The Quant View: A Tale of Two Stocks

I have a special story for you this week about a pair of stocks, but let's begin with our usual market overview.

The economic news was pretty good last week for a change.  Nothing great, mind you, but we had one of the better employment reports in some time, and only pending home sales were disappointing. The market has reacted positively all week, and today we are in our seventh consecutive up or flat day. These were not wildly positive up-days, just a steady accumulation, but seven days in a row without giving anything back is enough to get our attention.

The Past Week.  A look at the Cap/Style table below may give you some warm-and-fuzzies about the economy.  Over the past three months small-cap stocks have performed almost 4 times better than large-caps; over the past month -- and the past week -- small-caps have doubled the returns of the large-caps. Specifically, Small-cap Growth led last week (+6%), and Large-cap Growth lagged (+3.1%). 

This is generally what happens in an economy that is coming out of the doldrums, but let's not celebrate quite yet as there is still plenty to worry about.   

As for sectors, Materials rose sharply. Clustered a few points below were economically-sensitive sectors Consumer Discretionary, Financials and Industrials, with the more defensive Telecom, Consumer Staples and Utilities at the bottom, although all positive.

Looking Ahead.  This coming week promises to be a lean one, as far as economic news goes. The only releases of consequence are wholesale trade inventories on Wednesday, jobless claims and trade balance on Thursday, and retail sales and business inventories on Friday.  So it is unlikely the market will be impacted significantly by economic news until late in the week. Fluctuations in the dollar could have some effect, but for the past month the dollar has gone essentially nowhere.

The Tale of Two Stocks.  I'm going to do something this week that I rarely do, which is share with you the recommendations from one of Sabrient's paid subscription letters. The following story appeared in the March 4^th issue of the Sabrient Investor's (H)Edge newsletter. 

We quants rarely have the opportunity to tell an interesting story, because we do everything by the numbers, so forgive our flight of fancy here.  Imagine someone unemployed going to Monster Worldwide (NYSE: MWW) to find a job. MWW has few jobs for which he is qualified, so he enrolls in Everest College, one of Corinthian Colleges' (Nasdaq: COCO) post-secondary education schools, to get some training. MWW loses the revenue that the guy's employment fee would have brought them while COCO adds the guy's tuition fees to its bottom line. 

This story, while fanciful, must be happening over and over in real life, because numbers don't lie, and COCO's numbers are soaring while MWW's are slipping.

In 2008, MWW's earnings were $0.95 per share; in 2009, they were $0.15.  They have lost money the past 3 consecutive quarters and are expected to lose at least $0.10 this year and are praying for profitability some time in 2011.

On the other hand, COCO made $0.82 in fiscal 2009, and in fiscal 2010 they have already made $0.81 and expect to make $1.67, doubling their income from over a year ago.  Forecasts for 2011 exceed $2 a share, and the stock is selling for about $17, having risen sharply from a recent low of $13.00.  Hopefully, it is headed back above its 2009 high of about $22.  In any event, COCO has a very attractive valuation, which I believe discounts the various issues confronting trade schools at this time. From our viewpoint, the governance at Corinthian is among the best of its peers.

COCO and MWW are the pair we recommended to our Investor's Hedge subscribers on Thursday of last week, and we're offering you the same pair as "Stocks Ideas" for this week:

LONG position:  Corinthian Colleges, Inc. (Nasdaq: COCO) - Mid-cap Consumer Discretionary (Diversified Consumer Services)      

SHORT position:  Monster Worldwide, Inc. (NYSE: MWW) - Mid-cap Information Technology (Internet Software & Services)

I want to be clear about the structure of the portfolio. Investor's (H)Edge contains 13 paired positions like this one, although frequently they are not related to each other in such a tightly paired fashion. The unusual construct of 13 longs and 13 shorts is used because I add one long and one short each week with the intention of holding them for a full quarter (13 weeks). (I review the oldest long and short position each Thursday and either renew or replace them.)  This has produced handsome returns for many years, and I believe it limits event risk and is easy for the retail investor to execute.

So let us hope that we continue to get incrementally better economic results and the market continues its gradual recovery.  Just to remind you, the S&P 500 is still about 28% below its high of 1576 on October 11, 2007.

 

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