The Crisis Indicator: Which countries are at risk?

Every investor dreams of making that one big financial hit which sends him right into luxurious retirement. The quickest way to do so is by shorting a financial crisis, but how to recognize impending economic breakdowns? A study by the European Central Bank in 2012 distinguishes 6 major indicators which are likely to predict financial turmoil. These are 1) domestic credit to the private sector, 2) increase of government debt, 3) current account deficit, 4) Foreign Direct Investment (FDI) Inflow, 5) a fall in housing prices and 6) a fall in stock prices. They distinguish domestic credit to the private sector as he key indicator for financial crises. The other indicators are very short-term indicators and may come too late such as the fall in stock prices, which is what you want to play into in advance. So let's take a deeper look into the domestic credit indicator.

The main advantage of the domestic credit indicator is that it can predict crisis almost four years in advance, whereas the other indicators are very short-term indicators. So let's see which countries have seen a slump in domestic credit to the private sector (as % of GDP) in the past years and which countries saw some growth. It should be noted that every mentioned country had a stable trend where year on year growth was either always positive (table 1) or always negative (table 2).

 

As you can clearly see, it's Europe that is in danger. Other regions seem to do just well. Let's take a deeper look to those countries that experienced more than a negative 20% change. Two indicators, high Debt-to-GDP and high FDI inflow indicate crises will be more severe. The table below shows scores for these indicators and shows Ireland is in major danger of severe crisis.

So, we've established Ireland as a potential danger. For completeness sake let's also take a look at the Irish housing market and stock market development. The housing market seems to be rising in Ireland, with a 7.4% change year on year during the first quarter of 2016. The Irish ISEQ Index marks -9.88% Year-To-Date, which can be somewhat troubling. However, over the last 5 years the index has seen a significant rise. 

In conclusion, we've been looking at crisis indicators and Ireland is one of the most vulnerable for a financial crisis. The most important indicator, domestic credit to the private sector, looks very troubling. Also, debt-to-GDP and FDI inflow are worrying aspects for Ireland. There is also some light for Ireland, as the housing market is quickly recovering. Still, the danger for a financial crisis in Ireland looms.

The TomTom Opportunity

TomTom is desperately trying to overcome its major problem: market saturation. Initially TomTom stock soared sky high up to €64, but when sales fell down, simply because everyone who wanted a navigation system already bought one, the stock collapsed below €3. Today, the stock is on the way to recovery as it is trading at €8.65.

So, what is it that makes TomTom stock interesting? First of all, the short-term technicals are looking great. TomTom stock is showing an uptrend with higher bottoms and higher tops, indicating the trend is likely to continue on the short term. Second, TomTom's yearly revenues have increased for the first time since 2010, which might indicate a turning point and therefore it could be a great entry moment while the stock price is still cheap. A third reason why TomTom is now an interesting investment again is their change of business strategy. TomTom is switching focus from single navigation system unit sales towards big contracts with car manufacturers, such as Jeep and BMW, to sell built-in navigation systems. Also, TomTom now has deals with Apple and Uber for selling digital maps. Finally, TomTom has all characteristics for a typical take-over target: a large client base, profits, expertise and a cheap stock price. So if you like to gamble on a takeover, you may want to consider TomTom.

Of course, there is no such thing as a free lunch, so let's also take a look at the risks of this stock. One of the biggest problems for TomTom might be Google. Google is gaining users of Google Maps simply because it's free and every Android user gets Google Maps for free. This is further harming TomTom's single unit sales and hence there is little chance of recovery for TomTom in this market segment. Then there is also the case of the insane P/E ratio of 115.97. The rules of thumb concerning P/E tell us that high P/E ratio's indicate either the stock is overpriced or high expected growth. Since the forward P/E ratio is lower, it is more likely the case that the market expects high growth (as earnings should be higher in the future, which lowers P/E ratio). Nevertheless, one should be aware of the risk of failing to realize that growth. Finally, there is also the possibility of global recession, which could significantly harm car sales and in effect also TomTom sales. On the other hand, US car sales are at the highest point in 10 years, hence the fear of recession could be exaggerated.

Weighing all the pros and cons, we think it is a great moment to enter in TomTom stock. The new business plan should increase revenues and profit over the coming years. Buy it while it is still cheap!

The Twitter Fatality

Twitter's fourth quarter results should set off the alarm bells, so if you are proud owner of Twitter stock, you may want to reconsider your investment choices.The number of active users remained at the same level as in the third quarter, bringing Twitter's main problem to the surface. Without new active users it is hard for Twitter to realize higher revenues through advertising. Now, it seems the time of easy growth is over and bigger investments will need to be made to make the user base grow, but this is costly. Also, since Twitter is a fairly focused company, it will be hard for Twitter to grow when their current market becomes (or is) saturated. As we've seen with multiple tech companies, once the market is saturated, stocks tend to plummet (e.g. TomTom). Moreover, it is historical fact that total advertisement income declines in times of a recession. The possibility of a new recession in the United States could therefore put another strain on Twitter's performance.
Let's take the simple investing rule of thumb into account that: 1) You don't want to buy unless the stock is going up, and 2) You don't want to sell unless the stock is going down. Since Twitter stock has lower tops and lower bottoms, this one is definitely going down. The second rule of thumb goes nicely along with our idea of Twitter being a bad investment. Sell or go short, don't keep this stock.

Stock Smash Performance Review & Outlook 2016

Since the launch of Stock Smash in September 2014 a lot of stocks have been discussed, but how well is our advise? The Stock Smash portfolio gained a return of 5.93% since our start, whereas the S&P500 realized a return of -2.93%, which means we outperformed the market by 8.86%.

Top 5 trades*:

1. Short Imtech:   +84.62%
2. Short GoPro:    +84.26%
3. Long Huawei:   +53.34%
4. Short Twitter:   +53.26%
5. Long Nike:       +37.82%

Worst 5 trades*:

1. Short Amazon:       -92.65%
2. Long Alcoa:           -50.65%
3. Long Tata Motors:  -40.40%
4. Long Shell:            -36.22%
5. Short Facebook:     -35.28%

Our short positions on Imtech and GoPro have been a particular highlight. On the other hand, going short on Amazon cost us dearly. Yet, as we gained a positive overall return and outperformed the market, we are fairly satisfied with our stock advices.

Outlook 2016
We become more conservative concerning stocks for 2016. Higher volatility in the markets and growing concerns about global economic growth can severely harm stocks in 2016. Yet, we also believe that this might also create golden opportunities for stock picking, so we won't write off stocks as a whole. Furthermore, we believe Europe still creates enough opportunities to keep investing in this region due to economic recovery and expected stimuli by the ECB. Due to the recent downfall in stocks in Emerging Markets we keep an eye on entry moments, because economic indicators in for example India are still on point. We also continue to look for other investment opportunities such as sugar and real estate. 
 
*Based on 12 January 2016.

Canadian Solar Inc.

Canadian Solar Inc. a manufacturer of solar cells and other solar related products, experienced a turbulent 2015 with stock prices ranging from $16 to $39. 2016 starts no less turbulent as Canadian Solar lost 20% of its value over the past 5 days. It is not just Canadian Solar that experiences a downfall in stock price, but rather it's the whole solar power industry that tumbles. One of the two major reasons is the current oil crash. When oil becomes cheaper, the solar industry loses its competitive edge since there is less incentive to innovate for financial reasons. Consequently, people will generally postpone solar power related acquisitions. The other reason is fear of China. Slowdown in the Chinese economy, which is the largest buyer of solar related goods, may cause a fall in demand of solar cells and could put profit margins under pressure.
Yet, the fundamentals remain strong for Canadian Solar. Net income and earnings per share have increased outstandingly over the recent years and with a Price/Earnings ratio of 4.97 the stock price is very attractive at the moment. It seems that due to the current downfall in stock price, the market has already accounted for worse sales in quarter one, but the correction may have been too strong as sales in markets as US and Saudi-Arabia are gaining momentum. Moreover, fear of China could be exaggerated, because the need to reduce pollution in China will remain. Besides, the Chinese government has always been stimulating their economy and will likely try to turn the tide by stimulating even further. This is another reason why solar cell demand does not necessarily have too fall as much as the market anticipates.
United States regulation could further boost Canadian Solar performance, as the US extended subsidies on solar projects to 2017.  Moreover, industry experts expect the US market for solar products to triple from 2015 to 2020.
In conclusion, the current oil price crash that caused solar stocks to plummet creates a great entry moment for the solar market.  Furthermore, looking at fundamentals of Canadian Solar, this firm looks like a raw pearl within this industry. Strong buy for the long term.