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Betting with Bernanke on the Dollar

By Michael Carr   |   Friday, 15 Aug 2008 09:09 AM

Federal Reserve Chairman Ben Bernanke has been talking up the dollar lately by saying that the Fed would be working with the Treasury Department to "carefully monitor" currency markets. That's prompted speculation among currency traders that the United States would lead an orchestrated intervention to increase the value of the beaten-down dollar.

Bernanke's comments echoed earlier statements from Treasury Secretary Henry Paulson that he was "committed to promoting policies that ... ensure that the dollar remains the world's reserve currency."

Recent currency market action indicates that their efforts may be starting to have results, and the dollar has begun moving higher after declining for more than five years.

For this week's investment screen, I studied stock market performance at other dollar bottoms and identified characteristics of the best performing stocks during those times:

  • Tech stocks stood out. Information technology and healthcare companies dominated the list of winning stocks.

  • Speculative stocks did the best as dollars flooded the market. This is probably because as foreign investors buy dollars they seek high returns by chasing growth stocks. Therefore, we limited the screen to stocks with a P/E ratio above the fair-market value of 25 and a smaller-than-average market cap.

  • Investors favored growth stocks, rewarding those with the fastest sales growth. The specific criteria I used identify stocks with sales growing faster than the market average.

    This screen found seven low-priced stocks that only aggressive investors should consider:

    American Caresource Holdings (XSI) provides outpatient services at more than 25,000 locations. This fast growing company saw revenue grow by more than 200 percent in its most recent quarter. It was added to the Russell Microcap index, and insiders have been buying the stock, adding to their already sizable 40 percent stake. Its recent price of 5.50 makes this a strong candidate for increased institutional buying.

    Commtouch Software (CTCH) makes computer security software designed to stop problems associated with email, probably the weakest link in corporate network security. At a recent price of 3.20, the stock is more than 50 percent off its 52-week highs. Ignoring the fact that it is in a growth industry with a 38 percent return on equity, CTCH is among the highest in its industry.

    Dynasil Corp. of America (DYSL) has grown earnings by more than 50 percent a year over the past five years, yet the stock is still too small to have attracted much notice in the marketplace. Among the company's products is the equipment used to measure the sun protection factor in sunscreens. Recently priced at 2.35, DYSL has a P/E ratio of only 25, about half its historic growth rate.

    Henry Bros. Electronics (HBE) recently partnered with defense industry giant L-3 Communications on a 3-year contract worth more than $327 million. Priced at 5.60 recently, the stock trades at 12 times this year's projected earnings. The stability of the defense contract revenue provides ample opportunity for long-term growth.

    Power-Save Energy Company (PWSV) is in the renewable energy and energy-saving products industry, a sector likely to grow for years to come. Recently trading at 2.64, PWSV has been profitable over the past 12 months and has a net profit margin of 9 percent. The presence of profits make PWSV a fairly conservative approach to investing in the greening of America.

    SourceForge (LNUX) is a former Internet high flier that once traded for 250 a share. Now priced near 1.34 a share, analysts see steady earnings growth of 15 percent a year and expect the share price to double over the next year.

    Trio-Tech International (TRT) The largest holder of this semiconductor company is Al Frank Management. Frank publishes The Prudent Speculator newsletter which, according to The Hulbert Financial Digest, has been the top-ranked performer over the past 15-, 20- and 25-year periods. Frank probably likes the 70 percent annualized growth rate over the past five years. Recent price: 5.23.

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    MichaelCarr
    Federal Reserve Chairman Ben Bernanke has been talking up the dollar lately by saying that the Fed would be working with the Treasury Department to "carefully monitor" currency markets. That's prompted speculation among currency traders that the United States would lead an...
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    2008-09-15
     

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