Across the Street - Louis Rukeyser

28  April 2011 - Louis Rukeyser's Wall Street 

The economy is healing, but the market hasn't acknowledged the plethora of risks related to uncertainty in the Middle east, Japan or even the US budget deficit. 

The Federal reserve's second round of quantitative easing will likely end soon, but investors are playing the momentum game, hoping to buy high and sell higher. That's a myopic and dangerous strategy. It's time to be cautious.

Recommended Strategies

If investors believe it's time to be cautious and protect their portfolio, there's nothing better than the VIX [S&P 500 Volatility Index]. During last year's Flash Crash and the european sovereign debt crisis, the broad market declined by 14 percent from March to May, while the VIX gained 181 percent. There are many ways to play the VIX, but we focus on two exchange-traded notes, iPath S&P 500 Short  Term Futures ETN (NYSE:VXX) and VelocityShares Daily 2X VIX Short Term ETN (NYSE: TVIX).

As contrarian investors, we like drug and biotech stocks. Many of these stocks trade at single-digit price¬to-earnings ratios because of uncer¬tainty surrounding President Obama's health care reform. Their balance sheets are clean and people will take their medication no matter what hap¬pens in the economy.

What to Buy Now

Research In Motion (NSDQ: RIMM) shares trades at 8 times earnings and 70 percent of the firm's revenue is garnered overseas. Overseas revenue has grown by 70 percent. Investors have focused on the firm's domestic sales, which have slumped 12 to 15 percent. The company's Blackberry line of com-munication devices is getting its lunch eaten by Apple's (NSDQ: APPL) iPhone on the high end.

But the real opportunity for research in Motion is in the emerging markets and the low end. We see at least 50 percent upside to the stock, and it could be an acquisition target.

Flir Systems (NSDQ: FLIR) has a virtual monopoly on the thermal and infrared imaging technologies used by the US military. Although defense bud-get cuts loom, the US military won't cut back on its ability to see at night, espe¬cially because Flir's products aren't very expensive.

The vast majority of the firm's sales come from the US defense industry. But the real opportunity for Flir is in the commercial and residential security space. Two years ago, Flir's cheapest products sold for about $25,000 to $30,000. Those same products today cost about $1,500 to $3,000. The com¬mercial and residential market could be 10 times the size of their defense busi-ness—that's a strong secular tailwind. Flir is also a likely takeover target for one of the large defense companies.

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