Go Back to School June 17, 2005 *** A Momentary Departure From Small Caps Irwin Greenstein reports from St. Paul Street in Baltimore, just a Molotov cocktail toss away from the anarchist cafe Red Emma's... *** In the spirit of anarchy, your contrarian Sleuth is going introduce today's issue with something that is NOT small cap. Many of you know Chris Mayer as editor of Fleet Street Letter. But what you don't know about the mild-mannered Mr. Mayer is that he recently launched a stock trading service called CrisisPoint Trader. Apologies, but the current CrisisPoint Trader was simply too good to pass up. Anyway, here are some excerpts... "The Utilities "The utilities continue their hot run. Utilities are traditionally bought for yield. Their yields today are low by historical standards. The continued strength in utilities reflects the consensus -- namely, investors are not worried about rising interest rates right now. In fact, I read this in today's Financial Times: 'Inflation has stopped being a worry for fund managers for the first time in two years, and fewer are expecting interest rates to be higher a year from now, a Merrill Lynch poll showed yesterday.' "The Dow Jones Industrial Average "The venerable Dow looks like it is in the middle of what the old Dow Theorists called a 'secondary reaction.' A secondary reaction is a strong movement that runs counter to the primary trend. So for example, we are in a longer-term bearish mode at the moment. We'll probably stay this way until the Dow can get back over its March high. "The bottom line is this: The market could rally higher from here. It certainly looks like it wants to do that. But this rally from April has all the makings of a classic secondary reaction, which means the longer-term trend is still intact -- at least until both averages can make it over 10,940. "The Dow Jones Transportation Average "The Transports have retreated below their 50- and 200-day moving averages and look to head lower. One of the old Dow principles is to be skeptical of one average if you don't see it in another. "Bottom line: The strength in the Industrials is further cast into suspicion without a comparably strong Transportation Average. Bull markets move all stocks up, and divergences between the two averages are important in determining whether a true broad-based advance is in the cards. Dow Theory tells us it ain't." Thanks, Chris. I think Sleuthers should know that CrisisPoint Trader is chock full of moneymaking stock recommendations that I couldn't include here. After all, that wouldn't be really fair to folks who pay for your great advice. So if anyone wants to find out more about cashing in with CrisisPoint Trader, they should click here: http://www.agora-inc.com/reports/CPT/WCPTF612. *** In the last issue, we reported that the high-risk sectors of tech and biotech have fallen out of favor as positive sentiment moves to staples, such as energy and industrials. Since other warning signs are popping up against tech in particular, you may want to consider putting your small-cap dough elsewhere. Why? Many small-cap tech companies eventually find themselves in price limbo. The stocks hit a resistance level and just don't budge. It may be due to business fundamentals or lack of Wall Street coverage. If it's business problems -- such as crummy products, cash-flow pinch or stupid management -- the company is likely to shop itself around. When it's sold, shareholders can make out pretty well. But with a flat IPO market and scarce venture capital, more private tech companies are looking to be acquired. This is bad news for small-cap tech companies that also want to extract maximum value through their acquisition. A June 16 story on CNN/Money observed that Internet fat cats like IAC/InterActive, Yahoo and Google "...need to realize that there are scores of private Internet companies out there which wind up being better acquisition candidates" than small-cap tech players such as eCOST.com or Bluefly. Of all the tech verticals, we think that the retail e-commerce sector will continue to hold attractive targets as online consumer sales steadily climb. But because these companies are competing with private ventures for the same acquisition dollars, the premiums just won't be there unless the small-cap has a niche sewn up. So if you insist on putting your money into small-cap tech, make sure the company has dominant market share. In other words, buy the here and now instead of a whiz-bang future. Now a word from Sala Kannan... *** "I stumbled upon ridiculous financial data on an everyday basis. Most of it has to do with IPOs. Today I read that finance professors Jay Ritter and William Schwert have shown that if you had spread $1,000 across every IPO beginning in 1960, sold at month-end and rolled that money over into the next month's IPOs, in 2001, you would have had about $533 decillion. "$533,000,000,000,000,000,000,000,000,000,000,000 "That's how $533 decillion looks. "Too good to be true? Absolutely. In the latest edition of Benjamin Grahams' book, The Intelligent Investor, editor Jason Zweig explains why. "First of all, you would have had to invest in every single IPO that ever sprouted for 41 years straight. A nearly impossible task. "Second, Zweig says, 'most of the high returns on IPOs are captured by members of an exclusive private club -- the big investment banks and fund houses that get shares at the initial price, before the stock begins public trading.' "The common investor, however, can only buy stocks of an IPO after it starts public trading -- and by this time, the investment bankers have loaded up on the stock and are ready to dump it. "Small-cap IPOs are particularly dangerous. The number of available shares can be so small that the stock can run up and then tumble right back when the big investment banks sell. "Zweig sums up IPOs very well: "'It's Probably Overpriced; Imaginary Profits Only; Insider's Private Opportunity; or Idiotic, Preposterous and Outrageous. Small-cap IPO investors beware.'" Sala, your friendly Sleuth couldn't agree more...except, that is, for Lincoln Educational Services. Read on... Make $6,580 in 1 Trading Session! Imagine making 41.3% in 90 minutes…37.7% in two weeks…$3,848 in one day...92.5% in 48 hours...or $6,580 in a single trading session. Since 2003, this trading system has accurately predicted seven out of every 10 trades. But the best part is... The same kind of gains that used to take years to see can be yours in days -- even hours. Find out what the next trade is. Click here: Go Back to School Come next week, the business of ABCs and 123s may debut an IPO that's H-O-T. For small-cap investors, the proposed public offering of Lincoln Educational Services could provide a rare entry point into the booming marketplace for corporate-run schools. Of the six leading public companies that operate for-profit educational services, only two have gone public since 1999, and now all of them have large-cap valuations exceeding $1 billion. If Lincoln does go public next week within the projected $19-21 range, the company could be worth an estimated $525 million -- placing it squarely within reach of small-cap investors. A small-cap play in the sector could present investors with a lesson in profitability if they heed the industry's trending toward long-term growth. For example... Since its IPO in 1995, Apollo Group, Inc.'s stock price has increased 514.9%. Strayer Education, Inc. hit the public market in 1996, and investors wise enough to buy and hold would have seen their gains rise by 708.8% today. The granddaddy of for-profit educational services, ITT Educational Services, Inc. went public in 1994 at $10 and now trades for $48.30 -- a profit of 383%. Lincoln would be pitted against bigger competitors that furnish classes primarily for working adults. Apollo, with a market cap of $14.75 billion, has degree programs in business, criminal justice, health care and other vocational disciplines. Strayer, which now has a $1.29 billion market cap, provides undergraduate and graduate degree programs in business administration, accounting, information technology and other fields through traditional classrooms and the Internet. And ITT Educational Services ($2.24 billion market cap) offer technology-oriented postsecondary degree programs in the U.S. Lincoln's adult curriculum of automotive technology, allied health, skilled trades, While Lincoln's strategy may sound pedestrian, for-profit educational companies have nonetheless done well over time. Naturally, the industry has its share of dunces. But even those that did not reach large-cap status upon going public eventually attained it. And Lincoln certainly has plenty of room for expansion, based on market statistics in the S-1. Citing numbers compiled by The National Center for Education Statistics, 17 million students in the U.S. obtained some form of postsecondary education in the fall of 2002. Those enrollments are expected to balloon to 18.2 million by 2013. The U.S. Department of Education, meanwhile, reported that over the past 25 years, for-profit postsecondary institutions have enjoyed a compounded annual growth rate of about 10%, compared with 1% over the same period for traditional colleges and universities. Finally, Lincoln uses figures from the U.S. Department of Labor to establish that there will be approximately 1.7 million job openings each year from 2000-2010 in careers related to its areas of study. In the case of Lincoln, those rosy projections demand closer scrutiny. Because last year, approximately 81% of Lincoln's revenues came from Title IV programs administered by the Department of Education. Under Title IV, students pay Lincoln through nonrefundable grants or low-interest loans that are awarded to the poor. If Washington ever cuts the program...well, it doesn't take a math whiz to calculate the bottom-line impact. Suspicions aside, Lincoln's financials put it at the head of the class... It booked $261.2 million in revenues in 2004, up 31.4% from $198.8 million in 2003 and 87.6% from the $139.2 in 2002. Net income for 2004 was $12.9 million, a gain of 57.3% over 2003 net income of $8.2 million and a 101.9% jump from a net loss of 674,000 posted in 2002. So what can we expect if Lincoln starts trading next week? Probably not much. The summer doldrums have hit June's IPOs -- at least as of 11:04 this morning. XenoPort came out at $10.50 and is now trading at $10.58. Aries Maritime had an offering price of $12.50, and it last traded for $12.70. LHC Group outperformed the others, shooting up from its IPO price of $14 to $17.05, or up 21.8%. And PSF Group Holdings, which started trading for $12.50, now sells for $13.14, a 5.1% bump. There's a good chance that Lincoln will follow the pack with a dull opening. So while we generally advise against buying on the first day of trading, this might be an exception, because the current market malaise has flattened prices. Buy Lincoln ASAP only if you consider it a K-E-E-P-E-R. Happy investing, The End of Radioactive Environmental Waste Could Mean $3 Million Profits for You Looking for tomorrow's life-changing technologies? This virtually unknown company has THREE innovations in the pipeline! Very soon, everyone will know about its microscopic batteries and other breakthroughs -- but you can get a sneak preview today! Best of all, you still have time to buy into this company cheap... for a chance to turn just $5,000 into as much as $3 million. The future starts here...
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