May 2014: Monthly Stock Selections

One of the remarkable features of the PE Gap approach is its flexibility. While the
formula for calculating the PE Gap is absolute, the types of stocks one can categorize
changes frequently.
Its rather 3 dimensional and this month we have some interesting and I believe
exciting selections to find our value in this market. And maybe even ... weird selections
(there, I said it).
Stick with this report and I'll explain: While it would be easy to take a pause this month
as the sell in May cliche comes in to play we are going to be resolute in our following of
the model.
As of today:
The Federal Reserve "did no harm"
ADP Employment for April beat expectations (we'll see if the actual government
jobs report does, as well)
GDP for the 1st Quarter is essentially being ignored.
It could very well be that, much like our late-arriving spring, the usual April rally may be
postponed into ... May? There are plenty of gains to be had and given the magnitude of
those believing the sell in May cliche the likely outcome is exactly the opposite: stock
prices going higher.
The key as always will be to find the right stocks and we have done that here.
The five selections this month offer a mix of traditional value combined with just the right
amount of growth to propel these picks higher. As always, we will have our triggers on
all of the picks giving us a ceiling and a floor.
A reminder to all members: Ill monitor all trades for you based on our Profit and Loss
Triggers. If a trigger is about to be hit, and you need to take a specific action, I will give
you the appropriate analysis and provide instructions.


PE Gap Training Example and PE Gaps for May Stock Selections
Example: Nabors Industries (NBR)
To calculate the PE Gap, you need three numbers:
Current Stock Price
Current Years Earnings Estimate
Next Years Earnings Estimate

Snapshot here taken from Yahoo! Finance:

Lets do the quick math:
Wednesdays closing price: $25.52
Earnings Estimates:
2014: $1.13
2015: $1.84
Lets do Price to Earnings first:
Divide the Price [$25.52] by Current Year Earnings Estimates [$1.13] = 22.5
PE Ratio = 23



Next, divide Next Years Earnings Estimates [$1.84] by Current Years Earnings
Estimates [$1.13] = 1.63
Note: to get the correct Earnings Growth Rate as a percentage, you subtract 1 from the
result of your division; in this case subtracting 1 from the 1.63 leaves you with a 63%
growth rate.
Now we have our Earnings Growth Rate = 63
Our next and final step is to subtract the Earnings Growth Rate from the PE Ratio to get
our PE Gap:
[23] [63] = -40
The PE Gap is NEGATIVE, which means we have an undervalued company and a
buying opportunity.
Next up is a complete PE Gap Assessment of all of our stock selections for the month of
April this way you can see the gaps (and how wide several of them are).
Ticker
Symbol
Current
Price
2014
Estimate
2015
Estimate
PE Ratio Earnings
Growth
PE Gap
PPC $ 21.86 $ 1.70 $1.55 13 -9 +4
ERA $ 28.55 $ 1.17 $ 1.78 24 52 -28
NBR $ 25.52 $ 1.13 $ 1.84 23 63 -40
GM $ 34.48 $ 3.18 $ 4.76 11 50 -39
SWC $ 15.78 $ .49 $ .80 32 63 -31

Quick note: PPC does show here a positive PE Gap; this company averages earnings
beats of 13% (having beaten earnings 3 of the last 4 quarters prior to the current
quarter). As such, with Jamies longer term forecast models we view the company as
actually having a small negative gap (-2); although we are providing the actual numbers
as they stand here in this chart.
Additional Details are included in the summary notes for PPC below.
With that - lets dig in to the trades - ranked in order. If you have a bucket to fill start with
the first pick and work your way down.


Here are the details:
Selection #1 - Pilgrims Pride (PPC)
April 30th Closing Price: $21.86
Summary: The chicken producer is rated near the top of the list of stocks using the PE
Gap model. While the year over year profit growth does not show Pilgrims to have a
negative PE Gap, longer term growth forecasts do. This one selection, however, is in
my "weird" category read on to discover why:
Have you seen the price of beef lately? It's rising faster than gasoline. What does that
mean? It means the masses "trade down" in food groups: from beef...to chicken.
In which case, Pilgrim's Pride is well positioned to see strong sales with beef prices
going through the roof this summer. Strong growth at chicken fast food restaurants like
KFC - Yum Brands - and Buffalo Wild Wings bodes well for the future of Pilgrims pride.
With a very low beta this stock will be less volatile if the wild swings in the market
continue in May but over the next 90 days, I see this stock having significant
performance opportunity.
Trade: Buy shares of PPC on Thursday, May 1 at the market open.

Selection #2 - Era Group (ERA)
April 30th Closing Price: $28.55
Summary: The air transport company that caters to the oil and gas industry is the
second pick for the month of May. Like Pilgrims Pride, Era Group offers a low beta - the
sort of stocks investors want to buy in this environment.
After peaking late last year shares have drifted lower thanks mainly to an earnings miss
at the end of the year. That temporary disappointment creates an opportunity for us
today.
Analysts expect the company to grow profits by 52% from this year to the next. At
current prices, shares trade for only 16 times 2015 estimated earnings. Look for this one
to be a steady climb to our 20% target over the next 90 days (or less).
Trade: Buy shares of ERA on Thursday, May 1 at the market open.


Selection #3 - Nabors Industries (NBR)
April 30th Closing Price: $25.52
Summary: The oil and gas sector is attracting investors and for good reason. Profit
growth in the space is booming, pun intended. It truly is an oil revolution powered by the
U.S.
Nabors is growing rapidly and while shares have appreciated nicely the gains should
continue. The higher beta is of no concern given the valuation.
From a PE Gap standpoint we are solidly in negative territory (where we want to be).
Analysts expect the company to grow profits here by 64% in 2014. At current prices
shares trade for 23 times 2014 estimated earnings.
With the summer gas driving season here and consumer spending the lone bright spot
in the recent GDP report, look for Nabors to be appreciating to our 20% target some
time after Memorial Day.
Trade: Buy shares of NBR on Thursday, May 1 at the market open.

Selection #4 - General Motors (GM)
April 30th Closing Price: $34.48
Summary: Shares of General Motors have been hit hard in 2014 thanks to the PR
disaster over ignition switches. The stock was one of my top picks for the year and thus
far has disappointed, but the reasons for choosing the stock remain in place: mainly a
wide negative PE Gap (and the reasons for disappointment recall problems weren't
known back in January).
Given the extent of that recall issue, here's the irony: this is as BAD as it got for GM?
Seriously if the price is holding this firmly at support, and considering consumers didn't
buy cars heavily in Q1 (but they will in Spring), GM is poised for a solid run. Remember
this a recall issue comes down to one thing: money. How much it costs GM to put the
issue behind them.


I believe the stock has bottomed thus we are not likely to get hurt here, if indeed, there
is a June swoon - something I do not expect. There are hedge funds buying GM at
these prices and now you should, too.
Analysts expect the company to grow profits by nearly 50% from this year to the next. At
current prices shares trade for 11 times 2014 estimated earnings. While the companys
actions regarding the ignition switches was abhorrent, one could argue that the
bankruptcy reorganization erases any potential liability. Worst case scenario the issue is
a one time hit to the company - a mere road block.
Trade: Buy shares of GM on Thursday, May 1 at the market open.
Note to Sizzling Stock holders: You can choose to increase your position on GM with
your short term investing account, or hold a bucket open.

Selection #5 - Stillwater Mining (SWC)
April 30th Closing Price: $15.78
Summary: The growing global economy will boost the value of platinum and palladium
miner, Stillwater Mining. The stock is cheap relative to expected growth. Basic material
stocks like Stillwater are attracting investors in the current environment.
Analysts expect the company to grow profits by 63% from this year to the next. At
current prices shares trade for 32 times 2014 estimated earnings.
Stillwater should be a good name to own as we head to the summer driving season. I
expect a 20% gain between now and the end of July, at the latest.
Trade: Buy shares of SWC on Thursday, May 1 at the market opens.

Let's have a terrific month! Remember, if you need help; if you have questions: Email
the hotline: millionairehotline@gmail.com
I'll have additional updates for you on Thursday and Saturday, as always.
All the best,
Jamie Dlugosch