a sharp multi-hundred point rally is likely to follow later this week. But first, we will see a panic/crash where as professional investors, we must step in as buyers no matter how dire the situation appears from the outside.

(Note: As of this writing, S&P futures are down 70 points and Dow futures are down almost 600 points.)

First on my list is Bank of America (BAC). The problems plaguing the major money center banks such as Citi are not hurting BAC as much, but this financial stock is nevertheless getting hammered in sympathy. Its primary uptrend line dating back to 1980 (can you say “long-term”) was broken last week. There is going to be a huge amount of buying on this stock if it gaps down significantly on the open. I am painting $31 as the ideal buy opportunity on Bank of America (BAC).

Next on the financial list is Citigroup (C). The stock is already down 50% from its all time highs on massive volume. I suspect another 50% haircut in Citi shares before this is over. The ideal entry on C therefore is around $12, with small incremental bids starting below $18, then becoming a greedy pig at $12. This one looks very good even at $24 but this is not over yet. So resist any urge to begin buying above $20.

Credit Suisse (CS) is down over 35% from its highs but has very little bid support below $50. Assuming she will open well below $50 on Tuesday, I expect to see $41 very quickly on this stock, perhaps in the next couple of days. Unless of course there is a full-blown panic in US markets on Tuesday, in which case we’ll see $41 on Tuesday. So if you haven’t guessed already, CS buy price is $41 and also $35 if it gets there. But not a dollar more than $41! Patience with financial stocks is a virtue.

Fortress Investment Group (FIG) is down almost 65% from its IPO. At these levels, it makes sense for management to buy the company back and take it private again. My technical indicators are not confirming the recent price low from last week relative to the August low near $15. Therefore, this new low around $11 should provide a major floor if there is a significant enough gap to the downside on Tuesday’s open. The strategy here with FIG is to buy into a gap down and park this stock away in your long-term book.

U.S. Global Investors (GROW) is hanging precariously above its 200-week Moving Average. Last time GROW tested this major moving average was June, 2004. If you see GROW printing anywhere near $13 per share this week, an initial buy would be a good long-term bet. After the dust settles from this panic that is unfolding, this position can be built up further. Suggested strategy here is to buy GROW between $13 and $14. This company is growing at an incredible pace and should continue to do so as the Fed drastically cuts rates. Moreover, the company operates at a 28% profit margin, something unprecedented in fund management companies. Perhaps the reason is they have a total of 76 employees managing almost $5 billion in capital.

Goldman Sachs (GS) a value play? With a P.E. of 8, what else can you call it? Goldman Sachs at this level is something I can’t get enough of. I never thought I would call Goldman a value stock. GS has been largely unscathed from the sub-prime slime and is therefore a great long-term investment candidate as it is being unnecessarily discounted by the market due to the sector as a whole while there is no rub-off on the company’s balance sheet. If anything, GS is profiting from other banks losses. Buy GS at $165 and again at $150. I wouldn’t be surprised to see a major expansion of their stock buyback and/or an increase in their dividend.

Jeffries Group (JEF) is another financial stock I want to own. Down over 50% from its peak in early 2006, I believe the stock is a steal at $12 per share and it’s very likely we will see it printing down there this coming week. Buy JEF at $12. With a P.E. of 10 and a current yield of 3%, this is a long-term position with huge potential. Furthermore, it makes sense to accumulate this after last weeks announcement by the major rating agencies that there are no downgrades on the horizon following their 4th quarter loss.

MasterCard (MA) is again another beaten down stock with zero exposure to sub-prime and other credit problems. The stock is down 22% and is therefore significantly outperforming her peers, showing strong relative strength. Any gap open to the downside on Tuesday, which is highly likely, will be a great buying opportunity for MasterCard (MA). The 200-day Moving Average is around $160, which is where I would be bidding aggressively for MasterCard International (MA). One major caveat here is that with a PE of 30, this is not presenting a significant value or discount like the other financial stocks. At the same time, the company is growing at an incredible pace which is why the market is pricing the stock so aggressively based on forward earnings. Management is rock solid and running this giant behemoth at a margin of 40%! The company is kicking off a tremendous amount of free cash flow and is in very good shape all around. A great long-term investment candidate where a scaled accumulation strategy would be most appropriate.

Merrill Lynch (MER) is down 50% from its highs but since John Thain has taken over the leadership at MER, the company has been writing down losses very aggressively. Perhaps over-aggressively as this is a “changing of the guard” for a major US brokerage. I’ve seen multiple panic situations in Merrill Lynch over the years, namely 1997, 1998, 2001. In each case, the company was written off as dead only to survive and become stronger and more powerful than the previous low. There is no reason for me to think this time is any different. In fact, with John Thain running the show today and turning Merrill Lynch into a Goldman Sachs type financial player, I love this stock for the long-term. Buy MER at $41 and buy aggressively! There is a possibility that the dividend will be cut although Thain has all but ruled out that possibility. The present yield is a fat 2.7% for this stock. But I am not buying MER for the dividend. This is a great stock undergoing a major “changing of the guard” as I mentioned earlier. For that reason, I am buying with both hands and betting on John Thain with my eyes closed.

Morgan Stanley (MS) is down over 40% from her highs last year and is now approaching multi-decade support levels. Furthermore, and perhaps more importantly, none of my trend indicators are confirming these recent lows. Rather, I am seeing accumulation across the board on this stock on all indicators. Coupled with the oversold state and possible panic exhaustion that is about to ensue, this is one of my top picks for an aggressive buy. Buy Morgan Stanley (MS) at $40-$41. Morgan Stanley is trading with a forward PE of 9 and a current PE of 16. The market is discounting the worst possible scenario and not factoring in the potential that JP Morgan will likely make a play to scoop up this company on the cheap and bring these two back together again after almost 100 years. The low forward PE will be very attractive to JP Morgan, which has a healthy balance sheet and can swallow MS in one gulp.

T. Rowe Price (TROW) is another financial experiencing tremendous growth in assets but getting hammered due to broader credit market woes. As such, the stock is performing relatively well compared to losses in her peer group. If TROW approaches the $42 level, I am buying her with both hands.

American Express (AXP) is about to test a major price level from 2002 and is already down over 40% from her highs. I would like to buy a small lot around $40 and then wait for the dust to settle before adding to this position. Who said Platinum and Black card holders are immune from a recession? Although not immune, they are certainly less likely to default so this is another financial stock being overly discounted based on broader macro conditions in financial markets.

One of my favorite metal/mining stocks for the past four years has been Posco (PKX). Posco is an integrated steel producer out of Hong Kong. With China sucking up steel at an unheard of rate, shares of PKX have been on an absolute tear for the past several years. Down nearly 1/3 from her all-time highs, Monday’s overnight selling in Asian markets is going to present a great buying opportunity in PKX. Regardless of a global recession, China will continue to use up steel for the next several years and beyond. Any short-term hiccup is a buying opportunity in this stock and I’ve been waiting for a chance to pick up shares in Posco for several months. Buy Posco (PKX) at $110-$112.

Now onto the energy sector and in particular, the service providers. These stocks have been experiencing tremendous growth and have been discounted in anticipation of a major global recession. As such, I believe the worst has been priced into the following stocks and make them great long-term investment candidates. The only point worth remembering right now is that with an outgoing administration full of energy executives, the next administration may not provide an ideal business climate. At the same time, I wouldn’t want to exclude energy stocks from my portfolio just because of this reason. So instead I am making energy stocks a smaller piece for now and instead accumulating international energy stocks such as Sinopec, Gazprom and others when opportunities present themselves, like now.

First on the list is Holly Corp (HOC), a major independent refiner of upstream petroleum products where their margins are fat. Down approximately 45% from its highs set last year, HOC broke below key support last week but didn’t see any follow-thru selling pressure. In fact, the stock spiked higher on Friday in what appears to be a short-squeeze. The global sell-off may catch HOC for another down leg where I expect to see tremendous institutional buying. I like HOC at $40 but will build my position slowly. This is an energy sector play so we have the luxury of building positions with patience and foresight.

Next on my list is Nabors Industries (NBR). NBR is a major oil rig operator both onshore as well as offshore. The company has an incredible management team and their balance sheet is impeccable as are their financial ratios. Down 40% from its all-time highs, and in a bear market for almost a year, I like Nabors around $24 but I would buy in small increments and build up slowly.

Potash (POT) has been one of my all-time favorite trading stocks and I have been highly successful buying into extended sell-offs during its 5-year long bull market. I don’t expect this time to be any different. The stock is hovering around its 100-day moving average but depending on where the US markets open on Tuesday, this stock could gap below support and head straight for its 200-day moving average at $100. This level is also acting as a major price magnet as prices tend to move to where liquidity is going to enter and $100 is a major liquidity area for Potash. The strategy with POT is two-fold. First buy is into any gap down on Tuesday’s open. The position will be built up if prices continue to head lower with aggressive buying if it approaches the $100 level. On the other hand, if after a gap down open the stock reverses and trades above last week’s low, I will add to the position.

That’s enough for now. I would like to see how Tuesday plays out. I wouldn’t be surprised to see a surprise rate cut before the market opens on Tuesday. Absent a surprise rate cut, expect a major plunge and therefore we may see footprints of the “plunge protection team” stepping in to bring some order to the market. Because of the major sell-off taking place in overseas markets as of this writing, program traders will have to be aggressive sellers on the open if the systems are not overridden manually. Something that is highly unlikely. Furthermore, the continuing downgrades in the major bond insurers is creating havoc for areas of the bond market that until now, have not been damaged too badly. Unless and until there is some sort of intervention, whether from the private sector, the government, or a coordinated effort from both similar to the LTCM bail-out, there is not much to get into the way of this turning into a market crash, if it isn’t one already.

Remember, it’s times like these when fortunes are made. Contrarian traders have to buy when most market participants think their stocks are going to be worthless, and sell when these participants think they’ve missed the boat. Now is the time for the former so get your buy orders ready, and let’s make some money.
(Disclosures:  None)