Sabrient Enhanced ETF Portfolio October 22, 2007 Vol. 1, No. 9
DAVID BROWN Chief Market Strategist Sabrient Systems
IN THIS ISSUE Top-Performing Sectors………….. 1 Enhanced ETF Portfolio Update….2 Top Stock Picks Commentary…….3 Espionage Stock Picks……………..5 About David Brown……………..…6 About Sabrient ……………….…....7 How We Do What We Do…………7
MARKET CLIMATE The major indices took it on the chin last week as higher oil prices and weak earnings sparked fears of a recession; options expiration activity may be exacerbating the decline. Oh yeah, and the fact that Friday marked the 20th anniversary of Black Monday in 1987 may also be spooking investors. The major indices were down more than 2 percent, with the DJIA off more than 300 points. The Dow and S&P 500 pierced their respective 20- and 50-day moving averages, with 200-day MAs about 4-5% lower.
Energize Your Portfolio! The Energy sector held on to the top spot this week as the price of crude oil shot past 90 bucks a barrel last week and is taking aim at the century mark. Playing tortoise to the energized bunny is Materials, moving into third place amid the broader marker decline this week. Sandwiched between the tortoise and the hare is Technology, while Telecom slipped to fourth place and will be dropped. To energize your portfolio, I recommend filling it up with National Oilwell Varco (NOV), Helix (HLX) and FMC Technologies (FTI), and selling Conoco-Phillips (COP). Then search for solid growth potential with Google (GOOG), along with Harris (HRS) and Western Digital (WDC) in the Technology field. Steam ahead with coal producer Massey Energy (MEE) and add a solid workhorse from the hot Agricultural Chemicals group—CF Industries (CF). Finally, top it off with a sprinkling of gold dust from Freeport-McMoRan (FCX) while selling U.S. Steel (X). And to make room for all the new Buys, last week’s Telecom sector picks should be sold.
Top-Performing Sectors/ETFs IYE, representing the Energy sector, is the top performing ETF over the past week. It saw some profit-taking amid the broader market sell-off, but let’s keep things in perspective: The 3.5% decline comes on the heels of a 25% move over the past two months. The sky is not really falling over Energy-land. IYM, the Materials ETF, is down just under 2% percent following a 20% move since August, while IYW, the
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_______________________________________________________________ Here is how the major indices grade out going into this week, on an A-F grading system (A is best): Market Index DJIA
S-T Tech. D
L-T Tech. A
Overall Tech. C
S&P 500
D
A
C
Nasdaq
B
A
B
Russell Midcaps
D
A
C
Russell 2000 Smallcaps
F
C
D
Technology ETF, is off marginally. This modest decline in IYM supports its highly-ranked Defender Score, which measures the underlying stocks’ resiliency during big market down days. IYF, the Financials punching bag, continues to get pummeled. On top of everything else that’s going on in that beleaguered sector, a spate of negative earnings surprises from several key players sparked steep declines earlier in the week. Here’s the scoreboard. The current market climate indicates an equal weighting among Fundamental, Defender, and Aggressor scores, as discussed in the Market Climate section below.
(continued on page 6) Top Performing Sectors & ETFS Rank
ETF
Sector
Fundamental Score
Defender Score
Aggressor Score
Composite Score
1 2 3 4 5 6 7 8 9 10
IYE IYW IYM IYZ IYK IYH IDU IYJ IYC IYF
ENERGY TECHNOLOGY BASIC MATERIALS TELECOMM CONSUMER GOODS HEALTHCARE UTILITIES INDUSTRIALS CONSUMER SERVICES FINANCIALS
52.3 86.1 52.8 56.9 48.5 60.2 33.1 44.7 36.5 27.4
89.9 64.9 62.4 60.3 74.9 65.8 55.4 50.4 44.0 28.0
59.6 50.7 89.3 45.7 34.9 31.3 48.9 45.7 42.5 71.6
90.3 84.3 77.0 69.8 55.8 50.1 40.5 39.5 31.0 28.4
There seems to be a clear demarcation between the top three and the rest of the field, which is something I like to see. IYE and IYW have composite scores that are clearly in the lead, and IYM boasts a Composite score that is not far behind. So, with IYW being so clearly strong, I feel confident in recommending we make the switch from Telecom to Technology this week. This may be a sign of the start of bull run into year-end, but of course I’ll continue to watch the numbers and let the quantitative system tell me where we should be.
Enhanced ETF Portfolio Update – October 22, 2007 My research team ran the Sabrient scoring system on the three top ETFs to identify which stocks from within those ETFs have the greatest chance to “goose” returns. Among the top three Energy stocks, ConocoPhillips (COP) was displaced by
FMC Technologies (FTI), while National OilwellVarco (NOV) and Helix Energy (HLX) will stay on as Buys. Massey Energy (MEE) bumps U.S. Steel (X) from our top three Materials stocks, while Freeport-
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McMoran (FCX) and CF Industries (CF) maintain their BUY status as the top two stocks in the Materials sector. Although MEE might sound like its another energy stock, it is actually a coal producer and is thus included in the Materials sector ETF. Within the Technology ETF, the Oscar goes to Western Digital (WDC), Harris (HRS) and
Google. (GOOG). I love these picks. Keep in mind, although GOOG carries a high price tag, you can buy any number of shares that fits your money management strategy, so don’t be intimidated. We are selling all three positions (FairPoint Communications, NTELOS and U.S. Cellular) within the Telecommunications ETF (IYZ) since it has fallen out of the top three.
ENHANCED ETF PORTFOLIO Sectors
ETF
Energy
IYE
Materials
IYM
Technology
IYW
Telecom
IYZ
Stocks
Value Score
Growth Score
Momentum Score
Composite Score
Action
Natl Oilwell Varco (NOV) Helix Energy (HLX) FMC Technologies (FTI) ConocoPhillips (COP) Freeport-McMoRan (FCX) CF Industries (CF) Massey Energy (MEE) U.S. Steel (X) Western Digital (WDC) Harris (HRS) Google (GOOG) Fairpoint Comm (FRP) NTELOS (NTLS) U.S. Cellular (USM)
46.7 84.6 28.5 56.9 67.3 43.0 84.2 52.1 81.2 64.9 31.5 16.0 35.9 45.5
98.8 94.4 94.2 75.1 86.2 96.6 93.7 56.8 90.0 93.0 98.4 36.7 49.7 76.6
96.4 82.7 85.6 77.8 93.1 100.0 95.5 93.3 75.1 63.6 88.7 83.2 99.0 77.5
94.1 90.5 72.1 68.7 99.2 98.4 94.8 90.1 99.4 90.5 89.4 64.8 63.7 61.8
BUY BUY BUY SELL BUY BUY BUY SELL BUY BUY BUY SELL SELL SELL
Note: The Value, Growth and Momentum scores are based on Sabrient’s top-performing multi-factor filters for the given style. The Composite Score, which is a weighted combination of value, growth, and momentum. Top Stock Picks - Commentary ENERGY
Helix Energy (HLX) operates as an offshore energy company that provides development solutions and various other services to the open energy market, as well as to its oil and gas operations market. The stock boasts among the best combination of numbers for the three key Sabrient Scores (Value, Growth and Momentum) and is only one of five stocks with scores above 80 for these important measures of investment potential (Materials ETF constituent Massey Energy also holds this distinction). Looking at the stock chart, buyers have taken control as HLX just broke out of an extended 2-year base that was preceded by a 400% move in three years. ______________ October 2007 – Vol. 1, No. 1 ___________________________________________________3 National Oilwell Varco (NOV), an oil and gas equipment and services provider, is one of the sector leaders within Energy. The stock pulled back some ten percent this week, but maintains its market-leading Sabrient Growth and Momentum Scores in the upper 90s. The company has been filling up investors’ pockets with a 150% gain over the last 12 months, fueled by EPS growth of 114% and four consecutive EPS surprises averaging 20%.
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Massey Energy (MEE) is a producer of steam and metallurgical coal whose stock has taken investors for a wild ride over the last five years, exploding FMC Technologies (FTI) manufactures systems from $10 to $55 in less than three years in late 2005 and products for the energy, food processing, and air transportation industries. The stock has been in before caving in to $16 just two months ago. The $16 level appears to be a legitimate bottom as the a strong uptrend since the beginning of the year downward-sloping trendline from the highs of the (100% gain) and has pulled back to its 50-day last three years was finally broken just a couple of moving average, which has been a source of weeks ago on heavy volume. Like Helix, the stock renewed accumulation over the last year. This level provides an attractive buying opportunity for ranks as only one of five stocks with Sabrient any of our readers looking for an energy play with Value, Growth and Momentum Scores above 80, indication that the company is poised to steam solid growth and profit potential. ahead in the coming months. MATERIALS TECHNOLOGY Freeport-McMoRan Copper & Gold (NYSE: FCX) boasts a Sabrient Composite Score of 99, Western Digital (WDC), a manufacturer of hard which indicates superiority for a combination of drives, is the top pick within the Technology ETF. factors including growth, momentum, value, The stock boasts solid ratings across the board for fundamental and balance sheet. The stock remains Sabrient’s key measures of investment potential and our top pick within the Materials iShares ETF ranks in the top 10 stocks for our Sabrient (IYM) for the third consecutive week. The Composite Score (99.4). WDC has been in a slow company has grown EPS by a market-leading 62% recovery for the last five years after crashing from clip over the last five years and analysts’ 1997-1999, and has recently rallied to its highest projections call for this eye-popping trend to level in ten years. The stock is currently taking a continue over the next five years (44% projected breather following a move above stiff resistance in EPS growth rate—more than double its industry the $24 area, which we expect will now serve as peers). All of this for a paltry forward-looking P/E firm support as the stock continues its advance into of 10.6! We recommend digging up shares of this new high territory. brilliant performer. Harris Group (HRS) operates as a communications and IT company that serves CF Industries Holdings (CF) engages in the government and commercial markets. The stock manufacture and distribution of nitrogen and has been in a strong and steady uptrend for the last phosphate fertilizer products in North America. five years and shows no signs of letting up as the The stock belongs to the exciting (yawn) company continues to churn out consistent and Agricultural Chemicals group that has been predictable double-digit EPS and revenue growth. anything but, with a 400% gain over the last five years; the group is among the leaders since the mid-August market bottom and is up 50 percent in Google (GOOG) has initiated another upleg within its long-term uptrend as this Internet search and ten weeks. The stock recently broke out to a new advertising darling continues to have no problem all-time high on elevated volume and shows no finding new growth opportunities. The stock has signs of letting up with a Sabrient Momentum gained 20% since breaking out to new highs a Score of 100.0 and Sabrient Growth Score of month ago and shares remain under heavy 96.6…and that’s no bull! accumulation. The stock recently rallied sharply to $675 on heavy volume after topping consensus estimates…next stop $1000? 4 _________________________________________________________________ www.Sabrient.com _______ ENERGY (continued)
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Espionage Stock Picks – October 22, 2007 My “Espionage Picks” for this week are a diverse bunch that I’m quite happy with. They come from the same sectors as the top ETFs and primary stock picks, but are typically smaller, lesser-known companies whose shares are under accumulation and have the potential for strong gains. Espionage Stock Picks Symbol
DWSN CRK ANR FTK FALC
Company
Source
Value Score
Growth Score
Momentum Score
Composite Score
Dawson Geophyscial Comstock Resources Alpha Natural Resources Flotek Industries FalconStor Software
Energy Energy Materials
46.1 62.0
98.4 69.4
90.9 61.5
91.9 47.3
48.2 17.1 14.0
20.8 99.8 95.8
84.2 95.2 93.0
52.4 85.1 80.2
Materials Technology
Espionage Stock Picks - Commentary
Dawson Geophysical (DWSN) provides onshore seismic data acquisition services, acquiring and processing 2-D, 3-D, and multi-component seismic data for oil and gas companies. This stellar growth stock is among the small-cap leaders in the market, and is up nearly 200% over the past 12 months. Comstock Resources (CRK) is an oil and gas exploration company that shows respectable scores for value, growth and momentum. The stock is in a strong uptrend since bottoming in August, and earlier this month broke above key long-term resistance in the $24 area on its way to closing at all-time highs. CRK is consolidating these recent gains as it gears up for the next advance into new high territory. Alpha Natural Resources (ANR), a Central Appalachian steam and metallurgical coal producer, has been under steady accumulation since January and has climbed higher by 150%. Following a string of sub-par quarters, the company is expected to rebound over the next four quarters and the stock charged higher in anticipation of this renewed growth. The stock is not cheap (P/E of 44), but the recent momentum should not be ignored and we think there is more upside potential for this mid-cap. Flotek Industries (FTK) provides oilfield services, equipment, and chemicals to the energy and mining industries. It has three segments: Chemicals and Logistics, Drilling Products, and Artificial Lift. The stock boasts a market-topping Sabrient Growth Score of 99.8 as the company continues to churn out burgeoning sales and EPS growth. This small-cap wonder is still flying under the radar for many institutions, but growing accumulation since April’s breakout indicates that some on Wall Street have begun to take notice, which will help propel FTK even further in the months ahead. FalconStor Software (FALC) engages in the development, manufacture, and sale of network storage software solutions, as well as provision of related maintenance, implementation, and engineering services worldwide. The company is a solid growth performer and remains in a strong uptrend after breaking above major long-term resistance at $10 earlier this year. ______________ October 2007 – Vol. 1, No. 1 ___________________________________________________5
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Concluding Remarks Last week’s sell-off warrants caution into this week, although longer-term, last week’s correction is normal behavior for a market that became overextended following double-digit percentage gains in two months. The Energy sector’s decline has done little to damage its long-standing position as the top sector ETF, and we see further gains ahead as oil prices set their sights on the century mark. The Materials sector has benefited from increasing global demand for everything from chemicals to metals to paper, and this sector shows increasing momentum over the last couple of months. Finally, the technology sector has seen pockets of strength in select groups, and the Nasdaq Composite remains the index leader heading into the stretch run of 2007. We are nearing the historical bullish Nov-May period, and I remain optimistic for renewed strength. The markets are still within their long-term uptrends and still display reasonable valuations. I think the sectors we are positioned in will give us great upside potential for the coming weeks. Remember … the best thin about a quantitative approach like ours is that you can simply trust the system without getting overly emotional about your every move. So, check your emotion at the door and let the system work for you!
MARKET CLIMATE (continued from page 1)
The Nasdaq, which has been the relative leader of the three major indices, is down 60 points and is sitting right at its 20-day moving average. At this stage, a move to its 50-day moving average (another 40 points lower) seems likely considering the action of the market and the fact that the 50-day MA has provided support for the Nasdaq on many occasions amid its strong uptrend since the 2003 bottom. The Russell 2000, the laggard of the bunch, closed right at its 200-day moving average so the next couple of weeks will be critical for the index. With the other major indices still firmly above their respective long-term moving averages, the small-caps are apt to ride the coattails of their large-cap brothers. For now we remain near-term neutral with a longer-term bullish bias. This week’s sell-off comes after a strong rally from the August lows, and amid a lot of uncertainty from various areas. The stock market’s resiliency continues to impress us, and we will not be surprised to see the major indices move to new highs in the near future as the seasonally positive November-April time frame is nearly upon us. As such, we are maintaining an equal-weighting on our Fundamental, Defender, and Aggressor scores. However, stay tuned, because if the markets bounce off their current levels we would likely move to a short-term bullish bias and up-weight the Aggressor score for the ETF rankings table.
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___________________________________________________________________ ABOUT DAVID BROWN David Brown, a former NASA scientist, is co-founder of Sabrient and it Chief Market Strategist. He heads a talented group of research professionals who develop the strategies and filters on which all of Sabrient’s rankings are built. A lifelong investor, David authored four books on investing and published several market letters, including the Undervalued Growth Report, a real-money portfolio with a 10-year record of nearly 20% compounded annual returns and no loss years. In 1988 Stock Traders Almanac named him Man of the Year for "[showing] the average investor how to spot the stocks that the hottest money managers are buying." He is a frequent guest “stock picker” on Chuck Jaffe’s Real Money radio show and has been invited by Forbes magazine to contribute to its 2008 stock-picking contest, “Love Only One.” David is the retired CEO of Telescan, Inc. While there, he designed and developed Telescan’s critically acclaimed stock search program, ProSearch, and the market timing indicator, the Brown Breakout Ratio (BBR). In 1985 he was appointed Chairman of the U.S. Science and Technology Commission. He has taught investing and finance courses at the university level and has served on many boards during his career. He holds an M.B.A. in Finance from the University of Houston and a B.S. in Engineering from the University of Pittsburgh.
ABOUT SABRIENT SYSTEMS Sabrient Systems is an independent equity research firm based in Santa Barbara, CA. We provide unbiased, fundamentals-based quantitative research on nearly 6,000 U.S.-traded stocks and ETFs to institutions, portfolio managers, investment advisors, and hedge funds, as well as to self-directed investors. Our proprietary research models account for fundamentals, technicals, and sentiment indicators, allowing it to dynamically adapt to changing market preferences. But because we use a fully rules-based, computer-driven, quantitative methodology, our rankings and stock/ETF selections are free of the personal bias of individual analysts. This quantitative methodology underlies all of Sabrient products, whether for the individual investor or professional portfolio manager. Visit us at http://www.Sabrient.com.
HOW WE DO WHAT WE DO The Sabrient Enhanced ETF Portfolio is a dynamic weekly portfolio aimed at investors who want the convenience and diversification of exchange-traded funds. . The Sectors. To find the top-performing sectors, we use our quantitative model to measure stocks according to proprietary Value, Growth, Momentum, Defender, Aggressor, and Insider Ranks. We then aggregate stocks within their industry groups and sectors to identify signs of market rotation The Enhanced ETF Portfolio. I work with my research staff to review market technicals, sector scores, company scores, and options premiums data to arrive at the Enhanced ETF portfolio recommendations. We recommend 3-5 sector ETFs that appear to be well-positioned and also name our top 3-5 stocks from within those ETFs for those investors who seek enhanced performance. The Espionage Stock Picks. Using the same top sectors, we then identify stocks (both longs and shorts) that are not components of the ETF but may offer higher potential performance. These picks may come from Sabrient’s topperforming SmartFilters or other relevant sources. A quantitative approach like ours works better as a basket of positions. So it’s best not to try to cherry-pick from our recommendations.
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