June 29th, 2007

Dear Jim Cramer (3): WAG

Dear Jim,

Alright, I may have been a little too harsh with you yesterday but I wanted to make a point which is “regardless of how much and how good the information an individual investor has, regardless of how experienced that investor might be, fundamental analysis alone may not lead to timely and correct investment decisions (as evidenced by your incorrect assessment that Walgreen was a better purchase in 2005 than Rite Aid). My argument is that perhaps the first and only tool individual investors need for making good investment decisions are stocks.

Perhaps a good way to demonstrate this is to simulate the analysis, choices and decisions a chartist might have made in mid-2005 contemporaneous to your writing your book (in other words, do a “what-if”). It’s only through study real cases like these can chart reading skills be developed.

Walgreen: There’s no question that Walgreen was considered a good company in June, 2005, but would WAG have been considered a good stock to buy then. Coincidental with the markets’ making a bottom in February-March 2003, WAG ramped up 70% to the end of June 2005 at which point is was bucking up against the resistance trendline stretching out from its previous all-time high reached in 2000-2001. It had a strong RSI throughout 2004 and 2005 greatly out-distancing the S&P500’s move. The S&P 500 had been stalled since the beginning of the 2005, unable to forge into new high territory. But WAG had successfully bucked the market’s trend until reaching that resistance trendline.

If we had missed the move’s beginning in 2003 and were looking to buy in 2005, as a chartist I would have waited until WAG (along with the overall market) broke through this very important trendline. It succeeded at the end of June and briefly continued to all-time new high territory . Unfortunately, the breakout failed and the long-term trendline, which was a resistance on the way up, failed as a support when it was tested on the way down in September.

When a stock disappoints, like WAG did here, then you have to sell to keep your small losses regardless of how good the fundamentals might be. Apparently, the momentum from big institutional support that carried WAG all the way from under 5 in 1995 to the mid-40’s in 2000 could not be recouped to carry the stock above that high in 2005.

Back to the theme of “Life Cycle Investing”, one might say that 1995-2000 was WAG’s growth phase as it reinvented itself into a drugstore chain. The market crash pushed it into its maturity phase in 2000-2005. Based on the charts we saw yesterday, it appears to be attempting to reinvent itself and move into a new growth phase. It’s unclear how long it might take before WAG to become, or if it ever will be, successful but an investment in 2005, as you recommended, would have become dead money. I still wouldn’t buy it today because of the many other stocks in their growth phases competing for my available investment dollars.

more on RAD soon …..

Subscribe below or click here to learn more about help for navigating turbulent markets.