World Fuel Services Corp
World Fuel Services Corp (INT) had a big earnings surprise last earnings season. Since then it has been rallying with occassional pullbacks.
Wednesday, December 31, 2008
Monday, December 22, 2008
Friday, December 19, 2008
China Sky One Medical
China Sky One Medical is not a Medvac company as the name would suggest. It has vast portfolio of medicines for all kinds of diseases!!!
China Sky One Medical, Inc., through its subsidiaries, engages in the development, manufacture, marketing, and sale of over-the-counter nutritional supplements and herb based pharmaceutical and medicinal products primarily in the Peoples Republic of China. It offers cosmetics, medical devices, and external use medicinal or pharmaceutical external use products in various forms, including sprays, ointments and creams, powders, and patches. The companys products include sumei slim patch to foster weight loss and prevent weight gain; pain killer patch used for the treatment of various ailments, including fever, headache, dysentery, diarrhea, and stiffness and pain in the neck caused by hypertension; anti-hypertension patch that improves circulation and reduces blood pressure; dysmenorrheal patch for pain relief from dysmenorrheal in a womans critical days, and for regulating pain and catamenia; yin ke psoriasis spray; wart removing spray; chilblain ointment; hemorrhoids ointment for sterilizing and relieving hemorrhoid symptoms, including itching, distending pain, burning, and bleeding; tinea pedis spray, ointment and powder for killing various pathogens on the skin surface and subcutaneously, such as mycete, trichopytic, staphylococcal bacteria aureus, bacillus coli, and candida albicans; dermatitis spray; dandruff treatment herbal shampoo; and runze eye drop. It also offers cardiac arrest early examination kit and kidney disease testing kit, as well as various products made from Chinese herbs and plants, including a leukoderma ointment, rheumatism spray, Coryza powder, Hircus removing spray, gonorrheal cleaning spray, a snoring retardant, deodorants, diet tea, cough arresting patch, and pharyngitis spray. In addition, the company engages in the sale of medicinal and pharmaceutical products manufactured by others. It sells products through pharmaceutical chains. The company was founded in 1994 and is headquartered in Harbin, the Peoples Republic of China.
Brink's Home Security
This is a spin off . Spin offs often tends to do well. Joel Greenlatt offers a strategy to trade spin offs in his book: You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits
As a side note the symbol stands for Custome For Life, the company motto!
Emergent Biosolutions Inc
One of the rare stocks doing well in this market. Has heavy volume in last 10 weeks.
Top 10 ETF
- DTO
- GDX
- DGP
- TLT
- FXI
- EWW
- EWY
- EZA
- EPI
- SLV
Non US markets like China, India, Mexico, South Korea, and South Africa is the current theme.
Thursday, December 18, 2008
The beauty of bubbles
A very well argued piece on lasting benefits of bubblesin latest Economics. It uses examples of some historic bubbles and looks at their lasting contributions to certain industries.
The story of Florida’s land boom is a classic example of a bubble and its dangers. The costs are clear: growing speculation as the bubble inflates, driving prices and value further and further apart; the sharks and the fraudsters, peddling fantasies to misguided investors; the gathering doubts about sustainability; and then the calamitous bursting of confidence, causing debts, defaults and despair.
But the Florida boom is also a reminder that the bubble metaphor does not do full justice to the consequences of a financial boom and bust. After all, a bubble is evanescent. Once it has popped it leaves nothing behind. In Miami and the rest of south Florida this was patently not the case.
Bankrupt he may have been but Fisher had streets to walk through. When he and Jane first visited Florida in 1910, the city of Miami was already growing fast but Miami Beach was home principally to mosquitoes. The painstaking efforts of Fisher and others to dredge the bay, clear the mangrove roots and landscape the new terrain had irrevocably changed Miami Beach before the 1920s even began. The boom years of that decade saw the scale of construction accelerate and widen. Dozens of flagship hotels were built. Resorts such as Boca Raton and Coral Gables were created in other parts of Florida. The boom had its share of schemes that never got anywhere but it also left behind a lasting physical legacy of buildings and streets and beaches and man-made islands.
Stocks up 50% plus in a month
The rally in last few weeks has resulted in number of stocks going up 50% plus in a matter of few weeks. There are 93 such stocks curently.
Stocks priced 5 plus a month ago and are now up 50% plus in 20 days:
ABX,Barrick Gold Corp (Google Yahoo Earnings Chart)
ACH,Aluminum Corp. of China Ltd. ADS (Google Yahoo Earnings Chart)
ACM,Aecom Technology Corporation (Google Yahoo Earnings Chart)
ACTL,Actel Corp (Google Yahoo Earnings Chart)
AIPC,American Italian Pasta Co (Google Yahoo Earnings Chart)
AMB,Amb Property Corp (Google Yahoo Earnings Chart)
AMLN,Amylin Pharmaceuticals (Google Yahoo Earnings Chart)
AMN,Ameron Internat Corp (Google Yahoo Earnings Chart)
AMSC,American Superconductor (Google Yahoo Earnings Chart)
AN,Autonation Inc (Google Yahoo Earnings Chart)
ANW,Aegean Marine Petroleum Network Inc (Google Yahoo Earnings Chart)
AU,Anglogold Ashanti Ltd (Google Yahoo Earnings Chart)
AZ,Allianz Se (Google Yahoo Earnings Chart)
BGC,General Cable Corp (Google Yahoo Earnings Chart)
BJRI,BJ's Restaurants Inc (Google Yahoo Earnings Chart)
BVN,Compania De Minas Buena (Google Yahoo Earnings Chart)
BW,Brush Engineered (Google Yahoo Earnings Chart)
CAS,A.M. Castle & Company (Google Yahoo Earnings Chart)
CBI,Chicago Bridge & Iron Nv (Google Yahoo Earnings Chart)
CETV,Central European Media (Google Yahoo Earnings Chart)
CGX,Consolidated Graphics (Google Yahoo Earnings Chart)
CKR,Cke Restaurants Inc (Google Yahoo Earnings Chart)
CLF,Cliffs Nat'l Resources Inc (Google Yahoo Earnings Chart)
CMC,Commercial Metals Co (Google Yahoo Earnings Chart)
CMN,Cantel Medical Corp. (Google Yahoo Earnings Chart)
CPKI,California Pizza Kitchen (Google Yahoo Earnings Chart)
CTRN,Citi Trends Inc (Google Yahoo Earnings Chart)
CTX,Centex Corp (Google Yahoo Earnings Chart)
DFG,Delphi Financial Group A (Google Yahoo Earnings Chart)
DHI,D.R. Horton Inc (Google Yahoo Earnings Chart)
DRYS,Dryships (Google Yahoo Earnings Chart)
EME,Emcor Group Inc (Google Yahoo Earnings Chart)
EVR,Evercore Partners Inc (Google Yahoo Earnings Chart)
FLR,Fluor Corp (New) (Google Yahoo Earnings Chart)
FNF,Fidelity National Finl (Google Yahoo Earnings Chart)
FWLT,Foster Wheeler Ltd (Google Yahoo Earnings Chart)
GDX,Market Vectors Gold Miners ETF (Google Yahoo Earnings Chart)
GET,Gaylord Entertainment Co (Google Yahoo Earnings Chart)
GFI,Gold Fields Ltd Adr (Google Yahoo Earnings Chart)
GG,Goldcorp Inc (Google Yahoo Earnings Chart)
GNK,Genco Shipping & Trading Ltd (Google Yahoo Earnings Chart)
GOLD,Randgold Resources Ltd Ads 1:2 (Google Yahoo Earnings Chart)
HIG,Hartford Financial Services Group (Google Yahoo Earnings Chart)
HMY,Harmony Gold Mining Co (Google Yahoo Earnings Chart)
HPT,Hospitality Prop Trust (Google Yahoo Earnings Chart)
HQS,HQ Sustainable Maritime Industries Inc. (Google Yahoo Earnings Chart)
HUGH,Hughes Communications Inc (Google Yahoo Earnings Chart)
JEC,Jacobs Engineering Group (Google Yahoo Earnings Chart)
JOSB,Jos A Bank Clothiers (Google Yahoo Earnings Chart)
JRCC,James River Coal Company (Google Yahoo Earnings Chart)
LEN,Lennar Corp Cl A (Google Yahoo Earnings Chart)
LIHR,Lihir Gold` Limited ADS (Google Yahoo Earnings Chart)
LORL,Loral Space & Communications Inc (Google Yahoo Earnings Chart)
M,Macy's Inc (Google Yahoo Earnings Chart)
MCRI,Monarch Casino & Resort (Google Yahoo Earnings Chart)
MET,Metlife Inc (Google Yahoo Earnings Chart)
MNT,Mentor Corp Minnesota (Google Yahoo Earnings Chart)
MNTA,Momenta Pharma (Google Yahoo Earnings Chart)
MTH,Meritage Homes Corp (Google Yahoo Earnings Chart)
MTW,Manitowoc Co Inc (Google Yahoo Earnings Chart)
NEM,Newmont Mining Corp (Google Yahoo Earnings Chart)
NUE,Nucor Corp (Google Yahoo Earnings Chart)
OSK,Oshkosh Corp (Google Yahoo Earnings Chart)
PAAS,Pan Amer Silver Cp (Google Yahoo Earnings Chart)
PCR,Perini Corp (Google Yahoo Earnings Chart)
PGI,Premiere Global Services Inc (Google Yahoo Earnings Chart)
PLFE,Presidential Life Corp (Google Yahoo Earnings Chart)
PSMT,Pricesmart Inc (Google Yahoo Earnings Chart)
RMBS,Rambus Inc (Google Yahoo Earnings Chart)
ROS,Rostelecom (Google Yahoo Earnings Chart)
RTI,Rti Internat Metal Inc (Google Yahoo Earnings Chart)
RUSHA,Rush Enterprises Inc Cl A (Google Yahoo Earnings Chart)
SBP,Santander Bancorp Holdng (Google Yahoo Earnings Chart)
SCHN,Schnitzer Steel Indust (Google Yahoo Earnings Chart)
SFD,Smithfield Foods Inc (Google Yahoo Earnings Chart)
SGR,Shaw Group Inc (The) (Google Yahoo Earnings Chart)
SLM,Slm Corp (Google Yahoo Earnings Chart)
SONC,Sonic Corp (Google Yahoo Earnings Chart)
SPWRB,Sunpower Corp Class B (Google Yahoo Earnings Chart)
SSRI,Silver Standard Resource (Google Yahoo Earnings Chart)
STC,Stewart Info Services Cp (Google Yahoo Earnings Chart)
STLD,Steel Dynamics Inc (Google Yahoo Earnings Chart)
STRL,Sterling Construction Comp Inc (Google Yahoo Earnings Chart)
SWS,Sws Group Inc (Google Yahoo Earnings Chart)
TBSI,TBS International Limited Class A (Google Yahoo Earnings Chart)
TEX,Terex Corp (Google Yahoo Earnings Chart)
THMD,Thermadyne Hldgs Corp (Google Yahoo Earnings Chart)
THRX,Theravance Inc (Google Yahoo Earnings Chart)
TLVT,Telvent Git Sa Ord (Google Yahoo Earnings Chart)
TSN,Tyson Foods Inc (Google Yahoo Earnings Chart)
UFCS,United Fire & Casualty (Google Yahoo Earnings Chart)
URS,Urs Corp (Google Yahoo Earnings Chart)
XCO,EXCO Resources Inc (Google Yahoo Earnings Chart)
Top Ten ETF
Top ten ETF by short term relative strength:
- GDX
- DTO
- DGP
- FXI
- XME
- TLT
- EWW
- SLV
- SLX
- MOO
Gold, silver, metals and emerging market seems to be the developing theme if these trend continue.
Wednesday, December 17, 2008
Momentum stocks
Three stocks showing good momentum currently. Slowly more stocks like these are emerging. Other momentum leaders to watch
AAI,Airtran Hldg (Google Yahoo Earnings Chart)
ADY,American Dairy Inc (Google Yahoo Earnings Chart)
AGA,DB Agriculture Double Short ETN (Google Yahoo Earnings Chart)
AIPC,American Italian Pasta Co (Google Yahoo Earnings Chart)
ALGT,Allegiant Travel Co (Google Yahoo Earnings Chart)
ALK,Alaska Air Group Inc (Google Yahoo Earnings Chart)
BBND,Bigband Networks Inc (Google Yahoo Earnings Chart)
CMN,Cantel Medical Corp. (Google Yahoo Earnings Chart)
DAL,Delta Air Lines Inc (Google Yahoo Earnings Chart)
DDP,DB Commodity Short ETN (Google Yahoo Earnings Chart)
DEE,DB Commodity Double Short ETN (Google Yahoo Earnings Chart)
DISK,Image Entertainment Inc (Google Yahoo Earnings Chart)
EBS,Emergent BioSolutions Inc (Google Yahoo Earnings Chart)
FRPT,Force Protection Inc (Google Yahoo Earnings Chart)
GVA,Granite Construction Inc (Google Yahoo Earnings Chart)
INT,World Fuel Service Corp (Google Yahoo Earnings Chart)
MAXY,Maxygen Incorporated (Google Yahoo Earnings Chart)
NL,Nl Industries Inc (Google Yahoo Earnings Chart)
RGLD,Royal Gold Inc (Google Yahoo Earnings Chart)
SHEN,Shenandoah Telecomm (Google Yahoo Earnings Chart)
STSI,Star Scientific Inc. (Google Yahoo Earnings Chart)
TCBK,Trico Bancshares (Google Yahoo Earnings Chart)
VITA,Orthovita Inc (Google Yahoo Earnings Chart)
Tuesday, December 16, 2008
Quantitative Strategies for Achieving Alpha by Richard Tortoriello
Quantitative Strategies for Achieving Alpha (McGraw-Hill Finance & Investing)
The author tests 7 basic categories of stocks factors:
- Profitability
- Valuation
- Cash flow
- Growth
- Capital allocation
- Price momentum
- Red Flags ( risk factors)
Detailed quantitative tests for each of the factors are presented in the book. As the author works for S&P, he has access to the best database on stocks and he presents his findings for multiple factors within each of the above seven categories. The testing shows that the top single factor strategy for achieving excess return is price momentum calculated using 28/16 relative strength. The best strategy using two combined factor for excess return is price momentum plus nearness 52 week high.
This book unlike other quant books is easy to understand and well presented. The biggest advantage of this book is it will give you building blocks to build your trading strategy around things that empirically work in the market. Knowing what works and why it works can help you build better trading models.
Monday, December 15, 2008
Can you learn trading from books part 2
In Part 1 I talked about some books on growth investing, in part 2 books by Livermore, Darvas and Ralph Wanger are covered.
Jesse Livermore
How to Trade In Stocks
- Jesse Livermore started as a pageboy and quickly turned a day trader. After several years of day trading he realized real money is not in day trading but in catching big moves or position trading.
- After that realization he quickly built a large fortune. Starting from scratch he built a fortune of 100 million in 1920's by trading in the growth stocks of that era. He used large leverage and made very concentrated bets in stocks and commodities.
- Excessive leverage, lavish spending, affairs, divorces and clinically depressed personality contributed to his burst.
- This book was written at the very end of his career as he was trying to make another comeback and wanted to raise money by starting advisory services. He committed suicide one year after this book was published.
- This small book distills his years of experience and method. The key messages of the book are:
- There are times when one should speculate and times when one should not. Trying to make money everyday is not a successful speculative strategy.
- His primary method was to buy new high in a trending stock after a consolidation or correction
- He concentrated all his efforts on leading stocks of his era. Which at that time were the growth stocks from industries like steel, motor, railroad, mail order, aircraft makers, and commodities.
- He had a theory about pivotal point for buy and sell. These pivotal points were basically breakouts after correction or consolidation.
- He also found other pivotal points like round numbers of 100, 200, 300 and so on, all time high in recent IPO, long (2-3 year) range breaks)
Nicolas Darvas
How I Made $2,000,000 In The Stock Market
Wall Street The Other Las Vegas: The Other Las Vegas- Nicolas Darvas was a Hungarian born dancer, who got interested in stock market after he got paid for one of his performance in stocks.
- He got fascinated by stocks and spent hours studying the market and trying to make money on short term moves in stocks without much success. From 1952 to 1956 he tried various methods of stock selection and churned his account till he put in place his own method of trading momentum/growth stocks called "box theory" which was simple a method to buy a second leg of a bull move in a growth stock after it had a had a consolidation period or trading range(which he called box). He bought the stock after the stock made a new high or 52 week high after such consolidation.
- Once he had his method in place, in span of 18 months he made 2 million starting with 10000 capital. If you look at the 5 or 6 stocks which made him that 2 million, you will notice they were the growth stocks of that time.
- Most people got fascinated by the "box " idea and they forget that the reason he was successful was because he chose the growth stocks to use the box on. Also he timed his entry with start of a new bull market, which was one of the top 10 bull market year. Between 1957 to 1958 the overall market went up by 50% plus. Which makes 1958 as one of the top 10 bull market years since 1825. Besides that he used huge leverage to magnify his returns.
- The key to his 2 million profit was:
- Growth stocks with established momentum
- Buying after correction/consolidation
- Concentrated positions
- Leverage
- Avoiding bear markets
- A bull market of 50% plus magnitude
- There are numerous websites selling stock picking service using Darvas box technical system. But all those systems miss out the essential element of Darvas method, which was growth investing. He himself subsequently wrote more books and elaborated on his method as techno fundamental approach to investing in growth stocks.
- Ralph Wanger was a mutual fund manager at Acorn Fund. For 25 years he put together a 16% plus annualised returns for his fund.
- His primary focus was investing in small growth companies for medium or long term holding periods.
- He says investors are like zebras in lion country. If they stick to the middle of the heard, it is safe , but they get meager amount of grass to eat. The richer rewards in the markets are on outer edge where the risk of lions eating you is high. So one must balance safety , risk and reward.
- His methodology consists of first identifying a predominant theme likely to play out over many years and then find smal companies likely to benefit from that theme for many years.
- The best investment picks are growing small companies with following characteristics:
- fast growing market segment
- dominant market share
- good product design
- low cost and efficient manufacturing
- skilled marketing
- high profit margins
- strong balance sheet
- understandable business
- and entrepreneurial management
- He was always looking for home runs as against singles.
Related Post: Can you learn trading from books part1
Friday, December 12, 2008
There might be more drama to auto bailout saga
The dominating story today would be the auto bailout failure. But there might be more drama and emergency actions before market opens. So the pre market tumble may not play out as anticipated. It will be interesting day to watch. Global Stocks, Dollar Tumble as Auto Bailout Fails; GM Slumps Dec. 12 (Bloomberg) -- Stocks tumbled around the world and the dollar slumped after the Senate rejected a bailout for American automakers, threatening to deepen the global recession. Treasuries rallied and yields fell to record lows. The MSCI World Index lost 1.3 percent to 880.41 as of 9:43 a.m. in London after senators voted down a bill to provide $14 billion of emergency funds forGeneral Motors Corp. and Chrysler LLC. GM plunged 28 percent in Germany, while Honda Motor Co. and Daimler AG sank more than 6 percent. The dollar fell to a 13-year low against the yen, while the cost of protecting corporate bonds against default soared. Metals and crude oil slumped. “The markets are still guided by fear,” said Robert Drijkoningen, The Hague-based head of the multi-asset group at ING Investment Management, which has $488 billion under management. “The markets are in a very dire situation and are in a very risk- averse situation. The short-term is bleak,” he said on Bloomberg Television. Standard & Poor’s 500 Index futures sank 3.9 percent, indicating the benchmark for U.S. equities will extend yesterday’s 2.9 percent drop. Europe’sDow Jones Stoxx 600 Index lost 3.3 percent, while the MSCI Asia Pacific Index fell 3.9 percent. “It’s over with,” Senate Majority Leader Harry Reid said on the Senate floor in Washington last night. “I dread looking at Wall Street tomorrow. It’s not going to be a pleasant sight.”
Thursday, December 11, 2008
Grand Canyon Education- LOPE
On November 10th I highlighted this IPO to keep an eye on. It has had a nice 50% plus run post IPO. This is in leading sector and worth keeping an eye on for possible further upside from here after a consolidation. The Educational Services sector iscurrently ranked number one by long term relative strength and this looks the best of the lot.
Line and saucer formation
SINO: As a pattern, this in very nice breakout. There is prior neglect , recent IPO, sudden volume expansion.It is part of my "Virgin" scan. In current market circumstances may not follow through.
This is the kind of pattern described in the book How Charts Can Help You in the Stock Market
"Lines and saucer form the chart reader's dream patterns. They're easy to recognize, they're reliable, they usually portend an extensive price move and- best of all - they give the chartist plenty of time to assume a market position close to the bottom or top of ensuing swing. They have only one major drawback: they're rare among popular, actively traded stocks."
Wednesday, December 10, 2008
Rise and fall of Bill Miller
In 2006, he bought a 235-foot yacht, "Utopia." And then things began to unravel.
William H. Miller spent nearly two decades building his reputation as the era's greatest mutual-fund manager. Then, over the past year, he destroyed it.Fueled by winning bets on stocks other investors feared, Mr. Miller's Legg Mason Value Trust outperformed the broad market every year from 1991 to 2005. It's a streak no other fund manager has come close to matching.
Mr. Miller was in his element a year ago when troubles in the housing market began infecting financial markets. Working from his well-worn playbook, he snapped up American International Group Inc., Wachovia Corp., Bear Stearns Cos. and Freddie Mac. As the shares continued to fall, he argued that investors were overreacting. He kept buying.
What he saw as an opportunity turned into the biggest market crash since the Great Depression. Many Value Trust holdings were more or less wiped out. After 15 years of placing savvy bets against the herd, Mr. Miller had been trampled by it.
Tuesday, December 09, 2008
What sectors are attracting buyers
In last few weeks the market has managed to put together a good rebound. Certain sectors are attracting buy interests. Some have Obama stimulus package as catalyst while others are just rebounding from severe oversold levels.
Top 6 Morningstar Industry Groups in Telechart by short term relative strength
- Technical Services
- Cement
- Gen Contractor
- Truck and other vehicles
- Internet service providers
- Surety and Title Insurance
Monday, December 08, 2008
Book Review: Beat the Market: Invest by Knowing What Stocks to Buy and What Stocks to Sell
Beat the Market: Invest by Knowing What Stocks to Buy and What Stocks to Sell
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- If you would like to learn about a method which beats S&P by over 7.7 times over last 25 years, then this book is for you.
"Over the past 25 years, Charles D. Kirkpatrick's exclusive stock-picking technique has outperformed the S&P 500's performance by a whopping 7.7 times. That's right: If you'd invested $10,000 in the S&P 500, you'd have $130,000 now...but if you'd followed Kirkpatrick's published picks, you'd have $1,000,000! If that's not amazing enough, Kirkpatrick's system is remarkably easy to use.In this book, he teaches you all you need to put it to work in your portfolio! Kirkpatrick reveals why an active strategy based on relative stock rankings is the surest route to profit, and how just a few pieces of publicly available information enable you to create rankings that virtually guarantee exceptional performance."
- This book by Charles Kirkpatrick was published in September 2008. Charles Kirkpatrick has been studying relative strength for more than 25 years. In this new book he synthesises his many years of research to come up with a very simple relative strength and value based approach to investing. The method he proposes is very simple method which involves weekly data. It at best involves a few hours of work on weekend and is easily replicable. It is a complete turnkey approach detailing what stocks to buy, why, when, how much, where to put stops and when to exit.
- This book presents data to question some of the most widely held beliefs in market. It has created a buzz amongst knowledgeable traders and the word about the book has spread by by word of mouth and most people who read it are amazed by the simplicity and the profitability of the system.
- Who is Charles D Kirkpatrick and what makes his system so unique.
Charles D. Kirkpatrick II, CMT is currently president of Kirkpatrick & Company, Inc., Kittery, Maine. This is a private corporation specializing in technical research that publishes the Kirkpatrick Market Strategist advisory newsletter.
In the recent past, Mr. Kirkpatrick has been a director of the Market Technicians Association–an association of professional analysts—and served on its Dow Award Committee, Education Committee, and as chairman of the Academic Liaison Committee. He was editor of the Journal of Technical Analysis—the official journal of technical analysis research—and an instructor in finance at the Fort Lewis College School of Business Administration in Durango, Colorado–one of only seven colleges (as opposed to universities) in the U.S. accredited by the Association to Advance Collegiate Schools of Business (AACSB). In 2007, with coauthor, Professor Julie Dahlquist, he published a textbook on technical analysis: Technical Analysis—The Complete Resource for Financial Market Technicians–now used in university finance classes and the Market Technicians Association’s professional education programs.
In addition, Mr. Kirkpatrick has received awards from his peers. In 1993 and 2001 he received the Charles H. Dow Award for excellence in technical researchand in 2008, he received the Market Technicians Association Annual Award–an award given once a year to someone for “Outstanding Contributions to the Field of Technical Analysis.” He is a graduate of Phillips Exeter Academy, Harvard College, and the Wharton School of the University of Pennsylvania, and served as a decorated combat officer in the First Cavalry Division in Vietnam. He currently resides on an island in Maine with his wife, Ellie, and various domestic animals.
- The book advises a reaction technique, dubbed STRACT to beat the market. It involves no prediction, it just reacts to the market and data. STRACT refers to three step reaction: setup, trigger, and the action. It offers STRACT buy and sell setups. So if a stock meets certain scan conditions it qualifies for a buy and when it satisfies certain scan conditions , it triggers a sell.
- For last 25 years the author has been following a "relative" approach to equity selection. Stocks are ranked either by relative value, relative earnings or relative strength. So when looking for value the author does not look at the value of company but as a relative value compared to all other stocks in the market.
- For ranking stocks by value the author uses the price to sales ratio. The logic being sales are comparatively difficult to manipulate compared to earnings. He uses price to sales ratio of last four quarters and compares it to previous four quarters a year ago. But instead of looking at absolute value, he looks at relative ranking of stocks using the ratio. The P/S ratio is very easy available information and all finance sites provide this information.
- For ranking stocks by growth the author uses change in earnings. Again he looks at last 4 quarters of earnings growth compared to previous year 4 quarters. But instead of looking at absolute value, he looks at relative ranking of stocks using the earnings growth rate.
- For measuring relative strength the author follows a approach similar to the approach outlined by Robert A. Levy in his 1968 article in Journal Of Finance:Relative Strength as Criteria for Investment Selection . Levy proposed using a ratio of closing price/131 day moving average to calculate price relative strength. The author uses 121 days instead of 131.
- Charles Kirkpatrick key findings about relative value based stock selection are:
- There is inverse relationship between relative price to sales ratio and relative price performance
- Stocks with relative value percentile of 17 to 47 have best chance of outperforming the market over the following three months
- Stocks with ultra low valuation (relative valuation below 7 percentile) have poor performance.
- Stocks with relative percentile between 87 and 99 are worst buy candidates.
- In a bear market the best buy candidates based on relative valuation are between 17th and 27 th percentile.
- The best sell triggers are above 57 percentile or below 7 th percentile during bear markets
- Charles Kirkpatrick key findings about relative earnings based stock selection are:
- Relative earnings growth is a poor criteria for selecting stocks ( IBD followers might find this news very disturbing!!!)
- Stocks with top 10 percentile ranking by relative earnings growth (or in other words stock ranked 90 % plus by EPS raning) perform poorly compared to market
- The authors research conclusively proves that using relative earnings to select stocks for future performance has no edge.
- Stocks with relative EPS percentile of 42 to 87 are good selection candidates for 3 to 6 month holding period.
- During bull market relative earnings is as effective method for selecting stocks
- Charles Kirkpatrick key findings about relative price strength based stock selection are:
- The most reliable technique for selecting stocks in both bull and bear market is relative price strength
- it does not work for short periods (below 3 month holding periods) and periods longer than a year
- relative price strength breeds more relative price strength and relative weakness breeds further weakness.
- Stocks with relative price percentile rank above 47 outperform market in next 3 month, but higher the rank the better
- Neither relative price strength nor reported earnings growth nor relative valuation has any predictive value 12 months in future.
- By combining relative price strength and relative value ranking the author creates a "bargain list" every week. The Bargain List Model is the heart of this book.
- Bargain List buy triggers:
- Relative price strength>=97
- Relative price to sales percentile>=17 and <=42
- Market cap>1 Million
- stock price> 10
- Bargain List sale triggers:
- relative price strength <52>
- relative price to sales percentile <=7 or >=67
- You can set this up in Telechart very easily. See my post about this:
- The author offers three methods for creating a portfolio using the above stock selection approach:
- Fully invested portfolio in bull and bear market
- Adjusted for market capital risk using max number of stocks
- Adjusted for market cap risk using simple moving averages
- So if you want to beat the market this book is a worthwhile investment. It is a small 157 pages book, very well written and above all offers you one of the simplest method to beat the market.
Friday, December 05, 2008
Buying all time high
Some days back I linked to this study on stocks making all time high.
The Capitalism Distribution - The Realities of Individual Common Stock Returns
by Eric Crittenden and Cole Wilcox, BlackStar Funds
If you read this study carefully, there is a way to build a trading system around it. The basic point of the study is that there is an edge in investing in stocks making all time high. Now if you read Jesse Livermore book How to Trade In Stocks
For instance, let us say that a new stock has been listed in the last two or three years and its high was 20, or any other figure, and that such a price was made two or three years ago. If something favorable happens in connection with the company, and the stock starts upward, usuallyitis safe play to buy the minute it touches a brand new high.
In next paragraph he describes a reverse of above situation where a stock makes a all time low after trading in a range for few years afterIPO.
A stock may be brought out at 50, 60, or 70 a share, sell off 20 points or so , and then hold between high and low for a year or two. Then it ever sells below the previous low , that stock is likely to be in for tremendous drop. Why? Because something must have gone wrong withthe affairs of the company.
So this is an old idea. Ed Seykota also talked about similar thing many years ago. If you look at the CANSLIM method, one of the catalyst in new high. IBD also marks stocks making all time high with NH notation in tables.
A a system based on buying all time high and selling short all time low. There is an edge in it. Only problem is in bull market it gives too many signals, often more than 1000 stocks will make all time high in bull market. In addition in severe bear markets stocks gets beaten down so much, that if you wait for all time high to get in , you lose bulk of the move.
Thursday, December 04, 2008
Can you learn trading from books Part 1
Every week I get emails from readers of the blog asking about which book do you recommend. Implicit in the query is an assumption that you can learn trading from a book. The problem with the assumption is that in reality very few books on trading offer you comprehensive solution to your trading problems. There are myriad ways to trade and that is reflected in the books.
The bigger problem for new or struggling traders is that they don't have an overall market perspective and hence cannot discriminate between a good and bad advise. When I was new trader I failed to understand the importance of many of the ideas which I use today. Even if someone had given me readily packaged the set of ideas I trade today, I would not have understood the significance of that.
The reason for this goes back to my hypothesis about mental models. You need to have a working mental model of the market which is based in reality and till that is in place, you cannot understand and appreciate the specific techniques.
Knowledge alone is not a solution to trading problems. Trading is a personal skill and it is a performance skill. Personal skills are very difficult to transmit from one person to another. They require a very motivated practitioner and requires very motivated student for the transfer to be effective. Performance skills require tons of actual and simulated practice till the skill and performance becomes one. They require extraordinary self motivation and doggedness and time and effort commitment. Such skills are best learned under a mentorship model.
Most books have very few profitable ideas and the trick is to separate the good from the bad. Sometime all that you find in a book is one sentence or paragraph or chapter which stays with you and then you can expand on it. I will give you an example from the book How Charts Can Help You in the Stock Market
On page 85 of this book the author talks about 'Line and Saucer Formations'.
"Lines and saucer form the chart reader's dream patterns. They're easy to recognize, they're reliable, they usually portend an extensive price move and- best of all - they give the chartist plenty of time to assume a market position close to the bottom or top of ensuing swing. They have only one major drawback: they're rare among popular, actively traded stocks."
That chapter stayed with me after reading the book. I copied that paragraph and underlined it and put it in my idea jar. For next 3-6 month I must have tried hundreds of methods to identify such stocks. I went back to 40 years worth of data, looked at such stocks, looked at what returns are possible, looked at their financial, technical, volume patterns, and so on. From that trial and error and hundreds of hours of dogged effort I finally put together a strategy which satisfied me and is very profitable: The Virgins.
The key really is in making such leaps from ideas in books. Most books on trading will not give you a complete ready to trade method, but will give you ideas or possible direction. Your ability to convert that idea in to trading method will determine what you get out of a book.
A recent book which I recommended has a complete trading system, backtested and very profitable, but few people will understand it after reading it. Of many methods in public domain I have studied so far Kirkpatrick approach is best and easiest. With minimum effort you can beat the market. It can be set up in Telechart. It gives you very few signals.
Beat the Market: Invest by Knowing What Stocks to Buy and What Stocks to Sell
Offers a comprehensive relative strength based trading method with entry, exit and risk management rules. It details a method similar to Modified Double Trouble but adds valuation criteria of Price to sales to it to further narrow down the list. The method can be easily replicated in Telechart.
But unless you are a slightly mature investor or trader,or make an effort to understand it, most people don't understand it. I got emails from blog readers who bought the book and who can not make a head or tail out of it. Comes back to the point that new traders do not have enough market perspective to understand when a very profitable idea hits them.
There are predominantly four investing styles followed by investors:
- Value
- Growth
- Momentum
- Arbitrage
Growth stock investors are high expectation investors as against value investors who are low expectation investor. The basic assumption behind growth investing is that the market will continue to reward a company growing faster than other companies. the key to success in growth investing is to identify early stage growth company and ride it till it is growing and abandon it before the growth slows down. Often growth investors are called patsies playing the greater fool game.
These are some of the books related to growth investing from my personal collection.
Peter Lynch
One Up On Wall Street : How To Use What You Already Know To Make Money In The Market
Beating the Street
Learn to Earn: A Beginner's Guide to the Basics of Investing and Business
William O'Neil
HOW TO MAKE MONEY IN STOCKS: A WINNING SYSTEM IN GOOD TIMES OR BAD
How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition
The Successful Investor: What 80 Million People Need to Know to Invest Profitably and Avoid Big Losses
24 Essential Lessons for Investment Success
Mark Boucher
The Hedge Fund Edge
Jesse Livermore
How to Trade In Stocks
Richard Love
Superperformance stocks: An investment strategy for the individual investor based on the 4-year political cycle
Nicolas Darvas
How I Made $2,000,000 In The Stock Market
Frank Cappiello
Frank Cappiello's New Guide to Finding the Next Superstock
Louis Navellier
The Little Book That Makes You Rich: A Proven Market-Beating Formula for Growth Investing
Gary Kaultbaum
The Investor's Edge: How to Empower Yourself for a Lifetime of Investment Decisions
Michael Moe
Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow
Ralph Wanger
Zebra In Lion Country: The Dean Of Small Cap Stocks Explains How To Invest In Small Rapidly Growing Companies
John Boik
Monster Stocks: How They Set Up, Run Up, Top and Make You Money
How Legendary Traders Made Millions
Here are brief reviews of some of these books:
Peter Lynch
One Up On Wall Street : How To Use What You Already Know To Make Money In The Market
Beating the Street
Learn to Earn: A Beginner's Guide to the Basics of Investing and Business
- "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them."
- "The very best way to make money in a market is in a small growth company that has been profitable for a couple of years and simply goes on growing."
- Peter Lynch was a mutual fund manager at Fidelity, he was in charge of Fidelity Magellan fund for 13 years.
- Invest in what you know was his simple investing mantra.
- His average returns for 13 years were 29.8% which were twice the S&P average growth rate for same period.
- He was constantly looking for undiscovered growth opportunities in day to day life.
- Once he had a good idea he did rigorous financial analysis to vet them.
- Peter Lynch is known for his PEG ratio of price/earnings/growth ratio.
- Lynch found that looking at the P/E ratio by itself was less useful than looking at it in comparison to a company's growth. The logic was that higher P/E ratios are okay, if the the firm is growing at an appropriate pace. He favored companies with a forecast P/E ratio well below their forecast EPS growth rate (i.e. a low PEG ). If a company's P/E ratio was about even with or less than its growth rate (i.e. P/E divided by growth rate equals 1.0 or less), Lynch saw that as acceptable
- He liked companies with a strong cash position.
- He avoided companies with a high debt-to-equity ratio ('gearing'), especially if the debt was in thee form of bank overdrafts (which are repayable on demand, rather than bonds, which are not).
- He categorized companies in to six categories:
- Fast growers - small, aggressive new companies growing 20-25% or more. This was his main focus. He was always searching for ten baggers.
- Stalwarts - good companies with solid EPS growth of 10-19%. Lynch always keeps a few stalwarts in his portfolio, as they offer protection during recessions or hard times.
- Turnarounds - companies with temporarily depressed earnings, but good prospects for recovery.
- Asset plays - companies whose shares are worth less than their assets, provided these assets could be sold off for at least book value.
- Slow growers - raising earnings at about the same rate as the economy, about 2-4% a year. Avoid they are too unprofitable.
- Cyclicals - whose earnings rise and fall as the economy booms and busts. Avoid as they are too hard to time
- He advises summarizing the story behind every stock chosen as a 2 minute monologue.
- The reasons you are interested in it
- What has to happen for the company to succeed
- The obstacles that might prevent its success.
- 50% or more of his ideas did not work, but he got out of them within months.
William O'Neil
HOW TO MAKE MONEY IN STOCKS: A WINNING SYSTEM IN GOOD TIMES OR BAD
How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition
The Successful Investor: What 80 Million People Need to Know to Invest Profitably and Avoid Big Losses
24 Essential Lessons for Investment Success
-
William O'Neil started out in 1958 as a stockbroker. During his three years in the job, he made a careful study of the top-performing mutual funds of that time. Jack Dreyfus was the leading mutual fund manager at that time. William O'Neil was greatly influenced by his style. He discovered that Dryfus success was entirely due to buying stocks that were setting new highs in price. In the language of chartists, they were 'breaking out' of previous holding patterns or 'consolidations'. Many of them would then go on to make advances of many tens or even hundreds of percent.
-
He decided to copy this method. Within a year or so, he had turned $5,000 into $200,000. In 1963, he bought a member's seat on the New York Stock Exchange and founded the firm he still runs today. He also has his own internal fund and employs fund managers who use his investing style.
-
His company is one of the leading supplier of financial statistics and data to professional investors. WONDA is the O'Neil proprietary database and is used by many big speculators and funds.
-
In 1983, he launched a financial newspaper to rival the Wall Street Journal, called Investor's Business Daily. IBD was a loss making venture for many years and rumored to have turned profitable only in recent years. In addition he has a big printing business.
- William O'Neil books offers you a complete, well thought out, and researched based system for trading growth stock. If you want to make money trading growth stocks, you should study his method till you can thoroughly understand it and internalise it. It should become part of you.
- Most people do not have the doggedness to understand the nuances of method and give up and keep searching for the holy grail. If you are really serious about making money, take this book, close yourself in a room, do not come out till you understand every single thing in it and can explain it to someone in your own words. I suggest reading all his books including old editions, you will find how his thinking has evolved over the years.
- The starting point for William O'Neil approach is a study of past biggest winners in the market. He analysed 600 of the biggest stock market winners from 1950 to 2000 and developed a model of stock which significantly outperform the market. He looked at their earnings history during the rise, their chart patterns, their volume patterns, their mutual funds ownership, float, number of stock outstanding, relative strength and their sector. The study forms the basis of his CANSLIM method.
- CANSLIM is a short form for key elements of his method:
- C= Current Quarterly earnings per share: the higher the better
- A= Annual earnings Increases: Look for significant Growth
- N= New products.New Management. New Highs: buying at the right time
- S= Supply and demand: shares outstanding plus big volume demand
- L= Leaders or laggard:Which is your stock?
- I= Institutional sponsorship: follow the leaders
- M= Market Direction: How to determine it
- The stock you select should show a major % increase in current quarterly EPS. EPS should be up 25 to 50% or more over the same quarter previous year. The best companies might show earnings up 100% to 500% or more.
- Select stocks with 25 to 50%or more annual growth rates. Look at the stability of company's three year earnings record. The emphasis is on selecting stocks with good earnings track record which in recent quarter had earnings acceleration. Earnings momentum is key part of CANSLIM stock selection method.
- Look for a catalyst. It takes something new to produce a startling advance in the price of stock. It can be new product, or change in management, new industry conditions like shortage, price increase, revolutionary new technology or change in govt regulations.
- Look for stock with small supply by looking at number of shares outstanding. In his first book he specified look for stocks with less than 25 million float. In recent editions he has dropped those requirements and made it more expansive criteria with 50 million outstanding shares. Avoid stocks with excessive splits. Look for companies buying own stock in the market. Prefer companies with high management ownership.
- Look for stocks within top 15% of relative strength. Concentrate on top 2 or 3 stocks in a sector. They can have unbelievable growth, while others in the pack may hardly stir. Do not buy stocks below 80 in relative strength rank.Look for stock showing abnormal strength during bearish market phases. They could be future leaders once market starts rallying.
- It takes big demand for a stock price to move up. Mutual funds, banks, pension funds, hedge funds are the big players. Look for stocks being aggressively bought by these large speculators.Quality of sponsorship is important. Look for stocks which are being bought by mutual funds which are in top 5% in performance. A new stock position bought by funds in last quarter is more significant. Avoid stocks with excessive institutional ownership oroverowned stocks.
- If you buy the best of stock in wrong market environment it will not perform. So a method to determine market direction in critical to success in growth investing. Study the past market bull and bear cycles. Look for a rally attempt confirmed by follow through day to confirm and end of bear market. Look for 4 to 5 distribution days on high volume for end of bull market. Learn to determine overall market direction by accurately interpreting the daily market indices's price and volume movements and action of individual market leaders. This can determine whether you win big or lose.
- Cut all your losses at 8% from entry price.
- His book 24 Essential Lessons for Investment Success
is better written compared to his other books. Recently a new edition of his book has come out which has minor new additions.
Mark Boucher
The Hedge Fund Edge
- Mark Boucher is a Hedge fund manager who got interested in trading when a bear market destroyed his trust fund set up by his father.
- The Hedge Fund Edge is a very ambitious book in its scope and at times digresses in to unrelated topics. The writing style is not crisp. There are some glaring data errors and typographical errors, but it is very useful book in furthering your understanding of growth investing. It is not a easy reading and part of the book can be safely ignored.
- The central message of the book is look for superior returns per unit of risk. Do not get caught in absolute returns. It is essential to consider investment strategy not only in terms of total returns but also in terms of returns,drawdowns, volatility, duration of drawdown and reliability of returns. Keep your drwadowns below 20 to 30%.
- There is a significant risk in buy and hold approach. Investors need to understand long term secular bull and bear markets. Historically every secular bull market has been followed by large and lengthy correction cycle, often lasting decades.
- If you want to achieve high average annual returns then you need to follow a flexible and adaptive global investment approach with many asset classes and should not rely only on stocks and bonds for returns. So expand your investment options from stocks and bonds only to stocks, bonds, commodities, currencies, futures instruments, real estate and other asset classes. Look not only at US markets but look at global market.Investors need to time their moves among different asset classes to avoid negative returns period in equity markets.
- This kind of a approach was difficult for average investor to follow when this book was published but today with proliferation ofETF's , it is possible to have this approach.
- To systematically time such asset classes the book emphasises a concept of "fuel". Big moves is assets require fuel to propel them forward. Fuel is a combination of factors which create a environment in which a particular asset class can outperform. Fuel is a force which propels prices in one direction or another.
- The author presents the Austrian Liquidity Cycle as an example of fuel which moves market. For asset prices to rise , money must flow in to markets from either increased savings, portfolio shifts, or new money creation. In the modern economy the single largest factor driving such liquidity is monetary policy. The Fed liquidity moves dwarf all other factors so monitoring the flow of new money from the central bank becomes paramount for successful investing.
- He researched and developed many monetary "timing systems" to time this liquidity cycle. Some of these models have deteriorated over the years. But understanding of them is useful if you are following a top down approach to investing. ( For a more detailed look at developing such monetary timing models look at books like Ned Davis book Being Right or Making Money
and ECRI approach as detailed in Beating the Business Cycle
)
- Boucher Monetary Timing Systems:
- 3 Month T-bill yield, 12 month ROC
- Dow Jones 20 Bond Index Annual ROC
- Annual change in 30 year govt bond yield
- 30 year bond yield versus 3 month T bill yield curve ratio
- Composite of positive conditions in T-bill yield, Dow Jones 20 bond index prices and 30 year bond yields.
- Capacity Utilization based S&P buy and sell
- Industrial Production 12 month ROC
- Unemployment , 29 month ROC
- CPI Inflation and GDP quarterly growth
- CPI fast and slow ROC
- Commodity Research Bureau Index 12 month ROC
- Sensitive Material Prices 18 month ROC
- These kind of econometric model building for timing the market is one of the ways to look at the market. But at the end of the day there are very few models like this which are always correct. They are prone to false signals. I spent lot of time on looking at some of these kind of macro economic based models and put in lot of effort in developing some of these kind of models. But now I prefer purely breadth based models like Market Monitor for market timing.
- This is the first part of the book. In next part we will look at rest of the book which deals with finding and trading growth stocks.
Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow
Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow
The author describes in detail his firms methodology to identify and invest in stars of tomorrow- the fastest growing, most innovative companies in the world. The idea like in any growth investing is to find small, unknown company , young company, with lots of growth potential ahead of them. If you find and invest in such company early, you benefit when the company is discovered and the opportunity becomes widely recognised. The author gives examples of companies like Starbucks, Apollo Group, Dell, and so on to illustrate his point.
The central premise of the author based on his analysis of past data is that in the short run variety of factors influence stock price- geopolitical events, funds flow, interest rates and so on. But in the long run only one thing influences stock price- Earnings Growth.In the long run, a company's price will be 100% correlated with its earning growth. Earning growth drives stock price. That is the central message of the book.
One of the pitfalls of growth investing is for every Starbucks, you have 10 or even 1000 duds which do not live up to expectations. The author offers an elaborate methodology to try and identify such stocks. That is where the book varies a bit from the CANSLIM method popularised by William O'Neil. This is where the book also loses its focus and makes the CANSLIM method needlessly complicated.
Many of the items on the laundry list of checklist to find tomorrow's winners is nice sounding rhetorical word plays:
1 Be right on fundamentals
2 Be proactive, not reactive
3 Be rigorous , but do not have rigor mortis
4 When wrong, admit it
5 The cockroach theory
6 Investment ideas are about information and insight
7 4 P (people, product, potential and predictability
8 Use 5 independent sources for each stock you invest in
9 Find 3 main reason for a stock to move up or down
10 Be passionate about investing, but dispassionate about the investment
Many of these things sound nice but are not really actionable. To further complicate the effort, the author proposes a framework for identifying megatrends. Hind sight is a very wonderful thing and the 8 megatrends identified by the author suffer from this bias. It is very easy to identify megatrends after the fact. A large part of the book is devoted to these megatrends.
All in all the book basically is a variation of the CANSLIM style investing concept. It tries to improve on it and in the process makes it more complicated.
Save your money, don't buy this book. The book vividly demonstrates the temptation to complicate simple things.
Superperformance Stocks by Richard Love is book mentioned by two of the Market Wizards as influencing their trading most. Many past employs of William O'Neil mention this book as one of the books which influenced them most. It is an out of print book and was published in 1977. The author was a trader and investment adviser. The central premise of the book is buy only for large capital gain:
I believe that an investor should look for stocks that are capable of tripling in value within two years . Since it is unlikely that the investor will buy the stock at the lowest price and sell it at the highest, it is more likely that he will double his investment rather than triple it. Stocks should not be purchased unless there is a good chance of a big move.
It details a approach to find and invest in such stocks.
I developed the Double Trouble method based on this book.Superperformance= SPF (as short form is used )
- First consideration in buying stock is safety. Safety is derived more from the good timing of purchase and less from the financial strength of the company.
- The biggest stocks and growth stocks also decline during bear market. Even income stocks (stocks with high dividends) decline during bear market or periods of high inflation
- Most stocks are price cyclical
- Buying stocks as the market rebounds from bear market lows. It is the safest time and it offers the best opportunity for large capital gains.
- The best time to buy most stocks is when market looks like a disaster. It is then that the risk is lowest and potential rewards are highest
- Buy for large capital gains."I believe that the investor should look for stocks that are capable of tripling in value within two years. Since it is unlikely that the investor will buy the stock at lowest price and sell it at highest, it is more likely that he will double his investment rather than triple it."Stocks should not be purchased unless there is a good chance of a big move.
- The selection of common stock for large capital gains depends primarily on a search- a search for super-performance (SPF)
- I define SPF stock as one that tripled in last two years.
- Rate of price increase >300 in two years
- Move was considered ended if price failed to make a new high in last six months
- Or a if there was a price correction of more than 25%
- Super-performance has occurred in well known growth stocks and it has happened in well known mature companies at some stage in their growth.
- It is triggered by many actions such as earnings, mergers , but most often it is found in stocks that are rebounding from oversold conditions, such as those characteristics of bear market bottoms.
- When you invest in common stock you must make three correct decisions: when to buy, which stocks, and when to sell. The evidence is overwhelming that really good price gains are made by stocks as they rebound from bear market bottoms.
- SPF price action is not consistent year after year in even the greatest growth stocks. The stock prices usually move rapidly upward for a period of months or several years. That stage might be followed by price reaction or sideways price moves. After a period of consolidation, which sometime lasts for years, there might be another SPF stage.
- Price SPF phases like these can be highly rewarding financially in a relatively short period of time.
- Many SPF moves can be correlated with earnings increase by companies.
- Most SPF stocks belong to small companies with relatively few shares of stocks.
- Most SPF stocks experience severe declines after SPF phase has run its course.
- Three causes for price reactions in SPF: weakness in general market, overpricing of stocks, and drop in stock's earnings. Stock price begin to slide much before earnings slide.
- A winning combination in potential SPF stock is rapidly rising earnings, a small supply of stock, low P/E, and a product that promises strong future growth.
- Superperformance= SPF (as short form)
- After you decide on ideal time to buy, next question is "which stock"
- Look for price volatility . The volatility a stock experienced in past continues in future. Look for highly volatile stocks.
- Volatility is a result of company's size and nature of the markets for its products, its financial leverage, and volume of trading in its stock.
- Volatile stocks have larger swings.
- Huge and mature corporations do not have high price volatility. Small and medium companies do.
- Large % increase in price is caused by a number of factors, but particularly by the size of the float.
- Demand for stock is determined by several factors including: price levels, price action, future outlook, earnings trend, overall market direction, sponsorship, cost and availability of money
- Some of the strongest SPF price moves have been result of a severe imbalance between the limited supply and the demand of investors.
- Opportunities for a big gains in stock market are most likely to occur in relatively small companies than in companies with many millions of shares outstanding. Look for small company introducing a unique product that is likely to become widely used. This is the combination that has time after time resulted in dynamic growth and volatile SPF price action.
- Financial leverage in a stock is often responsible for high volatility in the stock's price. In such companies reported earnings can fluctuate greatly if there are large amounts of debt in the capitalization.
- Stocks with high leverage offer good opportunities for profit provided you can time entries and exits. Such stocks are risky but very profitable.
- A stock has high leverage if the company has high proportion of bonds and preferred stocks relative to the common stock.
- A relatively modest increase in income in such companies leads to disproportional increase in EPS
- Airlines and utilities are best examples of high leveraged companies.
- When high leverage is combined with an erratic income pattern- such as railroads or certain cyclical businesses, volatility in EPS can occur resulting in great volatility in stock price.
- Financial leverage is also found in warrants, stock options, and in many low priced stocks.
- Retail sector is another high leverage sector . Retail tend to have high volume but low margin. Any improvement or deterioration's in margins have strong impact on EPS
- High leverage is involved when a small company discovers large oil field or metal ores.
- Safety is sacrificed when you select company with high leverage. High leverage companies have greater danger of going bankrupt.
- During periods of recession, when profits decline for most businesses, companies that have large amounts of debt sometimes have no profits at all. But as the national economy emerges from recession, corporate sales and profit margins improve. The % increase in profits can usually be larger than for stocks with small leverage. Highly leveraged companies, then, are even more business cycle sensitive and often are buying opportunities when the stock price is depressed.
- Another type of leverage is that found in low priced stocks.
- Best place to look for Superperformance (SPF) stocks is among stocks selling at 5 to 20
- Comparatively few high priced stocks move in to SPF action
- Cyclical stocks often have abrupt declines in sales or earnings that are temporary.
- Many low price stocks have only temporary problems and can rebound if earnings and sales rebound.
- Another kind of leverage is warrants.
- A warrant is preferable to buying common stock.
- Avoid warrants with less than one year to go before rights expire and options become worthless.
- Look for new earnings power
- Primary objective of companies is profit.
- Companies are not in a business to make automobiles or soap or television set or widget, they exist to make money.
- Investors should evaluate companies from the point of view of their profit generating potential.
- In established companies earnings are predictable. Most of them are too large to be affected by new products. Their product lines are too extensive for a new product to make dramatic change in profit.
- But in smaller companies profit are strongly affected by change. Their prices often do not reflect changes like new product launch or new management.
- One place to look for new earnings power is to look where change is happening.
- Change means opportunity, and change is one thing that is certain.
- Wars begin and end
- Fed policy changes from tight to plentiful
- Technology changes constantly
- Technology changes during past century have afforded countless opportunities for profit.
- New industries in last century were
- railroads
- automobile
- airplanes
- electricity
- radio
- computers
- rocketry
- electronics
- birth control pills
- mobile houses
- travel
- Many shareholders who bought shares of these companies at early stages profited handsomely.Today there are other companies in similar early stage of development
- Change in company might involve change of management or acquisition of another company. Major mineral or oil find
- Change implies the introduction of a new element that has not been factored in to current stock price.
- Most superperformance moves are caused not by development such as increased earnings, but rather by overreaction of investors to those developments.
- Some of the biggest stock market profits are made by going along with the crowd while it pushes the price of a stock higher and higher in non stop optimism. SPF moves in stocks happen when large number of investors all think alike and cause a buying stampede.
Louis Navellier
The Little Book That Makes You Rich: A Proven Market-Beating Formula for Growth Investing
- Louis G. Navellier is Chairman and Founder of Navellier & Associates , which manages approximately $5 billion in assets. Navellier also writes four investment newsletters focused on grwowth investing: Emerging Growth, Blue Chip Growth, Quantum Growth and Global Growth. He can frequently be seen giving his market outlook and analysis on Bloomberg, Fox News and CNBC
- Louis Navellier in his book gives a formula for beating the market using growth investing. There are many flavors of growth investing and this book presents one of the approach to selecting growth stocks for investing purpose.
- At the heart of the Navellier system are eight variables he has found useful in selecting growth stocks. They are:
1. Earnings revisions
2. Earnings surprises
3. Sales Growth
4. Profit Margin Expansion
5. Free cash flow
6. Earnings Growth
7. Earnings Momentum
8. ROE
These factors are very similar to CANSLIM factors. Obviously he has added more nuances to it, but at the end it is similar to IBD approach. The book leaves many details out and so you will have to rely on the accompanying website to replicate exactly the authors ranking.
- This book is seriously lacking in many details so it becomes more of a trap to get you to sign up for his service.
Frank Cappiello
Frank Cappiello's New Guide to Finding the Next Superstock
- Frank A. Cappiello is President of a McCullough, Andrews & Cappiello, Inc., a large investment counseling firm with offices in San Francisco, CA and Baltimore, MD. Frank Cappiello is best known to television viewers as a regular panelist of the PBS television series "Wall $treet Week With Louis Rukeyser".
- There are stocks and then there are super stocks, there is a stock market and there is a super stock market. And they barely know each other. That is the central premise of Frank Cappiello's book on growth investing.
- Super stock according to him is a stock of small growing company which will beat the market significantly. His book was published before O'Neil book. It also gives a approach to trading growth stocks.
- All the things he finds about growth stock are more or less same as what the CANSLIM approach emphasizes in stock selection. He found 9 characteristics common to super stocks.
- Small to medium size
- Rising unit sales volume
- Rising pretax profit margins
- Above average and improving return of shareholders' equity
- Strong earnings per share growth relative to other stocks
- A low payout ratio with rising dividends
- Low debt ratio
- Low institutional holdings
- Increasing price earnings multiple
- In this book by John Boik, he focuses on period between 1897 to 2007. He features eight great traders of all times and tries to demonstrates how they traded using examples of their actual trades. The book also does a good job of giving historical perspective on how the market behaved during this period. The book goes in to decade by decade in to market action, lays out economic conditions at that time and market characteristics at that time. Then it details the industries or sectors favored by he market during that time. Then it details the strategies used by the selected traders during that market periods.
The eight traders featured in the book are :- Bernard Baruch
- Jesse Livermore
- Richard Wyckoff
- Gerald Loeb
- Nicolas Darvas
- Jack Dryfus
- William O'Neil
- Jim Roppel
- Now when you go through the development of each of these featured traders, you would notice a common thread. At some stage in their profitable career development , they realized after studying the market that the real money in stocks is made in trading growth stocks, stocks of companies growing earnings and sales rapidly. That proved to be a turning point for them in most cases. Some realized it early in their career, many realized it after 5-6 years after trying all kinds of things.
- The book details actual trades done by these traders and if you go back and look at those stocks, they were the growth stocks of that period. They made their millions by trading the leading stocks in the leading 4-5 sectors during their time periods.
- Now this kind of a book is valuable resource for new traders as it will prevent you from chasing wrong ideas and approaches. Growth investing has been around since the market first opened for business. It is one of the proven ways to make money.
- There is a lot of useful historical material in this book for growth investor and I would recommend it to all those seriously interested in making money using growth investing.
John Boik
Monster Stocks: How They Set Up, Run Up, Top and Make You Money
- It is basically another take on growth investing. Much of the book is rehash of CANSLIM method. However I still recommend it for growth investor as the lessons from this book will come in handy once this bear market gets over.
- A monster stock is basically a stock that doubles in price in 4 to 18 months. Many of them will go up 3, 4 ,5 or 10 times plus in short time periods.
- If you want monster returns, you should know how to identify and handle the next monster stock.
- Book covers some monster stocks that appeared in last 10 years (1997-2007)
- Monster stocks are growth companies, most trade on Nasdaq, have new and innovative products and above average earnings and sales growth . When they catch the attention of big money investors, the huge demand from these players leads to them making monster moves in short time frames.
- Each major up move in overall market leads to emergence of such monster stocks.
- Eventually all such stocks top and often the top in such stocks coincides with new downturn in overall market.
- Recognize a monster stock at right time, sit with it for right amount of time and then sell it at correct time. That in short is the way to monster returns.
- "It only takes a few monster stock, if you handle them correctly, to improve your life financially" Jim Roppel.
- Stocks highlighted in the book as monster stocks by year are:
- 1997
- Jabil Circuits
- Compaq Computers
- Home Depot
- Yahoo
- 1998
- AOL
- Charles Schwab
- Network Appliances
- Lucent Technologies
- Sun Microsystem
- Optical Coating Lab
- Yahoo
- Nokia
- 1999
- Qualcomm
- Broadcom
- BEA System
- Microstrategy
- Yahoo
- 2003
- SanDisk
- Amazon
- Ceradyne
- Coach
- eResearch
- Harman
- Gen Probe
- Int. Game Technology
- Omnivision
- Yahoo
- American Pharma Partners
- Dick's Sporting
- JetBlue
- J2 Global Communication
- Mobile Telesystem
- Stratsys
- Teva
- United Online
- Sina
- 2004
- Taser
- Apple
- Southwestern Energy
- 2005 and 2006
- Hansen
- Hologic
- Apple
- Titanium Metals
- NVE Corp
- Crocs
- Research in Motion
- 1997
- These are the stocks covered in this book. But these were not the only stocks which had monster moves in these years.The stocks highlighted in the book are basically based on WilliamO'Neil's trading record and Jim Roppel trading record.
- If you look at all these stocks you will see earnings growth of 50% plus during their Monster Move phase. They all had strings of quarters with 50% plus and in most cases 100% plus earnings growth during their Monster move phase.
- Even though the book is a bit of a hack job, the basic concept of finding monster stocks is a valid concept and the basic idea ofCANSLIM is to find such stocks. However even Mr O'Neil acknowledges the difficulty of finding a Monster Stock at beginning of move and staying with the move throughout its run.
- If you read William O'Neils first edition , earlier his approach was completely focused on finding such monster stocks. In latest book he advocates finding several 20% kind of moves and occasionally finding a Monster Mover.
- The real monster moves happen after a bear market. After the 2000-2002 bear market when market started rallying after start of Iraq war, there were over 500 stocks up 200% plus in less than a year. If you go back and look at the stocks from that period you would see several straight vertical moves with very few corrections on individual stocks. A period like that can be incredibly profitable forDT, IBD 200 and EP methods.
Wednesday, December 03, 2008
Fat tails in stock returns
This interesting study makes a case for trend following on stocks and buying new high or new all time high.
The Capitalism Distribution - The Realities of Individual Common Stock Returns
by Eric Crittenden and Cole Wilcox, BlackStar Funds
When most people think of the stock market they do so in terms of index results. Popular indexes include the S&P 500 and the Russell 3000. However, most people are not aware of the tremendous differences between winning and losing stocks “beneath the hood” of a diversified index. From 1983 to 2006 over 8,000 stocks (due to turnover and delisting) were at some point members of the Russell 3000. The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. (Some Russell 3000 statistics here.)
Key findings:
39% of stocks had a negative lifetime total return
(2 out of every 5 stocks are money losing investments)
18.5% of stocks lost at least 75% of their value
(Nearly 1 out of every 5 stocks is a really bad investment)
64% of stocks underperformed the Russell 3000 during their lifetime
(Most stocks can’t keep up with a diversified index)
A small minority of stocks significantly outperformed their peers
(Capitalism yields a minority of big winners that all have something in common)
In this paper we make the case for the Capitalism Distribution, a non‐normal distribution with very fat tails that suggests a small minority of stocks have been responsible for virtually all the market’s gains while most stocks have been below average investments.
Tuesday, December 02, 2008
5 day bounce suffered a serious blow
- 5 day old rally suffered a serious blow after holiday week was over.
- The MM 4% breakout ratio is 80/3101. Half trading day on Friday is one of the reason for such a high ratio.
- It was the 4 th largest decline in Dow Jones index since its inception.
- A pullback of some kind after a 5 day rally was expected but the market action on Monday went much beyond a pullback kind of action.
- Market opened lower and kept going down.
- At this stage the lows established in October still holds
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