Market Buzz

While Friday’s session ended down, Canada’s main stock index rose sharply on the week, powered by four consecutive days of triple digit gains as firm commodity prices and what was trumpeted as new signs of a global economic recovery helped fuel a broad rally led by key energy players.

Once again, it does appear the rally has gotten ahead of itself particularly in reference to a report published this past Friday by Gluskin Sheff’s well regarded economist, David Rosenberg.

Rosenberg has done a little number crunching on the market “recovery” and concluded that on an operating basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows to stand at 27.6x. His research suggests, historically when the economy is taking the turn away from contraction towards expansion, which indeed was the case in Q3, the trailing P/E multiple is 15x or half what it is today.

It is interesting to note that the last time the multiple was this high was back in March 2002. Over the next several months, the S&P 500 proceeded to lose just under 35 per cent of its value. Yes, the macro environment today differs from that in 2002 as both interest rates and inflation remains lower. But overall, the rising multiples should not be ignored.

So, what should one do in this environment? Continue to look for companies with low multiples relative to their growth prospects. In fact, this past week our long-time clients were rewarded with a huge jump in the shares in one company from our Small-Cap Universe (www.keystocks.com) that has long possessed solid fundamentals.

The company, China Agritech, Inc. (CAGC:NASDAQ), a China-based manufacturer and distributor of liquid and granular organic compound fertilizer, saw its shares jump over 40 per cent on Friday after it announced it was increasing its annual net revenue and net income guidance for the year ended December 31, 2009.

The company is now expecting net revenue for the year 2009 to be as high as $70 million versus the previous guidance of over $60 million. The revised guidance for net income is approximately $12.5 million compared with the previous net income guidance of $9.5 million. Diluted earnings per share are now expected to approximate $1.88, based on the current average number of diluted shares outstanding. The new guidance represents almost a 55 per cent increase for net revenues and around a 45 per cent rise for net income over the year 2008 results.

Of note, I will be speaking at a Calgary Small-Cap Conference (www.smallcapconference.ca) this coming Thursday, October 15th, at 6:00pm at the Coast Plaza Hotel & Conference Centre and encourage our clients or other interested parties to register online and attend.

Looniversity – Paper Profits – Unrealized Gains & Losses

An unrealized loss occurs when a stock decreases after an investor buys it, but he or she has yet to sell it. If a large loss remains unrealized, the investor is often hoping the company’s fortunes will turn around and the stocks worth will increase past the price at which it was purchased. If the stock rose back above the original price, then the investor would have an unrealized gain for the time he or she still holds onto the stock.

For example, say you buy shares in ABC Company at $10 per share and then shortly afterwards, the stock’s price plummets to $3 per share, but you do not sell. At this point, you have an unrealized loss on this stock of $7 per share. Let’s say the company’s fortunes then shift and the share price soars to $18. Since you have still not sold the stock, you’d now have an unrealized gain of $8 per share.

Gains or losses are said to be “realized” when a stock is sold. This is especially important from a tax perspective as, in general, capital gains are taxed only when they are realized. Unrealized gains and losses are also commonly known as “paper” profits or a loss, which implies that the gain/loss is only real “on paper.”

Put it to Us?

Q. I recently placed an order through my discount broker and she asked whether or not my order was an “all or none” or “any part” order. I told her it was a “regular order” and we proceeded. Fill me in on what she was referring to.

– Anne Urchuck; Calgary, Alberta

A. Good question, Anne. An “all or none order” is one under which the trader is restricted to executing the total number of shares specified on the order at one time or none at all. For example, if your order is to purchase 1000 shares of Company XYZ at $1.00 and there are only 500 shares available at $1.00, you will not get a partial fill (500 shares). Many investors use this order to prevent the acceptance of partial fills and avoid paying multiple commissions on separate fills days.

An “any part order” is the opposite of an all or none order. Under this order, you agree to accept as much stock as can be obtained up to the full amount of your order.

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