Looking for the Sweet Spot in Potential New Long and Short Ideas

Every minute there is a new piece of information coming to light in the stock market, and every minute the picture changes. Most of it is just noise, perhaps amplified by programs chasing patterns or slow-moving bureaucratic investment committees. Somewhere in between is the sweet spot, and this is what the Ascendere Long/Short Model Portfolio attempts to capture.

We have found that a monthly rebalancing of updated long and short stock idea works best for us -- slow enough to ignore noise and, if the results are any indication, fast enough to act before most other institutions can act on these key pieces of information.

For example, the long model portfolio is up 92.1% since "inception" on 12/31/2004 and the short portfolio has declined 35.9%. Putting these two portfolios together in a market neutral portfolio would have generated a 141.95 return, and combined a simple dynamic long/short portfolio using 2-to-1 leverage has returned 204%. This compares to the S&P decline of 6.04% over that same period. Real or not, we find it a compelling way to look at stocks.

At the risk of picking up some intra-month noise for the potential reward of finding a good idea a little bit quicker than waiting for the end of the month, we thought we would share this update. Perhaps it may also shed some light as to how we go about deciding how to focus our energies on generating deeper research on companies like McKesson, Starbucks or Joy Global. As always, stocks should only be purchased after a detailed analysis of the underlying story. This is because simple fundamental factor models can communicate a lot of good solid information, but there is usually something missing. It is up to you as the investor to dig deeper and decide for yourself what that is.

New long ideas that look potentially attractive as of March 5 include GPS, AZO, TJX, FDO, SJR, NFLX, LTD, THI, DLM, CM, BNS, WCRX, IRM, SNDK, SAY and UFS.

New short or contrarian long ideas that may be worth taking a look at include HBI, FO, WPPGY, TRI, LUX, TM, DAI, TLM, NDAQ, AXA, UDR, HST, STI, DRE, GOLD, GNA, SMS, BT.

Of particular interest on the long side is LTD, THI, CMI, WCRX, SNDK and UFS. Of reluctant particular interest on the short side is FO, LUX, UDR, DRE and SMS.

To narrow it down even further, we think SanDisk Corp. (SNDK) and Limited Brands Inc. (LTD) look extremely promising. All the metrics are going the right way for these two companies. We understand the basic positive story behind flash memory and handheld devices. As long as ROIC and earnings accelerate, a further move could be justified though we would hate to be wrong on this volatile stock. We know that LTD has been working hard for several years to cut costs so maybe it could especially benefit if this resurgence in retail stocks sustains itself. We should study these further.

It does not seem the best time to short stocks right now, especially cyclical companies with strong balance sheets like SMS, but they are on the list so deserve a look. Of these five, we need to understand why Luxottica Group Spa (LUX) is trading at such a high multiple while operating momentum might be waning and analyst estimates have recently moved lower.