While we like to be your one and only resource for all-things-small-cap related, we’re mostly interested in fostering more and better knowledge of how small caps work. If that means acknowledging someone else’s work, then so be it.

The reason we bring it up is to refer you to a pretty good point made by SmallCapInvestor.com’s Jennifer Schonberger.  In her article ‘Small caps to lead out of the economic “rubble” ‘, she argues - well, actually finds someone else’s argument - that a relatively long drought from small caps could be winding  down soon.

Though we don’t agree or disagree, we did think the article was a good read…..OK, we actually agree.
As always, we’ll continue to watch the same small cap market, and warn you when we think these stocks are taking a turn. We prefer to let results and a little momentum bolster our economic-rooted forecasts, but there’s more than one way to skin a cat.

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Yesterday, the Conference Board - an arbitrary and self-selected group - released May’s ‘consumer confidence’ number. Let’s just say it wasn’t good. In fact, the average consumer was as nervous as they’ve been in the last 16 years. The last time we saw the confidence reading below this month’s 57.2 level was in October of 1992…when it reached as low as 54.6.

The typical assumption was that it wouldn’t be good for the market (though most investors have become desensitized by this point). The thing is, why would investors - led by the media - make that assumption?

Yes, the logic is obvious…battle-scarred consumers are in hiding, according to their confidence levels. However, the flaw in the assumption is assuming that logic and reason prevail. What the media didn’t tell you is that following that low confidence reading of 1992, the S&P 500 spent the next six months gaining 5%. By the next October, the S&P had gained 11%. That’s not gang-busters, but it sure doesn’t suggest low confidence is a guarantee of gloom and doom for the stock market.

The reality is, low confidence levels are more often associated with bottoms than tops. There are always exceptions, but the odds say this is more bullish than bearish. Take a look at the chart and decide for yourself.

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Today we continue to flesh out a handful of industry forecasts made in a recent commentary. We talked about the methodology on Wednesday, and put the strategy into action on Thursday by making a couple of consumer electronics stock picks. Today we’ll apply the same principles to pick some entertainment stocks…a surprisingly strong sector lately.

As before, our interest in entertainment stocks is rooted in poor long-term performance, but strong short-term results. The aim is to find stocks that are (1) undervalued, and (2) starting to outperform the rest of the market.

Wednesday’s industry-strength table isn’t the Holy Grail in that endeavor, but it’s a great place to start. Why? It can show investors trends they may not have found on their own. And, as obscure as the broadcast and entertainment industry is, today’s picks may be prime examples how the strategy finds undiscovered opportunities.

We’ll start with the chart of the Dow Jones Entertainment & Broadcasting Index (DJUSBC).

Between last year’s peak and this year’s low, the group sank about 25%….a fairly significant devaluation. From this year’s low, the group has gained 16%, thanks to a rebound at a key support line. Still, there’s a lot of room for more recovery. How much? A move back up to last year’s highs around 500 is possible, which would be a 16% move from current levels. That’s a lot more potential than many other groups are offering, largely in part to the size of the loss a few months back.

Of course, the leading stocks in the group may do even better than that. How do you find them though?

We’ll stick with yesterday’s precedent and look for a good fundamental pick as well as a good technical pick. Just bear in mind that the very best trading opportunities often have positive elements of both schools of thoughts.

One broadcast/entertainment stock with a great-looking fundamental snapshot is Dish Network (DISH). Revenues have grown at an 18% clip for the last five years, and earnings have improved by 36% over the last twelve months. The P/E is 17.8, and the P/S ratio is 1.34….all good numbers.

Those numbers weren’t enough to prevent the stock’s decimation between late last year and early this year though - the same trouble spot the whole sector went through. In Dish’s case though, the market may have thrown the baby out with the bath water. Of course, if this past week’s rebound is any hint, the market also figured out their mistake.

From a technical point of view, Shaw Communications (SJR) may be worth a look. For some reason. Shaw was hit particularly hard when the rest of the industry was too. The rebound so far has been great as well, but doesn’t even begin to rival the stock’s trading level before the dip.

If you look further back on the chart you can see the market has no problem liking and paying for this stock. The attraction here is a possible repeat of the move we saw in 2006 and 2007. Half of that would still be a great move though.

The sweet part about this chart is that the company actually has some impressive fundamentals to go along with it. The P/E is 15.0, the ROE 30.8%, and profit margins come in at 28%.

As before, these are two possibilities out of hundreds, so don’t assume these are the absolute best choices. They might be, but a little more digging could find something better. The trading strategy and method is the point we’re trying to illustrate.

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In yesterday’s commentary we featured a handful of the stock market’s industries that may be ready to rally or sell off, as the case may be. We also mentioned we were going to try and find a few stock trading ideas from within the group - preferably a small or micro cap, and ideally, an undervalued and unknown company.

The opportunity that caught our eye a little better than any other is the potential recovery in the consumer electronics arena. These stocks are still down by 46% for the last twelve months (which was basically the worst of any of the groups), yet these same stocks are up 8% for the last two weeks (which is among the best). So, clearly something has changed for the better here.

The chart of the Dow Jones Consumer Electronics Index (DJUSCE) shows a terrible start to 2008, not to mention a terrible last half of 2008. However, that may mean the recovery is just that much bigger, if the last few days is a hint of things to come. 

From a fundamental point of view, Universal Electronics (UEIC) looks like a bargain. This micro-cap company’s P/E is 17.7, with a P/S ratio of 1.23. None of its valuation measures are jaw-dropping, but all of them are solid. What’s most interesting here is the rather high short interest of 11.2%. A little strength could prompt a brief short-covering rally.

The only big downside we see is the chart. We saw a rebound attempt earlier in the year, but the stock gave up a little too much ground when it failed to crawl back above the 200 day moving average line in April. This past week we’ve seen volume pick up a little, but not enough to get it over the hump.

Though the fundamentals are outstanding, the technicals are still telling us ‘not yet’. We’ll keep it on the radar.

As far as a technical pick is concerned, Sanyo Electronics (SANYY) might be a good bet. It’s just now coming out of a long-term oversold situation, but hasn’t bolted out of the gate. More importantly, for the first time in a long time we’re seeing this ADR make higher highs and higher lows. And, bullish volume has been flowing at least a little more consistently.

In the very short-term we view SANYY as a little overbought, so don’t be surprised to see it ease back slightly from the recent high of 13.70. As long as it catches itself early and starts to recover well, a dip may be a good entry opportunity into what could be a longer-term uptrend.

As always, cross referencing a chart with the company’s underlying fundamentals is a good idea. We didn’t do this for Sanyo due to time restraints, but you may want to invest the time.

Of course, these two stocks aren’t the only two possibilities within the world of consumer electronics. Other stocks also have to be helping the industry index move upward. Maybe one of those is an even better choice. We just wanted to get some trading ideas flowing.

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We got lots of great feedback following Monday’s newsletter about spotting sector rotation, and how to capitalize on it. In fact, the feedback was so good, we’re going to go ahead and post an even-deeper look at current industry trends.

Using the same kind of analysis - comparing long-term performance with short-term results - we’ve found several industry-specific trends worth a closer look (industries are sub-sets of sectors). We’ll look at those opportunities in a moment. First, let’s just look at the foundation for the forecast. The table below tells all.

What we’re looking for are what may be the best and the worst arenas right now. If the short-term numbers are horrible but the long-term numbers are great, we may be seeing an over-extended industry starting to implode…a bearish possibility. If the short-term results are very strong but the long-term numbers are poor, we may be seeing a recovery in the making.

But what if the short-term numbers and long-term results are both bullish or bearish? That’s ok too - it might indicate a sustained trend (though caution is advised - keep reading). 

The starting point for our study is the one-month return. That’s a long enough time to weed out simple volatility, but still a short enough time frame to catch the early part of any emerging trend. Also, though we said above consistent trends can also be trade-worthy, we’re not necessarily looking for the stocks that are the strongest of the strong or the weakest of the weak. Those scenarios are often too dangerous to get involved in.

Take a look at the table. We’ve highlighted what we think are the best trade-worthy possibilities.

Top 15 Industries - One Month

Bottom 15 Industries - One Month

The industries highlighted in green or orange are the ones we felt were/are most apt to offer bullish or bearish (respectively) trading opportunities.

Obviously the work isn’t done here. You can rarely trade an industry ETF, particularly for some of the focused indices cited above (like soft drinks, recreational products, heavy construction, or tires). However, there are clearly underlying stocks in those groups. Any of the top or bottom 15 might make good places to look for stocks that are moving. 

In other words, these industries are moving for a reason - the task now is to go find the stocks leading the charge.

Over the next few days we’re going to dig up some ’stocks of interest’ within as many of these categories that we can. Be sure to check the blog again soon.

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When we sent out our thoughts on the potential downside of corn-based ethanol, our goal was to inspire a discussion about the topic. We’ve gotten some great feedback and new ideas regarding clean energy so far. We want to post a couple of them here, and then add our comments. If you have any more to add, feel free to do so at the bottom of this post.

Rod writes…

The financial side of using subsidized corn in place of cheaper sugar based imports sounds stupid when we have grain prices have become so expensive with the potential bring export revenue to your economy.

There is second side apart from the financial aspect to support using sugar instead of corn which is related to an increasing shortage and demand for food internationally. Corn rates highly as good food whereas sugar does not. Areas that can grow corn can also grow many forms of grain which is one of the most cost effective quality food components in human nutrition. I would have expected it would become increasingly more important to utilize and keep areas that can grow all forms of grain. Our experience in Australian agriculture is areas suitable for sugar are rarely suitable to grow grain crops. Maybe I do not understand how things work in the US so can someone enlighten me ???

Robert wrote in… 

There should be some consideration given to the production of cellulose-based ethanol. While there is as yet no commercial production, it should be starting in about a year. In about 3-5 years the cellulosic process should be expanding rapidly, taking pressure off corn prices. According to the website of Bluefire Ethanol. they have a truly viable and highly economical, patented process with production at a small prototype commercial plant commencing in about a year.

Some quick thoughts in response….

Rod, we tend agree - many farms are growing the wrong thing. Logic doesn’t always apply. We can’t offer enlightenment.

Robert, we again agree. Another reader wrote in with the same cellulose ethanol story. It sounds like that’s what corn ethanol was supposed to be. That may be the next big opportunity.

If you’ve got something to add, go for it using the submission form below.

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We here at the Micro Cap Press have been following ‘clean energy’ trends for nearly a year. Broadly speaking, we’re in support of it (though who isn’t?) At the same time, we’re under no illusion that solving one energy problem won’t create another one. Take the debate over corn ethanol for instance. The technology works, but at what cost?

We fully intend to maintain our neutrality on all political or social matters. On the other hand, the truth is the truth…which just so happens to be the basis of our neutrality. Given the nature of the topic, we feel a fruitful discussion can be developed on the matter of corn ethanol, provided all of the participants (that’s you) are genuine about sharing and receiving information and opinions.

Though we intend to examine corn ethanol issues in perpetuity, for today we just want to get the ball rolling by publishing these factoids. We believe all are accurate.

• The United States’ use of ethanol meets only 3.5% of the total need for combustible auto fuel, but it requires the use of 20% of our corn.
• Recent Federal legislation calls for ethanol usage to increase dramatically between now and 2022. The law, however, unduly favors the use of corn ethanol (which would be subsidized), and disfavors sugar-based ethanol…by heavily taxing it. So what? The United States produces mostly corn ethanol. Sugar-based ethanol is largely Brazilian. Again, so what? Sugar ethanol happens to be much more efficient when comparing the energy it produces against the amount of energy needed to convert sugar into the biofuel in the first place. What’s the real priority?
• Ethanol/gasoline ‘blends’ of 10% (meaning 10% of the gasoline is actually ethanol biofuel) cut greenhouse gas emissions anywhere from 18% to 29%.

As investors, the comparison we need to make is the upside and downside of each side….perhaps acknowledging that this is a bigger deal than mere money. On the other hand, if there’s a fiscal opportunity built in, there’s no point in overlooking it.

We’ll continue to post pros and cons surrounding ethanol. We may even eventually come to a firm conclusion about what ultimately makes the most sense. In the meantime, we’ll continue to search for important micro cap news, and ferret out any stocks worth trading - inside or outside the ethanol arena.

Do you have something to add regarding the corn ethanol discussion? Chime in below.

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One of our mega-investment themes has been solar power - an area we liked before these stocks became all the rage late last year, and an area we’ll like when the fad wears off. Our bigger-picture point of view was validated recently when Wal-Mart (WMT) - the quintessential icon of predictable, uncreative merchandise - opted to expand their line of personal solar panels offered in their stores.

These portable solar panels aren’t going to power a small city, or even a small house for that matter. They can provide a charge for one hand-held piece of electronics, or maintain a charge for a car or boat battery. However, they do work, and they are selling.

The technology and the demand aren’t the interesting part. What’s interesting is that even Wal-Mart is seeing their future. We’ll take that as another validating clue in support of our long-term forecast.

The manufacturer of the Coleman-branded portable solar panels is ICP Solar Technologies (ICPR). It wasn’t one of the names we’d looked at before, though it’s now going on our solar energy watchlist.

If you have a related company or thought, feel free to post it using the link below.

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