Betting on a Small Cap With Big Potential

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Global stock markets corrected last week, with the Dow Jones down 1.28%, the S&P 500 falling 1.26% and the NASDAQ tumbling 2.67%. The MCSI Emerging Markets Index held its own better than U.S markets by falling only 0.43%.

Big gainers in your Bull Market Alert portfolio included United States Oil (USO), which climbed 5.02%, breaking out to the upside, and the iShares MSCI Ireland Capped (EIRL), which rose 1.60%. Raise your stop in United States Oil (USO) to $10.95 to lock in at least a 10% gain in the position.

You were stopped out of Domino’s Pizza, Inc. (DPZ) at a loss on April 28, when the position opened below its stop price on a disappointing earnings report.

Your position in The TJX Companies, Inc. (TJX) fell below its 50-day moving average and moved to a HOLD.

With May upon us, we are now entering what traditionally has been the toughest time of the year. The statistics are pretty clear on this. For the last 50 years, nearly all of the S&P 500’s gains have happened between October and April. The mean return from May to October was 1.3%. From November to April, however, the market has returned 7.1%, on average.  And with earnings declining in the S&P 500 for the sixth quarter in a row, it’s getting harder to imagine that the S&P 500 is set to do much more in the coming months.

So it is very much a stock picker’s market. This week’s Bull Market Alert recommendation, Healthcare Services Group, Inc. (HCSG), is an example of this.

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Small-cap stock HCSG is in a very unsexy business, as it provides housekeeping, laundry, linen, facility maintenance and dietary service departments to nursing homes, retirement complexes, rehabilitation centers and hospitals in the United States.

Here’s why I expect the stock to continue its strong recent run.

On April 13, the HCSG announced strong earnings for Q1, with earnings increasing 18% year over year — in stark contrast to most large-cap companies. HCSG’s bottom-line growth was driven by a strong increase in revenues, supported by a whopping 70% market share in its sector. The company’s board of directors also declared a quarterly cash dividend of $0.1825 per common share — the 52nd consecutive quarterly cash dividend payment, as well as the 51st consecutive increase since its initiation of quarterly cash dividend payments in 2003.

From a technical standpoint, the stock also is strongly outperforming the market, rising 8.55% in year to date, compared with the S&P 500’s gain of 1.05%. The stock also gained 2.52% last week, even as the broader market pulled back.

Finally, HCSG is held by no fewer than 12 small-cap investment strategies focused on factors as wide ranging as growth, low volatility and momentum. In short, there’s a lot of smart money that is betting on this stock

So buy Healthcare Services Group, Inc. (HCSG) at market today, and place your stop at $32.00.

I’m going to hold off on recommending options on this one until the stock’s next pull back.

Portfolio Update

United States Oil (USO) climbed 5.02% last week as it continued to hit new 2016 highs over the past three trading sessions. The U.S. oil rig count continued to tighten last week, falling by another 11 rigs. JPMorgan also pushed its forecast for 2017 Brent crude prices upwards, moving from $47.75 to $52.00. USO remains a BUY.

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iShares MSCI Emerging Markets (EEM) stayed relatively flat last week, dipping just 0.43% despite high trading volumes of near 50 million shares. Sentiment remains bullish for this trade as a weakening dollar and strengthening commodity prices continue to help push this exchange-traded fund (ETF) higher. EEM is a BUY.

iShares MSCI Ireland Capped (EIRL) rose 1.60%. Your bet on Ireland stands just above its 200-day moving average (MA). EIRL moved above this line one month ago and has traded above it ever since, standing as a good sign of strength with a bias to move higher. EIRL is a BUY.

The TJX Companies, Inc. (TJX) dipped 0.93%. TJX is well-supported by analysts’ ratings, as 18 analysts cover the stock. Thirteen analysts rate TJX as a “Strong Buy,” one analyst as a “Moderate Buy,” four analysts at “Hold” and TheStreet Ratings has an “A+” set for the stock. TJX did dip below the 50-day MA last Friday to move to a HOLD in the Bull Market Alert portfolio.

Sociedad Química y Minera de Chile S.A. (SQM) fell 4.05%. Recall that I mentioned the impact of Tesla Motors’ (TSLA) automobile battery production on the lithium industry in my SQM recommendation. In addition, Tesla will also increase current production levels of its seven kilowatt in-home battery pack this year — and the impact should be huge. Tesla expects its 2016 sales to beat the sales figures of the entire 2015 energy storage system market. SQM is a BUY.

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Nicholas Vardy

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