In a broad selloff, not all stocks deserve to be hit, so there is always opportunities in the teeth of panic selling notes Gordon Pape and Ryan Irvine in Internet Wealth Builder.
Small-cap expert Ryan Irvine is here with his views on the market sell-off and some suggestions on ways to profit from it. Ryan is the CEO of KeyStone Financial (www.keystocks.com), and is based in the Vancouver area. Over to him:
Expect volatility to be the order of the day for the remainder of summer and into the fall. Investors are likely in for a bumpy ride, as stock markets adjust to the reality that another recession is more likely than not.
At present, we remain with losses that count as a "correction" from the curious market strength we have witnessed since the March 2009 lows, with the most recent leg-up that began last summer.
But the fundamentals and market action this past week, particularly within the Thursday session, tend to suggest we may be in for some sort of repeat of the declines we saw in 2008.
Has the correction produced bargains? Fundamentally, we would say yes—but on a very selective basis given the overall level of uncertainty.
In reference to the companies we follow that are listed in Toronto but operate in China, a number are trading at a "fraud" discount, with several below book value. In stable times and based purely on fundamentals, many would call the valuations silly, but fear rules the day.
We continue to be of the opinion that not every TSX-listed company doing business in China is a fraud, and there will be some big winners from current levels, but this arena is not for the faint of heart. A mid- to longer-term patient approach will have to be deployed here.
We are seeing some select value in the junior gold segment as well, where junior producers are trading with a significant disconnect to the strength in the underlying commodity. Several low-cost producers appear cheap at present given expected cash flows in upcoming quarters. We are also seeing a number of cash-rich technology-related stocks that appear attractive in the current correction.
To be clear, we are not seeing the "silly" valuations that we saw in late 2008 and early 2009. Then, the type of meat and potatoes businesses that we love, such as The Boyd Group (BYD), Glentel (Toronto: GLN), and K-Bro Linen (Toronto: KBL), were trading a significant discounts to book value, and we were able to buy operating businesses such as Orvana Corporation (Toronto: ORV) at a 25% discount to its cash value.
We are nowhere near those levels, and it will take a 2008-type crash to get there. If that happens, we will be aggressively buying. In most cases, the best companies are not yet that cheap.
In our view, the world markets are suffering from a massive lack of confidence. Investors have lost trust in our political leaders to do the right thing, in the financial leaders on Wall Street, and in our regulators to effectively police the markets.
Fear rules the day, and is re-pricing assets without an eye to fundamentals in the near term, as the uncertainty reaches higher levels.
We can no longer kick the debt issue down the road as we did in 2008 and 2009. In fact, given the current uncertainty, another round of quantitative easing (QE) in the US might actually have the reverse effect, promoting fear in the markets.
What has to be done is what we suggested back in the credit crisis—a hard pill of austerity. That means spending cuts and a tax increase that will hurt growth near- to mid-term, but will be a credible plan to avoid a Japanese-like scenario in the US
In an environment like this, the markets may sell off initially, but it will become a stock pickers’ market, one in which we will be less focused on the US debt ceiling or the potential insolvency of an Italian bank or a tsunami in Japan. We could focus on individual businesses based on cash flow, earnings, and dividends.
We continue to look at the markets this way, and believe the majority will eventually come around once again.
So while it appears we may be in for a rough ride, we remind you that fortunes are made in the bad times, not in the good ones. So keep that cash ready for what should be some great individual opportunities.
NEXT: The Market Drop Creates a New Pick
|pagebreak|This week, we will take advantage of some indiscriminate selling and offer a new recommendation: WiLAN Inc. (WILN). Founded in 1992, WiLAN is a leading technology innovation and licensing company which has licensed intellectual property to over 250 companies worldwide.
It has a large and growing portfolio of more than 1,400 issued or pending patents. Inventions in the company’s portfolio have been licensed by companies that manufacture or sell a wide range of communication and consumer electronics products, including 3G cellular handsets, Wi-Fi-enabled laptops, Wi-Fi/DSL routers, xDSL infrastructure equipment, WiMAX base stations, and digital television receivers.
On August 4, WiLAN reported that its revenues for second quarter jumped 137%, to a record $27.4 million. The Top Ten licensees accounted for 79% of royalty revenues, as compared to more than 93% for the same three months last year.
For the quarter, WiLAN generated adjusted earnings of $20.8 million, or 17 cents per share, compared to $1.2 million (a penny per share) last year. The difference in adjusted earnings between the reporting periods is due to increased revenues, and lower litigation and total operating expenses.
We have been watching the progress at WiLAN closely for some time, and have been tempted to issue a buy signal on several occasions, but the share price appeared to be running slightly ahead of the fundamentals. However, with the 25% haircut it received in the indiscriminate selling last week, we see a solid mid- to long-term buying opportunity.
The recent settlement of several key patent agreements has brought the type of strong and sustainable cash flow generation to WiLAN that we find critical for our initial Buy ratings.
Given the expectation that earnings could grow to the 80- to 85-cent range in 2012, and that we believe WiLAN will generate enough cash over the second half of 2011 to end the year with $245 million ($2 per share) in cash, the company appears to offer solid value via strong cash flow despite the current macro environment.
Additionally, WiLAN pays a decent quarterly dividend of $0.025 per share (current yield of 1.4%), with potential upside while we wait for the markets to settle down.
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