There is not a quick and dirty way to look at value plays. Many sophisticated metrics and models go into determining if a stock is valuable. The analyst community has run these numbers already though. The average recommendation is overweight/buy (zero sells) with an average price target of $13.33. Analysts also are expecting $1.00 of EPS for the next fiscal year, in line with how management guided. Average numbers here should be taken with a grain of salt however, the average price target, for example, only takes into account six analyst opinions!  The analyst sample set is rather small and thus is easily swayed because not many people cover the stock. To put this into prospective, AAPL has over 53 analysts covering the stock!

SWHC’s forward PE is not only under the average market multiple (around 12-17x), the multiple of its closest public competitor, RGR, is also significantly above it. RGR is currently trading at nearly 15x forward EPS. If a trader was inclined to play a compression between the two multiples…a pair trade could be advised. This would include selling RGR and buying an equal amount of SWHC; dollar weighted. The correlation between these two stocks over a 60 day period is 0.68.

A correlation coefficient is a quantitative indicator of the severity of a particular relationship. In this case, 0.68 indicates that there is a reasonably strong relationship between RGR and SWHC, but not too strong. Having a decently strong relationship between two stocks in a pair trade allows for one to sleep at night. The risk is that one has a massive gap and the other leg of the trade does not follow. On the other hand, if the correlation was too strong there would not be a chance of the two moving favorably inversely and compressing

Away from the fundamentals for a moment, the technical picture is pretty bullish. The $7.75 level in the stock proved to be solid support after we came down and tested it after the tragic events of late last year. Considering the firearm stocks are under immense scrutiny now, it may be wise to pursue pair trades instead of single leg trades if one was inclined to trade this sector of the market.

salerno.mark.a@gmail.com

LNKD seems to be at a decision point now and so does AAPL. The two could very well put up impressive numbers, but the market seems to be entering a period where that is just not enough. If AAPL is getting discounted for mediocre earning, shouldn’t LNKD be sold too? This may be the case.

From the macroeconomic prospective, the Citi US Macro Index has recently turned negative. This economic indicator has been a solid ‘tell’ for investors when trying to time the market. Should the economy start to contract, stocks like LNKD present an excellent selling opportunity…especially considering the stock was under $80 just about one year ago.  There are not many reasons to be long 700+ multiple names when stocks like AAPL are getting wacked to back below market multiples.

Consumers will naturally flock to the cheapest alternative at a given price. We are currently seeing this in AAPL, for consumption has shifted to similarly (sometimes cheaper) priced technology. Should LNKD start to charge for more items, the stock could take a hit based on lower performance metrics and that will be the start of its massive multiple unravel; similar to the NFLX top at $300. Existing sties may pick up the slack when they smell blood in the water and start to create a similar platform for professional networking. First to a market does not always mean instantaneous success

Remember, stocks take the escalator up, but the elevator down to reality. Just because a stock or company has a massive user base does not mean that it is of value – think AAPL, GRPN and ZNGA. Once these stories break, it will become exponentially harder to find ‘value.’ Retail investors and Wall Street alike love to pick bottoms. For example, AAPL seems to be a ‘value’ stock at $700, $600, and now sub $500. The future looks bright for LNKD and AAPL, but that does not mean the stock is a ‘perma-buy’ regardless of price.

salerno.mark.a@gmail.com