Middle East Conflict Stocks

With recent tension in Iran, it is time to start looking for stocks and ETFs that will outperform during times of global conflict. The most obvious securities to own would be Oil (USO), Gold (GLD), Silver (SLV), and soft commodities (DBA). The defense companies also look attractive trading at forward P/E ratios under 16.

Company Name, Forward P/E, 5-Year Growth
Armor Holdings (AH) (12, 15%)
Lockheed Martin (LMT) (15, 11%)
Northrop Grumman (NOC) (14, 11%)
Raytheon (RTN) (16, 16%)

Note: I am long DBA

Realize Some Gains in AHM

I did not buy American Home Mortgage (AHM) when I recommended it on Monday. If you did follow my recommendation and bought AHM, I would take some off the table. A 7.5% return in 2-3 days is a great gain I wouldn't want to give back. I still like AHM long term. I believe shares are worth $30 which is 6X 2007 estimated EPS of $5.00. Still AHM could easily fall back between $22-$25 if more bad news is released regarding the residential mortgage market.

Note: I have no position in AHM

Value in American Home Mortgage (AHM)?

Any stock that provides home loans is probably trading near its 52 week low. I have been bearish on two subprime lenders, New Century & Novastar. The question is whether mortgage REITS are currently a value trap? This reminds me of the summer of 2005 when the homebuilders were all trading at forward P/E ratios under 6. July of 2005 was the top in the homebuilder stocks. The difference is now the mortgage REITS are trading at forward P/E ratios under 5 but are at 52 week lows.

One particular REIT I have been looking into is American Home Mortgage (AHM). I believe the 17% dividend is safe. I am even considering purchasing some shares for my own account. The fact of the matter is that AHM has very little exposure to subprime mortgages. AHM opened its portfolio for investors to look over on March 6, 2007. A loan with a FICO score under 620 is considered a subprime loan.

Percent of Mortgage Portfolio
FICO Score Under 620: 1.7%
Subprime Off Balance Sheet Securitized Loans: 1.1%
Subprime Loans Held for Sale: 7.3%
Subprime Loans Held for Investment: 1.3%

Clearly AHM has very little exposure to the subprime market. I would look to get long this stock on any weakness.

Eyeing Two Mortgage REITS

On Sunday I will be providing a recommendation for two particular mortgage REITS. I have been bearish on Novastar (NFI) and New Century (NEWC.PK) for a long time. I am looking to get long either American Home Mortgage (AHM) or Thornburg Mortgage (TMA). Check back Sunday for more details.

Getting Long The Soft Commodities

In an attempt to reduce my overall portfolio correlation with the US equity markets I went long the PowerShares DB Agriculture ETF (DBA). The ETF is equally weighted in corn, soybeans, wheat, and sugar. You can read more about the DBA on Stockpickr.com.

As a short term trade, I went long the Intercontinental Exchange (ICE) near today's close. I believe the valuation is more in line with the CME. ICE now trades at 25X forward earnings.

Portfolio Change

I sold my position in Broadcom (BRCM) last week. I really did not like any of the action in the semiconductors, especially in a down market. I initiated a position in Akamai Technologies (AKAM). Akamai will be providing online streaming video for CBS during March Madness.

I am also looking at some of the agricultural names such as DBA, ADM, SMG, & DE.