Tuesday, February 19, 2008

Presidential Hangover

Having trouble recovering from the three-day presidential birthday celebration? Take heart because you are not alone. Nearly every investor across the country is smarting, but it is not from too much birthday bubbly. It is the dismal showing of retail sales that has us reaching for the Tums.

Yes, retail sales have increased, but that is only because inflationary pressures are driving prices of necessities upward. Estimates suggest that U.S. consumers are spending as much as 13% more on food and energy than a year ago. Those who drive a car know the situation well because gasoline prices are up over 20%.

This year the big sales that typify the President’s Day holiday were driven more out of sense of tradition than business strategy. Merchants often put on flamboyant sales pitches for the Monday holiday from work. With sales down between 2% and 3% at department stores and down 5% at computer stores, even major discounts may not bring in buyers.

For an economy that is driven largely by consumers, this is just not very good news. It is looking more an more like a second half 2008 recovery is unlikely. Indeed, there are all the signs of stagflation - slow or no growth along with rising prices. I would be delighted to be proven wrong.

In the meantime, small-cap investors need to get defensive. Crystal Equity Research just published the February 2008 issue of Small Cap SEARCH, a newsletter offering three new small-cap stock ideas each month. This month features three ideas from the health care industry, a sector largely viewed as recession resistant: clinical trial automation, medical medical records automation and home health care. All three embody the kind of cost-saving or efficiency creating services or products that we believe can save the health care industry from the waste and poor service that has come to characterize modern healthcare systems.

The SEARCH newsletter also reviews previous picks. The worrisome drop in value of some stocks in the SEARCH portfolio means our dollar is essentially dead unless there is a potential for speedy or dramatic recovery. Since we had long since weeded out names that would fare poorly in a recessionary market, the next thing to look at is a situation of stagflation. This month’s issue includes a look at the original investment thesis and a review of the trading guide provided for each stock. If there is any positive fundamental movement development, staying the course appears to be a better choice that locking in losses. Nonetheless, if there are identifiable factors that could impede a stock price recovery - such as a class action lawsuit - that could spook investors, we suggest cutting losses and moving on.

Sign up for a free, three-month trial of Small Cap SEARCH but visiting the Crystal Equity Research web site.

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