GeoTeam Continues to Diversify with U.S. Stocks

Here We Go Again. The market turmoil is back. It’s certainly both an amazing and mentally challenging time as not even two years have passed since the 2008 debacle.

Putting it into perspective, financial markets have rocked from March 2009 lows, so last week's pullback was healthy and will give us the chance to lock and load. While the market has already recovered its losses from last week’s breakdown, there are many micro-cap names that have yet to fully recover. Overall, I think that investors may actually flock to the U.S stock universe as the rest of world deals with its own issues. It is not a matter of “if”, but “when.”

Sure, there is fear caused by recent memory, but those who missed the first market run face the possibility of being given another chance to vindicate themselves. That is my half glass full approach, which is admittedly my weakness.

My half glass empty glass is motivated from the 2008 events. It is amazing how eerily similar the European crisis is playing out. First, the sub-prime mess was only 2% of the mortgage market and "contained" just like Greece was originally dismissed. Then we got our two month bounce, after which a bigger problem arose. Next we got the U.S. bailout package passed and the market still went down. As of now, the market is responding favorably to the approval of the European one trillion dollar bail out package. Only time will tell if the positive market response will continue.

There is no doubt that market pessimists will still predict a Greece default. Even where there is no problem, lack of confidence from the players in the credit markets can eventually create a problem. Not to mention that the media is pasting videos of the Greece streets like it is the end of the world, hoping we crave the coverage in their sick quest for blockbuster ratings.

Luckily, differences between the current crisis and 2008 can assure us that if the correction resumes, it will not be as deep as 2008 since most economic indicators point to a stronger than expected economic recovery. However, some strategists, including Jim Cramer, have commented that the DOW could retreat to 8500. Just these words of fear of could instill panic, creating a self-fulfilling prophecy. Still, even though we may not go to 6500, 8500 is bad enough. I would bet that investors suffered the most portfolio damage during the DOW’s descent from about 11,000 in September 2008 to the lows of October 2008 that were near 8,100 .

To reference Jim Cramer’s recent commentary, a few weeks ago he commented that you should buy into the market gyrations caused by Greece’s turmoil, essentially downplaying the country’s woes. Last week his sentiment was totally reversed when he inferred that even with a bailout move, the European crisis will not come to pass until Greece defaults. Now he is riding the bull again. This is the nonsense that drives the novice investor crazy.

Combine all this with the negative fallout from China’s current monetary tightening moves and the landscape takes on an added level of complexity. Personally, I believe that the media is exaggerating the China issue as the government is taking the appropriate steps to ensure long-term growth. Unfortunately, investor psychology is a driver of markets, taking precedence over realities.

Although I am still very bullish on China, the recent events have convinced me to increase my portfolio weight to include more United States equities, an exercise my team had begun on November 4, 2009 .

Strategy Abandoning the market entirely has never been my style. But one must be selective right now and be cognizant of risk. I feel that increasing exposure to U.S. equities can reduce overall portfolio risk while maintaining above average returns. I will use market pull backs to nimbly execute this strategy. Just to be clear, I am still very bullish on China as shares pull back.

Focus. The following is exactly what I and my team have done:

• Select China names that have yet to run and likely see no need to dilute via equity offerings.
• Select China names that have yet to run, even if they have raised funds that will be immediately accretive to EPS.
• Select China names that have pulled back for no logical reason
• Focus heavily on strong U.S. names that we feel are leading the economic recovery charge; reduce volatility, while not sacrificing returns.
• Make of list of U.S stocks that have beat the street and issued bullish commentary.
• Make a list of U.S. stocks that may have slightly missed analyst estimates, yet growth is still robust.

As you peruse such a list in the coming weeks please note that if the European crisis were to spiral out of control, strong company commentary that I use to justify some of my decisions may hold less weight.

Recent Highlights on GeoInvesting. In our diversification efforts, we identified a handful of U.S. companies to include in our portfolios.

Rehabcare Group Inc (NYSE:RHB)

GeoSpecial RHB reported exceptional 2010 first quarter EPS of $0.50, exceeding analyst estimates by 20%. Comments remain strong. After being up big on the day results were released RHB had pulled back with the market from a high of $34.88. We are speculating that RHB can quickly reclaim its 52 week high if market is strong.

Teradyne Inc (NYSE:TER)

On April 21, 2010 TER reported 2010 first quarter EPS of $0.33 exceeding estimates by 43.5%, but the stock has pulled back sharply from its high of $13.37, despite very bullish commentary. On May 5, 2010 we coded TER a GeoSpecial at $11.99.

Motorcar Parts America (NASDAQ:MPAA)

On May 3, 2010 MPAA issued preliminary fiscal 2010 results that call for revenues to come in at around $37 million vs. an estimate of $34.6 million. We like MPAA as a play on the consumers trend to delay purchase of new cars during a weak economy in a recession.

Its products are sold to automotive retail outlets and the professional repair market throughout the United States

2011 EPS growth is expected to come in at 15%, but we feel this could be conservative as the company has been exceeding estimates in recent quarters. The stock is selling at a P/E of 15. Please note that subpar revenue growth may limit P/E expansion. But investors may see reason to take company shares to at least its book value of $8.34.

Hawk Corp (NYSE AMEX:HWK)

The company crushed estimates by 95.7% on May 4, 2010 when it reported 2010 first quarter EPS of $0.45. The stock has finally reacted to this news this morning. EPS is expected to grow 37% to $1.03 in 2010 followed by 45.6% in 2011. We are banking that the stock can attain a P/E multiple of 25 vs 20 now. Also encouraging is that HWK is buying back stock even as the stock is near its 52 week High. Please note that the company will face a challenging EPS comparison in its third quarter after an easy comparison in the up coming second quarter.

Marathon Oil Corp (NYSE:MRO)

While we rarely have considered oil and gas companies for consideration in our portfolios MRO has grabbed our attention. The company reported 2010 first quarter EPS of $0.44 crushing estimates by 83.4%. Comments indicating that expenses related to maintenance activities are now behind the company indicate that growth could accelerate going forward. Even before these results MRO was expected to report 2010 EPS of $3.14 followed by $4.81 in 2011 compared to $1.67 in 2009. We feel it is reasonable that the stock could trade at a P/E multiple of 15 on 2010 EPS estimates.

Super Micro Computer (NASDAQ:SMCI) and Career Education Corp (NASDAQ:CECO) are two companies that reported strong EPS results. Their share performances have not responded appropriately, possibly since they were basically on target with analyst estimates.

SMCI's 3rd quarter 2010 EPS grew 250.0%, yet the stock was pummeled. In addition to just meeting analyst estimates, we believe that the problem could be for two reasons:

- EPS guidance for its next quarter is one penny shy of estimates.
- The company has commented it is not issuing guidance for 2011 yet.

Regardless, comments were strong.

We are banking that the stock will eventually retrace its fall from $19.55 per share. Analyst estimates have SMCI 2010 EPS growing 40.7% to $1.14. We feel that it is not too much to ask investors to take shares to a P/E of 15 on this estimate.

CECO's Shares trade at a P/E of 17, despite posting EPS growth of 140% for its first quarter 2010 which came in at $0.66. Analyst estimates have 2010 EPS growing 89% to $2.75 and 21.5%.in2011 to $3.34. The company is also buying back stock.

La Barge Inc (NYSE AMEX:LB)

Our newest GeoBargain. Please see recent note.

Other U.S. stocks already added to our portfolios:

Aceto Corp (NASDAQ:ACET)
Ricks Cabaret Intl Inc (NASDAQ:RICK)
Technical Communications (OTC BB:TCCO)
Alpha Natural Resources (NYSE:ANR)
Marathon Oil Corp (NYSE:MRO)
Integrated Silicon Sol (NASDAQ:ISSI)

Other U.S stocks we are tracking, but have not yet made an ultimate decision on include:

Medquist, Inc. (NASDAQ:MEDQ) - We need to assess the impact of a recent acquisition.
Compass Diversified Holdings (NASDAQ:CODI) - We need assess whether analyst estimates include a recent stock offering.
Tandy Leather Factory (NYSE AMEX:TLF) - We need to assess if EPS growth can accelerate.
Sutron Corp (NASDAQ:STRN) - record back log, but company has a record of sporadic quarters. We need to assess if this is still the case.
Lannett Inc (NYSE AMEX:LCI) - We are keeping a close vigil on this generic drug firm. when EPS growth is expected to accelerate in Fiscal June 2011. LCI was one of our big winners several years ago.
Kraton Polymers (NYSE:KRA)- we need to calculate 2009 non-GAAP EPS to assess 2010 growth rate. Initial findings seem very compelling.

Please note we have not yet interviewed any United States companies mentioned.

As far as China goes we currently like the following stocks.

Telestone Technologies (NASDAQ:TSTC) - Stock has pulled back sharply from its high of $24.96. Although we still are concerned that company will offer shares soon.
Soko Fitness & Spa Group (OTC BB:SOKF)- Recent fund raising activities should accelerate growth. Stock has not run yet.
New Energy Systems Group (OTC BB:NEWN) - Provided strong guidance. No current needs to raise capital. The company needs to up-list to attract consistent investor interest.
China Energy Corp (OTC BB:CHGY)- Shares have pulled back since the company reported strong first quarter results. Investors may have unjustly punished the stock since EPS were sequentially less than fourth quarter 209 results. We are mildly concerned that the company may have to tap the equity market. see research.

Disclosure

Positions: Long TER MPAA SMCI LB ACET RICK TCCO ISSI KRA TSTC SOKF NEWN CHGY

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