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Thursday, July 28, 2005
Market Recap
The market rallied into the close once again today with the Russell small cap index leading the way. Small cap stocks were on fire and this index gained 8 more points to close at another all time high. It just keeps making higher highs after every small pullback. The Dow had another good day, gaining 68 points, the NASDAQ gained 12 points and the S&P gained 7 points. The NASDAQ closed above its latest resistance line that was around 2190. Now the big resistance is the psychological number of 2200 and we are now just 2 points below that.
Volume on this latest rally has been very good considering it is the summer months when trading tends to slow down. On up days, there has been generally more volume than the down days and that is a great sign for the bulls. Earnings news continues to be very good and many stocks that are reporting strong numbers are going up as of late. Stocks like DRIV, FOXH, and NTRI from our bulletin just reported earnings and the street rewarded them with massive run-ups today. DRIV was up 13% today, FOXH, up 23% and NTRI gained an amazing 32% today alone. These are all small cap stocks and I urge you again to stay with the small caps because they are not only leading the way, they are making some incredible gains. You will not see a one day 32% gain in a big cap stock very often, if ever. Small caps are the way to go when you want to strike quickly for the big gain. Speaking of small caps, tonight we will explain them so as not to be confused with what we are talking about when we say “small caps”.
Market Capitalization
In a previous commentary we talked about the difference between a Small cap stock and a big cap stock. Tonight we have a follow-up to that.
A common misconception is that the higher the stock price, the larger the company. Stock price, however, may misrepresent a company's actual worth. Let's take XMSR and SIRI for example. Both are considered big cap stocks even though they are start-up companies in a fairly new industry (satellite radio). If we compare the two companies head to head, we see that there is a considerable difference in price. SIRI trades at $7.00 and XMSR at $36.00. XMSR is 5X higher than SIRI and to the unsophisticated investor, SIRI looks like the cheaper stock. However, this of course is false assumption. Although XMSR's stock price is higher, it has only 211 million shares outstanding while SIRI has an incredible 1.3 billion or 5X the outstanding shares XMSR has. So from a valuation stand point, they trade at roughly the same. If we compared the two companies by solely looking at their stock prices, we would not be comparing their true values, which are affected by the amount of their outstanding shares.
Compare the Outstanding Shares
Some people forget to check the amount of outstanding shares before they compare two companies with similar stock prices. For example, take small cap stock HANS, its stock price is $95.00 and that seems high but they have a market cap of only 1 billion while SIRI has a 10 billion market cap. The classification of companies into different market caps also allows investors to gauge the growth versus risk potential. Historically, large caps generally have much slower growth but with lower risk. Small caps on the other hand have higher growth rate potential, but carry much higher risk.
On the Surface
We say traditionally because there are exceptions. In this case, even though SIRI and XMSR are considered big cap stocks because of their high market capitalization, they are still very risky investments because neither is profitable and will not be for years, if they survive. Compare this with HANS, a small cap stock. HANS is already a profitable company with super earnings growth but is still considered a small cap stock because of its market cap even though its stock price is $95.00. With only 11 million shares outstanding and of that, only 5 million that float it is considered a small cap stock based on the 1 billion market cap. On the surface, HANS looks like the big cap and SIRI looks like the small cap but it is just the opposite. In this case HANS, already profitable with a very small float is the better choice when looking for the quick fast gains. HANS has gained 100% in the last 6 months. Compare this with say CSCO, or MSFT, two big cap tech stocks. I do not think CSCO or any other big cap stock is going to gain 100% in that short a time frame. It happens, but not often.
STHQ Chart Index - If you go to the chart index in the left side menu, you can review and study charts we have annotated for each stock listed in the past.
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings you can either use this link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
Stockcharts Listing
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For New Members:
For all the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented. |
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