SCS: This Week’s Breakout Stock – Steelcase, Inc.

Steelcase Inc, (NYSE: SCS) makers of office furniture and architectural office systems is my stock pick of the week. (www.steelcase.com)

This little known, 100 year old, multi-national manufacturer does $2.8 billion a year in sales across the US, Europe, Africa, the Middle Ease, and Asia. It has seen double digit revenue growth over the past few years and estimates are that is will continue this trend in the coming year. They posted and EPS of $.25 for the previous quarter, up from $.15 the previous year. Net Income was $78.7 million. It has a forward P/E of 11.34, and a market cap of $1.43 billion.

The company’s earnings are very sensitive to 2 items; the price of raw materials (steel, aluminum), and the strength of the dollar. As steel production is increasing in China and India, the cost to steel consumers like Steelcase is on the decline. This has a significant impact on the EPS and operating income. According to their annual report, a 1% increase in commodity prices can affect operating by as much as $20 million.

Take a look at the 1yr chart. Since October, the stock has been trading above its 50-day. We can see a clean break away after a bounce off the trend line. With earnings coming out next month, I would expect to see a large advance of this stock on any positive surprise.

It is currently trading at 11.45.  I give it an annual price target of 15.

Steelcase Inc. (SCS) – 1 year chart

Happy Trading!

STX: Seagate Showing Weakness Ahead of Holiday Sales

Seagate Technologies (nasdaq: STX) down 3.6% in midday trading, as investors sell ahead of concerns over weaker demand for disk drives. It is currently trading below it’s 200-day ema, on heavy volume.

UPW: Trading a Leveraged Utility ETF

With the start of a new year fast approaching, we are already seeing what the impact of the pending tax laws are having on the markets.  Income stocks, or dividend stocks that pay large and increasing quarterly dividends, are being heavily sold on a daily basis.

The new 2013 tax code is currently set to increase the dividend income rate from 15% up to a whopping 43.4%, This is sending institutional holders to the sidelines, driving the price of these stocks to new lows.

What does this mean for the little guy, who doesn’t own 250,000 shares of a utility company and couldn’t care less about dividend income?  Well, it presents a buying opportunity play on the Utility ETFs.  Yes, catching a falling knife in a downtrend is foolish.  Nobody can time a market like that.  But what we can do is add it to our list of plays to watch out for as the fundamentals in these stocks reassure investors that they are a good investment.  Not to mention, if Capital Hill and the White House come to an agreement on amending the tax increase on dividends.

Take a look at ProShares Ultra Utility ETF (nyse: UPW).  It is a 2x leveraged ETF, that tracks the Dow Jones US Utility Index.  It is comprised of gas, electric, and water utilities, and is non-diversified.  Ever since the election, it has seen a 9.8% drop in value due to the administration’s stance on taxing the wealthy.  And it’s not just the wealthy, as many of your 401k age-based funds contain a portion of their holdings in the income stock sectors.  But that’s another story.

 

Is it oversold?  Will the republicans in congress win some ground on the dividend tax issue?  That is yet to be determined, but from a pure technical standpoint, the entire sector is oversold.  And playing a leveraged ETF on even a small bounce is a great way to catch a nice 5% pop.  Watch the overall markets, and if the S&P breaks through 1425, I would expect to see a nice rally in the Utilities.  Watch it carefully, as this ETF is leveraged and can get away from you if the dividend tax law sticks.  But I feel that the bulk of the major selling has already taken place, and this is a safe entry point to make a little money here.

Happy Trading!

5 Tax Changes You Need To Know

Remember when President Obama promised that he would not raise taxes on taxpayers making less that $250,000?  Here are 5 reasons why you can never trust a politician.

President Bush helped the American taxpayer by enacting a series of tax cuts and deduction increases, that all of us were able to benefit from.  As you have heard in the news, we are facing a financially significant issue coined the “fiscal cliff”.   As the Bush tax cuts approach expiration (they were meant to be a temporary boost to the economy), Congress and the White House are at odds as to how to resolve this issue.  Both sides agree that simply letting them expire could be disastrous to any hope of an economic recovery, and would lead to a certain recession next year.

Here are 5 tax increases that will affect you:

  • Payroll Tax – 2% increase.  The FICA portion of your payroll tax deductions (social security and medicare) are 4.2% for the employee, and 6.2% for the employer.  These will go back to 6.2% for the employee portion, while the employer portion remains the same.
  • Itemized Deductions – Phased out.  Tax filers who elect to itemize their deductions (mortgage interest, taxes paid, employee job related expenses, etc) will no longer have that benefit, and will be forced to settle for the standard deduction.  For those of you with large mortgages who travel a lot for work, this will hit you directly.
  • Income Tax Increases –  See chart.  Back to how Obama said he will not raise taxes of those making less than $250,000.  Beginning on January 1st 2013, anyone who makes more than $35,350 ($58,900 married filing jointly) will see a tax increase on every dollar earned above that.  Yes, you read that correctly.  The marginal tax rate goes from 25% to 28% for what is considered the average per capita income across most of the country.  So much for not taxing the middle class huh?
Tax Brackets (2012 Dollar Amounts) Marginal Rate
Unmarried Filers Married Joint Filers    
Over But Not Over Over But Not Over 2012 2013
0.00 8,700.00 0.00 17,400.00 10% 15%
8,700.00 35,350.00 17,400.00 58,900.00 15% 15%
35,350.00 85,650.00 58,900.00 142,700.00 25% 28%
85,650.00 178,650.00 142,700.00 217,450.00 28% 31%
178,650.00 388,350.00 217,450.00 388,350.00 33% 36%
388,350.00 388,350.00 35% 39.60%

 

  • Capital Gains – 15% up to 20% + 3.8% “Medicare Contribution Tax”.  For those of us who have unearned income and capital gains on stocks for a period longer than a year (long term capital gain), we will pay 23.8% in taxes on those gains.  With the increase in the marginal tax rate we see that it also raises the short term capital gains rate (which happens to be considered income and taxed the same as your payroll income).  So either way investors, and the markets in general, will certainly pay more in taxes next year.  A terrible thing for the markets.
  • Dividend Income – 15% up to 39.6% + 3.8% “Medicare Contribution Tax”.  This is what is going to kill a lot of the momentum in the stock market we have seen this year, specifically the higher yielding dividend stocks.  It will also crush the stock price of many good companies who are considered dividend stocks, and are held by a lot of pensions and mutual funds.  A 15%-20% drop in this group of stocks will have a huge negative impact on the US economy.  Not only are corporations going to see higher taxes next year, dividends too will get it’s cut, and if you held the stock for less than a year….well you too will again be taxed at your income tax rate.  I have never seen a single dollar earned, get taxed that much in my lifetime!  This means that even those who don’t own stocks will suffer as well.

 Take an average working man, who has a company sponsored pension.  Well he will unknowingly pay more to Obama’s “no tax for the middle class” idea, as the value of his company’s pension fund deteriorates under these new tax rates.  Also, the working family that ritually contributes to their 401k at work, will suffer a deterioration of their retirement savings as a large portion of their “safe” mutual funds hold high dividend income stocks.  See how politicians can twist words?  Everyone who holds a job, will pay more taxes next year.  Every single one….

 

                 

 

 

SSYS: 3D Printer Manufacturer Set To Breakout

3D printer manufacturer Stratasys Inc. (Nasdaq: SSYS) has seen some pretty impressive growth this year.  The maker of 3D prototype modeling printers posted third quarter EPS of .40 cents, beating analyst’s estimates of .19 cents.  Revenue came in at $49.7 million for the third quarter, 24.5% above the $40 million in third quarter 2011.  With a mix of both manufacturing and service revenue, Stratasys is expected to post FY 2012 revenue of $194 to $199 million.  Earnings guidance is expected to be $1.37 to $1.40, both raised from previous guidance as a result of strong third quarter results.

If you are like me, you have probably never heard of a desktop printer that is capable of printing plastic parts for use by engineers and designers in developing scalable prototypes.  Similar to a CNC machine that’s been in use for years, the 3D printer can take designs and turn them into a tangible model that less than an hour ago was a schematic on a monitor.  Truly fascinating technology!

Stratasys recently unveiled their Mojo printer, which is priced at just under $10,000.  These units can literally be operated in the same space as your typical paper multifunction machine we all use today.  This allows them to sell into a much larger client base, and expand sales globally.  They currently have markets in the US, as well as Europe, the Middle East, Korea, Taiwan, Japan, and China.  The Mojo has potential to grow the company’s sales in these markets.  In addition to the Mojo, they also have the uPrint, Dimension, and Fortus models.

The stock has seen some impressive growth this year, kicking off January around $30 up to today’s close of $70.78.  The chart shows the 50 day EMA has been above the 200 day EMA since the FY 2011 earnings call.  Throughout 2012, the stock has been trading above it’s 50 day EMA, bouncing along it with very little weakness.  Back in April, with the debut of the Mojo printer, volume spiked as interest gained in this new innovation of the computer peripherals sector.

As you can see, the stock is set for a technical breakout above it’s current levels.  Pushing up on its 52-week high, which I think will be met with little resistance, there will be a lot of upside going into the end of the year.  If Stratasys beats estimates by a significant amount, we could easily see this stock around the 100 levels.  Analysts see the company gaining an additional $100 million in revenue, bringing average estimates close to $300 million for 2013.

Stratasys 50/200 day 1 year chart

Of course, the looming fiscal cliff issue as well as competition from companies such as 3D Systems Corp. (Nasdaq: DDD), are factors that need to be weighted heavily in your decision to trade this stock.  So do your homework, and keep a close eye on what Obama has in store for our tax dollars next year.

Happy Trading!

Bonds Don’t Have To Be Boring

Most new investors are somewhat familiar with stocks and the events that cause their prices to go up or down.  A company comes out with a great earnings quarter, and the stock moves up 5%.  Great!  Everyone makes money (except the short traders).  When earnings season is delivering negative news, for instance with what we are currently seeing with revenue expectations for early 2013, well we get a decline.  Additionally, the looming fiscal cliff issue that lawmakers are having to negotiate, will also have a significant impact on the immediate direction of the markets.

What can we do to keep our portfolios marching upward, in the face of a potential market correction? We can diversify. And one way of doing that is to buy bonds. 30, 20, and 10 year Treasury Bonds are common US government bonds, and are the most popular and stable in price fluctuations. Corporate bonds issued by large, well-established companies that are profitable are also relatively stable in a declining equities market.

Now, I know most of you think that bonds are boring and don’t have the same sexiness of the momentum stocks we hear about in the news. But unless you have the timing and attention required to short trade a stock, you can safely purchase bonds to maintain, and even increase your portfolio’s value as the bottom is falling out from underneath us. As money is flowing out of equities and the markets are declining in big numbers, bonds are being bought up in large numbers. Although this drives up the bond price, it inversely drives down the yield (which I will discuss in another post). That is how we, as simple investors, gauge the flow of money in and out of the bond markets. Something to watch as we try and get a leg up in this game.

The S&P vs TLT over the past 6 months

So to understand how this price correlation transpires, I suggest you watch the movement of the iShares 20+ year Treasury Bond ETF (TLT). This ETF is a large fund, that invests in long term US government bonds, with a duration greater than 20 years. As the stock market was declining after Obama’s election, TLT was doing just the opposite. It closed out election week with a modest 3.5% gain. Not too bad when the S&P lost 2.8% during the same trading sessions. A much safer trade when compared to the ultra short leveraged ETFs that a lot of traders try and play during big pullbacks, where bad timing can get ugly really fast.

 

Happy Trading!

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