A profitable strategy

There are a few times every decade where I believe you can easily spot oversold conditions in the stock market. The uncertainty over the currency markets, the direction of the Fed and geo-political terrorist concerns, have caused many investors to take losses and watch from the sidelines. The oversold condition of the market has created a few splendid purchasing opportunities. Since I primarily watch technology and gold stocks, I have come up with what I believe will be a highly profitable strategy in the short-term (1-3 months).

In technology I watch several semiconductor stocks and currently none appear to be a better value to me than United Microelectronics Corporation (UMC). UMC is the world’s second largest outsourced semiconductor fabricator. Global demand for outsourced semiconductor services is growing. Sales and margins are up at UMC, yet the stock is down and appears to be marching toward its 52 week low of $2.68. Looking at UMC’s June sales we can see that sales have improved 32.94% compared to the same month a year earlier. I don’t see sales dropping at all as we approach the holiday season. In fact I expect demand to reach record levels as the consumer electronics industry gets ready to launch a bevy of new technologies. 2006 heralds the introduction of the new High Definition DVD formats, HD-DVD and Blu-ray. Investors should take note that standard definition DVD was the most successful consumer electronics technology category of all time. DVD technology sales far eclipsed that of VHS, Walkmans, MP3 Players and everything else before DVD.

It’s an exciting time for outsourced semiconductor companies like UMC that rely on electronics companies placing orders for new chips. UMC also receives higher margins on newer electronics that require smaller process technologies to fit more microprocessor connections into smaller areas. Looking at the max chart for UMC, we can see that the stock is trading near late 2002-early 2003 levels. During this drop in the semiconductor industry, the consumer electronics industry was experiencing an inventory glut amidst softening demand, so fewer orders were placed with outsourced semiconductor fabricators.

The landscape for the consumer electronics industry is vastly different today than it was in 2002-2005 period. Prospects couldn’t be any better for UMC and other outsourced semiconductor fabricators. The stock price is not reflecting the strong current and future potential for growth. My only concern is a Macro view of the global stock markets. A crash driven by currency worries and fears over rising crude oil prices is a distinct possibility that should not be ignored. I believe the coming earnings week will be overshadowed by the conflicts in the Middle East. I expect the markets to be driven by news coming out of the Lebanon conflict instead of earnings announcements. If you are of the mind that the market will rapidly revert back to a normal state as the Middle East conflicts pass over or as investor’s price in results of the conflict, then I suggest buying into the oversold condition of the market.

I would play this short-term strategy:

1. Buy gold mining stocks in the next 1-2 weeks if gold trades above $700. This would signal a positive psychological entrenchment in mind of investors that the Middle East conflicts aren’t going to blow over anytime soon. I am actually giving readers a conservative approach. I have already started accumulating a gold position. My top two picks Yamana Gold, Inc. (AUY) and Tanzanian Royalty Exploration Corp. (TRE) now represent 1/2 of my portfolio.

2. Sell gold and take your profits as the Middle East conflicts ease and crude oil prices drop.

3. Buy UMC and other beaten-down tech stocks like my number 2 choice, eBay, Inc. (EBAY).

If UMC drops below $2.50 or EBAY drops below $24, I would consider either a tremendous value. I have my sights set on buying UMC in the $2.60-$2.80 range. I believe this simple strategy will lead to extraordinarily high returns in the next 3-6 months. The only thing the strategy is predicated on is the market returning to flat or slightly bullish growth toward the end of the year. If the Middle East conflicts persist, holding onto gold stocks as a hedge is most likely the best way to go. I would not be surprised if gold were to jump up above $800, almost entirely driven by the escalating Middle East conflicts and crude oil supply fears. In either case, whether the conflicts persist or not, I am continuing to recommend holding 50% of your portfolio as cash if you have available investment capital or you have the possibility of cashing out without much loss. These certainly are uncertain times. There are chances of huge profitability if you play into the oversold conditions, but safety and preservation of capital should always come first.

RawGreed gold update

On June 13th, 2006, I wrote this post predicting gold’s low in its previous correction would be in the $540-$550 range. It looks like I was correct as gold has firmly remained above my predicted low last month. Gold is currently trading at $660.10. Gold will likely continue to rise in the short-term as tensions persist in India, North Korea and the Middle East. If tensions ease, I expect gold to pullback a bit before continuing its bullish trend. It is unknown if gold’s recent rise due to geo-political terrorist concerns will set a new range for the metal or if it will drop again. With the market being very uncertain, it would not surprise me to see gold drop back to the $610-$650 range. The performance of gold mining stocks appears to reflect the markets uncertainty over the price of gold. Shares of my top two gold mining picks, Yamana Gold, Inc. (AUY) and Tanzanian Royalty Exploration Corp. (TRE) are down from the highest prices reached this week even though gold is trading at its highest level in the past month. Gold is up around $30 or 4.7% this week compared to last Fridays, July 7th, 2006, close of $632.60. AUY is up .07 or 0.7% from 9.89 to $9.96 in the same period. TRE is down .15 or 1.9% from $7.80 to $7.65 in the same period. I expect to see AUY and TRE both jump up today if the price of gold continues to rise.

Looking at the past months performance for gold, instead of the past weeks performance paints a different picture for gold mining stocks. Gold closed at $562.70 on June 13th, 2006 and $659.30 on July 13th, 2006. The one month gain for gold is $96.6 or 17.16% from June 13th, 2006 to July 13th, 2007. TRE has risen $1.47 or 23.78% from $6.18 to $7.65 in the same period. AUY has risen $2.15 or 27.52% from $7.81 to $9.96 in the same period.

Short-Term Alcatel prediction

I am setting a target buy price for Alcatel (ALA) at under $10 in 1-3 months time. ALA’s 52 week low is $11.01. I have written about Alcatel when the company first announced its merger of equals with Lucent Technologies, Inc. (LU). I believe that the merger of Alcatel and Lucent will be mutually beneficial. By consolidating, Alcatel will gain key inroads to the U.S. market and Lucent’s IP portfolio. Lucent will gain key exposure to the European market and better long-term growth prospects. Alcatel has seen steady declines since announcing its merger with Lucent. I believe there are looming fears over a mid-year spending slowdown in the telecom industry. Lucent has also recently announced declining demand for its wireless networking gear. I believe ALA is oversold and being dragged down with LU as investors digest the possible long-term implications of Lucent announcement. I expect to see a rebound in ALA and I am setting my target sell price for ALA at $14 in 3-6 months time.

Watching from the sidelines

I am employing a wait and see strategy to determine if the current rally in the market has any sustainability. I may have found one interesting situation. I am currently watching Logitech International S.A. (LOGI). The company engages in the design, manufacture, and marketing of personal interface products for personal computers (PCs) and other digital platforms. The company’s products include Web-cameras, mice, trackballs, and keyboards for the PC; interactive gaming controllers, multimedia speakers, headsets, and headphones for the PC and for gaming consoles; headsets for mobile phones; headsets, headphones, and speakers for mobile entertainment platforms; advanced remote controls; digital writing solutions; and 3D control devices. Logitech has recently announced a 2:1 stock split effective July 14th, 2006 and a $250 Million share buyback initiative. In spite of these two pieces of normally positive information, LOGI has been down since the announcements. Logitech has cash of $245 Million and long-term debt of $14 Million. I am a fan of Logitech products and believe the release of Microsoft Windows Vista will create a surge in demand for PC accessories such as mice and keyboards. It may be worthwhile to look at building a position in LOGI.

I am still advocating building a position in gold mining stocks, during what I consider uncertain times. Gold is currently trading at $623.20.

Returning from Beijing

I’ve returned from Beijing this afternoon and will be concentrating on several exciting opportunities. I have been given the unique opportunity to work on the expansion of two of China’s state owned ethanol companies. One of the companies has been funded with $1.25 Billion USD and the other has been funded with $5 Billion USD. The opportunity I see will be to find a privately owned ethanol or energy company looking to gain an entry point into China’s ethanol market. China tightly controls the availability of ethanol licenses. Only 6 ethanol licenses are being given out in 2006 and the limited number of available licenses prevents competition in China from privately owned companies. The state owned ethanol companies have been made so large by the Chinese government that competition from smaller private local firms or foreign companies is unlikely to succeed.

I will likely propose an M&A plan to foreign ethanol and energy companies. The state owned companies have long-term contracts with the Chinese government to purchase ethanol. The contracts are valuable as a long-term source of recurring revenue. China has many contracts such as this in place with Orimulsion suppliers in Venezuela.

I have also been given a similar opportunity with China’s state owned gold mining companies. A few of China’s state owned gold miners are struggling to expand operations as the price of gold rises. The state owned gold miners face daunting technology issues that I believe a foreign miner would be able to tackle. I see an opportunity to merge several small state owned gold miners into a single larger state owned gold producer or under a holding company. I also see an opportunity to bring in private funding and technology to improve the yield from China’s existing gold deposits.