Company name DragonWave, Inc.(USA)
Stock ticker DRWI
Live stock price [stckqut]DRWI[/stckqut]
Confident Investor Rating Poor

The following company description is from Google Finance: http://www.google.com/finance?q=drwi

DragonWave Inc. (DragonWave) is in the business of developing broadband wireless backhaul and pseudowire equipment. The Company is a provider of wireless Ethernet equipment used in Internet protocol (IP) networks. DragonWave designs, develops, markets and sells carrier-grade microwave radio frequency networking equipment (referred to as links), that wirelessly transmit broadband voice, video and other data between two points. Its wireless carrier-Ethernet links, which are based on a native Ethernet platform, function as a wireless extension to an existing fiber and global optic core telecommunications network. The principal application for its products is the backhaul function in a wireless communications network. Additional applications for its products include point-to-point transport applications in private networks, including municipal and enterprise applications. On February 7, 2011, DragonWave announced the introduction of its Horizon Compact+ product.

Confident Investor comments: At this price and at this time, I do not think that a Confident Investor can confidently invest in this stock. It is not possible to confidently invest in a company that is not currently profitable.

I don’t want to be accused of being Chicken Little and warning the sky is falling but we are entering a time when the market could go down dramatically.

As I write this, the US government is getting very close to not raising the debt ceiling. Most pundits expect that a compromise will eventually be reached and "Armageddon" will be averted. It appears that by Monday, August 1, 2011, this will be far from certain. By August 2, the markets will be a mess if the US government doesn’t have the money to pay bills. While it is possible that some stocks will do well in that scenario, the biggest likelihood is that the entire market will go flat or have a significant loss.

So what should a Confident Investor do in this situation?
The thing to remember is that cash is king! You will not lose money in the stock market if you are not in it. I wrote a popular article many months ago about the benefits of sitting on your money when you are concerned with the direction of the market. Here are my suggestions for August 1:

  • Sell every stock you own. Yes, that is extreme but it is the safest way to insulate your portfolio from government inaction.
  • If you don’t like that advice, if you have a profit in an individual stock, lock those profits in by at least selling your principle. If you want to leave your profit in the stock and put your principle back into the bank you will at least not lose your hard-earned money.
  • At least, cut your exposure to your largest investments by selling half of your investment.

Let’s examine the risks in this strategy
For this analysis let’s assume that you own 10 high-quality companies such as those found on the Watch List. Let’s assume that they are each $50 per share and you own 100 shares of each. To sell these 10 positions you will be out $100 (I am assuming you have chosen a broker that charges a reasonable fee for a transaction e.g. $10 or less)

  1. The market is flat and nothing happens. You buy back into your holdings at approximately the same price.  You are down $200 for a round-trip and a little piece of mind.
  2. The government doesn’t do a deal and the market appreciates slightly. I doubt this scenario will happen but there is a chance. On a typical good week, the market might go up a couple of points but since you have great stocks, maybe they go up 3% and you missed out. To buy back in you are out the $200 for your broker and 3% of $50,000 for a total of $1,700.
  3. If the market tanks by 15% (a very real possibility for the short term) and you buy back in at an average of 10% lower when you are confident that the worst is over then you have made money. In this case, you will buy 10% more stock for your 50K and since you are invested in great companies like on the Watch List, your stocks will eventually grow back to their present value and you will have made $5,000 (minus the $200 for the broker so a net of $4,800) off of this government screw-up.
  4. If the market thinks this Armageddon is not a big deal and only drops a paltry 3-5% then you will essentially break even since you will wait a week or so and much of the 5% will recover to maybe a 2% loss when you rejoin. This means you will buy back in for a net of about $800 which is essentially covering your costs and headache of managing your portfolio so closely.

When was the last time you were extremely confident that you were at a short-term high price and the stock was going to drop significantly? Be cautious on Monday and make money. If number 3 above happens, you would have an approximately 10% increase in the size of your portfolio just by doing some solid money management.

Why should you wait until Monday?
To be honest, if you have a lot of profit on a stock then maybe you shouldn’t. No reason to get greedy. Sell your holdings now if you are very concerned and think there is little chance of a deal. However, if the US government puts together a solid plan over the weekend when their backs are against the wall then the market may reward them. A good deal that gets wrapped up on Sunday could see a several point move early in the week. I would hate to see you miss that move by being too cautious. If you are scared though, I cannot blame you from moving on Friday.

Also, any deal on Monday is likely to not be very compelling. It might avert a debt ceiling but it likely will not harbor great changes in ways to avert the problem in the next year. This means that a deal on Monday will probably not make the market move up greatly. Only a deal during the weekend will be complete and tough enough to make the market move.

Mutual fund strategy
If you own a mutual fund, your options are far more limited. By buying a fund you are relying on a smart manager to take care of your money. The problem is that manager cannot react too rapidly to this situation due to the large amount of invested capital. Selling a large chunk of shares in any one company is difficult for a fund manager as it causes a market reaction and the price of the stock drops. Also, since your fund selling is not transacted until the end of the trading day, Monday may be too late.  If you want to reduce the exposure in your stock based mutual fund then you may need to do your selling on Friday.

Other options
I do not recommend to any Confident Investor that they short a stock, but if you are so inclined then this may be an excellent time to evaluate this strategy.

Some investments may appreciate so you might want to take a risk. I would avoid any companies that get a lot of money from government or are very cyclical (think defense contractors, oil companies, transportation companies, and farm management companies). You may also want to avoid companies that make a product that the government buys (think construction equipment, big construction companies, etc.). Also, if interest rates rise dramatically then any company that needs to borrow cash on a regular basis or does not have a lot of cash in the bank should be avoided. Companies that do well when the US government is screwed up MAY take a quick uptick though (think gold).

Warning
With all of this, there may be tax consequences. If you are concerned about the tax consequences of your move, I suggest you approach a tax adviser.

Company name Dover Corporation
Stock ticker DOV
Live stock price [stckqut]DOV[/stckqut]
P/E compared to competitors Good
MANAGEMENT EXECUTION
Employee productivity Poor
Sales growth Good
EPS growth Good
P/E growth Poor
EBIT growth Good
ANALYSIS
Confident Investor Rating Fair
Target stock price (TWCA growth scenario) $92.42
Target stock price (averages with growth) $117.39
Target stock price (averages with no growth) $89.6
Target stock price (manual assumptions) $88.24

The following company description is from Google Finance: http://www.google.com/finance?q=dov

Dover Corporation (Dover) owns and operates a global portfolio of manufacturing companies providing components and equipment, specialty systems and support services for a variety of applications in the industrial products, engineered systems, fluid management and electronic technologies markets. The Company operates in four business segments: Industrial Products, Engineered Systems, Fluid Management and Electronic Technologies. The products designed, manufactured, assembled and/or serviced by the Company includes material handling equipment, mobile equipment related products, engineered products, product identification related products, energy market production and distribution products, fluid solution products, and electronic technology equipment and devices/components. In July 2011, it acquired Sound Solutions from NXP Semiconductors N.V.

Confident Investor comments: This company has had a very nice appreciation over the past year. At this time, I think that a Confident Investor can cautiously invest in this stock as long as the price is correct. Most of the fundamentals of this company are good but there are some concerns.

Apple [stckqut]aapl[/stckqut] has come under a great deal of discussion in the past week or so due to it’s ever expanding hoard of cash. Most companies hate having that much cash in the bank (or perhaps they are not fortunate enough to accumulate it) but Apple seems to really enjoy having a big savings account.

Since all the other bloggers that discuss companies and investing seem to have chimed into this conversation, I have to decided to do it as well.  Here are my suggestions:

  1. Use the cash like they have been. Apple uses its cash very effectively and very aggressively. As pointed out in PC Magazine, Apple effectively uses its cash to gain a technical advantage by locking up its supplier community in ways that their computer and device competitors such as Toshiba, Dell [stckqut]dell[/stckqut], and Hewlett Packard [stckqut]hpq[/stckqut] simply cannot afford to do. They are able to help manufacturers build their plants to create new components and lock in a pricing and supply chain that virtually locks out or delays the competition from the latest and greatest hardware advances. This competitive advantage means that they can continue to create large amounts of profit and build more cash.
  2. Increase R&D and rapidly expand their products with things that people want. Last year, Apple spent about 2.7% of revenue on R&D (and last year about 3.1%). I would like to see this grow to 7 or 8% of revenue. Yes, this is a big increase but Apple has a unique opportunity to solidify their presence in the markets that are important to them. Think what would happen if Apple had twice as many products that covered a broader spectrum of electronic experience.
  3. Increase their library. They should vastly increase their library of movies and video content to stream.  While they shouldn’t be stupid about the deals that they cut but they need to make deals with every movie and TV content holder out there. The consumer needs to feel that if they want to watch a professionally created video, Apple will always have the content. Making a ton of money in this area is not incredibly important (but don’t do it at a loss). What is more important is that they use this content to drive the sales of more multimedia devices and computers. While they are at it, they need to cut deals with the newspapers and magazines as well. Apple has had some short-sighted rules that have prevented the allegiance of those that create printed material – they need to put these rules aside.
  4. Streaming. They should make it so that they can stream to their subscribers more easily and more reliably than ANYONE else.  Supposedly they are investing in more data centers and that is a project that should be accelerated and expanded. Also, there are rumors of acquisition discussions with Hulu, this would be an acquisition that makes sense as it fits with their core offering today. Some commentators suggest that they should diversify by buying a company like Facebook but that would be ill-advised. Most companies that try to expand into vaguely related markets end up screwing up (think of EBay [stckqut]ebay[/stckqut] buying Skype).
  5. Integration with the cloud. They should make it so that integration between their products on your local network and between their products and the cloud is seamless and easy – in fact even fun.  Lion looks like it has great features in this area but they should take it to a new level. They would do well to expand that connectivity by putting a Windows application out there that makes Windows computers integrate easily and rapidly with Macs/iPhones/iPads. This doesn’t mean iTunes but instead iTunes on steroids – no cords – use the cloud, the private cloud, and the local connectivity connection of the computers.Read More →

Company name Cabot Oil & Gas Corporation
Stock ticker COG
Live stock price [stckqut]COG[/stckqut]
P/E compared to competitors Good
MANAGEMENT EXECUTION
Employee productivity Good
Sales growth Poor
EPS growth Poor
P/E growth Poor
EBIT growth Fair
ANALYSIS
Confident Investor Rating Poor
Target stock price (TWCA growth scenario) $64.66
Target stock price (averages with growth) $87.46
Target stock price (averages with no growth) $59.37
Target stock price (manual assumptions) $96.4

The following company description is from Google Finance: http://www.google.com/finance?q=cog

Cabot Oil & Gas Corporation is an independent oil and gas company engaged in the development, exploitation and exploration of oil and gas properties located in the United States. During the year ended December 31, 2010, it produced 130.6 billions of cubic feet equivalent, or 357.9 millions of cubic feet equivalent per day. During 2010, oil production was 808 thousand barrels. During 2010, it drilled 113 gross wells. During 2010, it sold various properties. In December 2010, the Company sold Pennsylvania gathering infrastructure of approximately 75 miles of pipeline and two compressor stations to Williams Field Services (Williams), a subsidiary of Williams Partners L.P. In November 2010, the Company sold certain oil and gas properties in the Texas panhandle to Kimbrel Oil Corporation and Millbrae Energy VII, LLC. In July 2010, it sold its properties in the Paradox Basin in Colorado. In June 2010, it sold its Woodford shale prospect located in Oklahoma.

Confident Investor comments: This stock price has done very well over the last year. You probably should consider this to be an aggressive or speculative investment and the growth of the stock price will make many people interested in this stock. At this price and at this time, I do not think that a Confident Investor can confidently invest in this stock.