As for the shorter term, today is session 113 of the longest “buying stampede” I have ever seen. To be sure, a stampede typically last 17 -25 sessions, with only one- to three-day pauses/pullbacks, before resuming its upward onslaught. A few have lasted 25 – 30 sessions, but I can count on one hand those that have extended for more than 30 sessions. Previously, the longest such skein encompassed 52 sessions. The current stampede began on September 1, 2010, at the intra-day Dow low of 10016, and has continued higher into last Friday’s closing price of 12273.26 for an eye-popping 22.5% surge. Over that timeframe the senior index has not experienced anything more than a one- to three-day pause/pullback; truly an amazing run. Some internal dynamics have changed, however. To wit, the “winners” of late 2010 (gold, bonds, emerging markets, etc.) have been having difficulty this year. Meanwhile, the “step children” of late last year (developed markets, banks, technology stocks, etc.) are acting fairly spunky. The banks’ outperformance began in November 2010, as noted in these missives, and concurrent with the first buy recommendation I have made on them in some 10 years (please see our Investment Strategy commentary of November 8, 2010).2 There has also been a rotation out of small capitalization stocks into larger caps. All of this is generally consistent with my cautious (not bearish) stance coming into the new year; that is “consistent” up until February 1st, when the stock market seemed to take on a life of its own.
Yet even though I have been cautious, I still have been able to find special situations to buy. Take Stanley Furniture (STLY/$4.60/ Strong Buy) – our positive rating on Stanley Furniture stems primarily from its strong balance sheet ($25.5 million of cash and zero debt), the shares' inexpensive valuation, and our view that operating performance is likely to improve significantly in 2011 and beyond. Additionally, we believe the shares offer investors a "call option" on the potential receipt of $40 million (or more) of Continued Dumping and Subsidy Offset Act (CDSOA) monies – an amount well in excess of Stanley's current enterprise value. If Stanley receives the CDSOA money it will have in excess of $6 per share in cash, implying you would be getting the operating business for free.
Another potential special situation is Royce Value Trust (RVT/$15.06). A few weeks ago RVT announced it was reinstating the managed dividend distribution policy (MDP) beginning in March. RVT is currently trading at a ~16% discount to its net asset value (NAV). I think the recent news is not being reflected in RVT’s share price. I believe once the distribution becomes active the discount will narrow and the fund will trade closer to NAV. Our Closed End Fund analysts have RVT on their Idea List, as well as in their Total Return Model Portfolio. RVT previously had a 10% MDP, which was suspended when the fund had to start returning principal to comply with its MDP policy. I think a 5% MDP is a much more attainable yield and therefore recommend purchase at these levels.
The call for this week: “The last shall be first, and the first last,” so says the Bible (Matthew 20:16). And, that seems to be what’s happening on Wall Street this year as the favored trades of 2010 have become the least favored trades recently. Of course that has been part of the restless rotation that has sparked many of the upside non-confirmations on which I have been commenting. It is also responsible for my cautious investment stance since history suggests that upside non-confirmations are a reason for caution. And with interest rates backing up, the yield on the 10-year T’note is above its 200-week moving average for the first time since 2007; it will be interesting to see how the Financials act this week. Without the Financials rallying it should be difficult for stocks in the aggregate to extend higher.
Copyright (c) Raymond James
