September 26th, 2008

Where to Look: DUF, GHL and SF – Not Cramer’s ETH

Thank you, Readers, for your prognostications. Unfortunately, we were all wrong. A group of Conservative Republicans and their new champion, John McCain, ran away from the bailout proposal. I can understand their feelings of being railroaded, similar to the way they were on the lead up to the Iraq war.

And it’s a matter of political principal for them: free market capitalism vs. government intervention and control. Furthermore, it’s getting all mixed up with election politics. About the smartest thing I’ve heard said during all these arguments was that “Bush, Bernanke and Paulson may be putting the plan together but it’ll be the new President and Congress that will have to live with it and make it work”. Something will be passed but, at the end, our concern is figuring out the response in our stock plans.

I’m still convinced that standing on the sideline until there’s a clear turn in market psychology and sentiment, until momentum clearly and unequivocally turns positive – not whether this or any other plan is approved by Congress and signed by the lame duck president. I may try to make some quick profitable trades but, to confess, they have rarely worked well for me. My time horizon is usually in the 4-12 month range rather than 4-12 days. You must be a better trader than a skilled chartist to be a short-term player.

However, one of my favored readers, Anonymous, asked “Guru any thoughts on what themes, sectors or individual stocks will be the big winners of the next bull run?” Unfortunately, Anon’, that could be so far off – probably not until early 2009 – and so many conditions could change until then that’s impossible to say today what will lead the market when it does turn.

Take, for example, Cramer’s special pick last night, ETH (Ethan Allen Interiors), a company he anticipates will be an “early cycle companies that will benefit from a housing turnaround”. Having spent 22 years in the home decorative industry myself, I know that company’s quality and the strong market position. But give me a break, Jim – an “early cycle company”? I don’t want to parse words but “early” is the overriding question.

ETH (Ethan Allen) has a major hurdle to cross, its 1998 all-time high at 43, a level it attempted crossing 3 more times. A move from yesterday’s 28.70 to 43 would represent a 50% gain but it will be a slog with significant headwind as holders, who got in sometime over the previous 10 years, will breath a sigh of relief at finally breaking even and then, fearing being underwater for another extended period take the opportunity of unloading – thereby making it a self-fulfilling prophesy.

Sure, it was a true “leading” stock, a stock with unbelievable momentum, but that was back during the tech bubble when everyone was making tons of money and spending lavishly on their home. But during the housing bubble, when everyone was spending money on buying the biggest house they could afford -some significantly more than they could afford, as we’ve since learned – ETH has done nothing. Is it tomorrow’s leading stock or is this a company that will it finish the right side of a huge, multi-year top. I wouldn’t want to take that chance and will wait for a move into new all-time high territory. Sorry, Jim, I think you again made a stinking lousy call.

An area I would look at are some of financial stocks that don’t appear to have been involved in the financial mess and could, in fact, wind up being beneficiaries of the fallout:

  • DUF (Duff & Phelps) – a provider of independent financial advisory and investment banking services. It principally supports client needs in financial and tax valuation (especially in the context of business combinations and other corporate transactions), mergers and acquisitions (M&A), restructuring, and litigation and disputes. They’re picking up a lot of talent from financial firms hit in Wall Street layoffs. Alert: this is a 2007 IPO and thinly traded.
  • GHL (Greenhill & Co) – an independent investment banking firm that provides financial advice on significant mergers, acquisitions, restructurings and similar corporate finance matters, and manages merchant banking funds and commits capital to those funds. Like DUF, this stock is attempting to move into new all-time high territory.
  • SF (Stifel Financial) – a financial services holding company providing securities related financial services, a retail and institutional brokerage and investment banking firm, an independent contractor broker-dealer firm and a retail and commercial bank. It is ahead of the stocks mentioned above and is now testing its ealier break into new high territory.

Each of the above meet one of my first criteria for creating a momentum-driven portfolio: breaking into new high territory.

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