GeoTeam's Short-Term Trading Strategy Review

A short-term trading position established by the GeoTeam is often prompted by one or the combination of

• A strong earnings report
• Other significant company news
• Technical upside price break out
• Uncertainty in sector sentiment leading to unwillingness for us to make long-term commitments. (This a strategy we are actively applying with our ChinaHybrid positions as the cleansing process for the this space evolves).

These stocks will generally be ones that we believe may have a shot at earning a longer term position in our portfolios after further due diligence is completed, as was the case with Versar (NYSE AMEX:VSR). (These companies may turn into a GeoBargains or GeoSpecials). Central to our strategy is choosing stocks that we may not mind holding if the trades do not immediately work out.

Sometimes we just need to take positions and ask questions later, especially during the busy earnings season. These stocks should not be confused with day trading decisions that we plan to sell by the end of the trading day.

Of course, we may sell:

• After further due diligence does not confirm our initial optimism.
• Due to portfolio rebalancing
• Due to changing market conditions

The following are some short-term trading positions that have not yet to panned out. All were prompted by the release of strong EPS results that exceeded analyst estimates.

Rpc (NYSE:RES)

On October 27, 2010, we took a short-term trading position in RES @ $24.72 ($16.48 split adjusted) 

• Beat analyst estimates
• Has a great one year chart
  
  
  
  
• Demand for its products should increase as the U.S. economy improves
• 2011 EPS is expected to grow over 50%
• Analyst estimates indicate that EPS is expected to grow at least 70% for the next three quarters.
• Has a P/E of 10.3 on 2011 EPS estimate of $2.21
• Announced a 3 for 2 stock split
• Increases dividend

The stock has pulled back since the release of earnings on October 27, 2010. We are willing to hang on a little bit longer. We believe the news of the stock split will give the stock some support. We have added to our position at lower prices.

Spansion Inc Shares - A (NYSE:CODE)

We took a short-term trading position in Spansion on October 27, 2010 @ 18.90.

• Crushed third quarter analyst EPS estimates
• Issued fourth quarter EPS guidance of $0.53 to $0.77 compared to analyst estimates of $0.45.
• Recently emerged from chapter 11 bankruptcy

The stock has pulled back since our trade alert was announced. As luck would have it, one day later, the company announced a secondary offering of up to 7,762,500 shares.

We think the fall in the price is an over reaction to the news of the offering:

• This is old news from September 17, 2010.
• The pricing of the offering was strong at virtually no discount to the market price.
• Leads to about 13% dilution, but EPS guidance has already been issued.
• Selling at a P/E of only 10.29 on EPS 2011 estimates of $1.70.

We will hold this position a little longer, but weak 2011 analyst estimates calling for negative EPS growth may force us to exit this position sooner rather than later. We need to keep in mind that the company has been exceeding estimates. We have also had great success investing in companies that emerged from chapter 11 bankruptcy.

Lojack (NASDAQ:LOJN)

On October 27, 2010 we established a short-term trading position in LOJN @ 5.10:

• Crushed analyst estimates that called for a loss.
• Cost structure has stabilized

"Our aggressive steps to control expenses had a dramatic impact on our underlying cost structure and we are confident that our operating expenses are now at an appropriate level to allow us to invest in our business and drive profitable revenue growth in the future."

• We believe 2011 analyst EPS estimates of $0.54 have upside as the auto sector rebounds.

"we expect our domestic business to follow the expected gradual recovery of the overall auto market in the U.S."

We plan to hold this position; our price target is $6.40 or 15 times tax adjusted analysts EPS estimates of $0.43. Please note that visibility for this company can be volatile.

Rockey Brands (NASDAQ:RCKY)

On October 22, 2010 we established a short-term trading position in RCKY @ $8.75

• Easily eclipses third quarter analyst EPS estimates
• Best quarter in sixteen quarters
• Selling at a meager P/E of 8.1 times 2011 analyst EPS estimates of $1.07
• Interest expense savings

"We also recently secured a new credit facility that will further reduce our interest expense approximately $2 million next year and free up capital to expand our business."

Will keep this position with a price target of $12.00, which is the midpoint of our conservative and aggressive target. P/E expansion may be limited due to quarterly lumpiness in EPS.

Green Plains Renwbl Energy (NASDAQ:GPRE)

On October 22, 2010 we established a short-term trading position in GPRE $12.49.

• Crushes analyst EPS estimates
  

We got a little greedy with this one. After a quick pop to $13.60, momentum was quickly reversed when a few days later the company announced the completion of a convertible debt offering. We still believe that the market overreacted to the offering, since the conversion price of $14.33 was set at a premium to market prices and will result in minimal dilution. Still, the company has been a dilution machine and the next two quarters will be challenging from an EPS growth standpoint. We will be seeking to unwind this position soon.

We took losses in China North East Holdings (NYSE AMEX:NEP) and China Marine Food (NYSE AMEX:CMFO) short-term trades. We thought that NEP was about to make a second leg up after it broke through $8.00. Although NEP has a low P/E, 2011 EPS estimates are calling for negative growth. CMFO was looking strong, but we decided to take a small loss after analysts lowered the near-term EPS outlook. CMFO is also dealing with fraud insinuations.

On October 26, 2010 we established a speculative option position in Orient Paper Inc (NYSE AMEX:ONP) calls @ $1.35 (February $5.00 strike), as we await the status of an independent Audit investigation. If positive, the stock should make an impressive move. If the news is bad, we have limited our exposure with options, as compared to buying the stock outright.

We are still performing due diligence on UFI and DTLK, but our initial read is that these holdings will gradually pan out with limited downside. With a P/E of 9.8 on 2011 analyst EPS estimates of $0.43, DTLK has a good shot at becoming a GeoBargain.

Disclosure: At time of this article, Long all securities mentioned except NEP and CMFO

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