September 23rd, 2008
Most of us have been extremely defensive for quite a while (nearly nine months for some of us) and sometimes we forget what it feels like searching for stocks to buy. But it doesn’t hurt to dream, to plan ahead and to begin thinking about how we’ll want to climb up the other side of this deep valley. We have nearly a clean slate and a safe stash of cash to begin with. As market momentum swings from dire pessimism to lukewarm optimism, we’ll have to start from scratch assembling a portfolio.
If we had essential gotten out of the market as dictated by the Market Timing Indicator (MTI) then, on a relative basis, our portfolio will have significantly out-performed our benchmark, the S&P 500 Index. By being in cash, our portfolio will have lost perhaps 0-4% (depending on how quickly we got into cash and to what extent) while the market will have declined anywhere from 25-40%. That’s equivalent to having a bushel full of stocks increase 35-50% when the market goes up only 10%. That’s why we’ve learned to – pardon the callousness – love bear markets.
How do we begin? What sort of stocks should we be looking for? Timing the market is the first half the challenge; the other half is selecting the right stocks to buy. Quite simply, we’ll look to continue outperforming the Index by looking for stocks that have a have a high probability of increasing faster than the Index. These stocks will meeting two criteria: 1) they’re stocks the herd is piling onto and 2) they’re stocks facing little headwind.
Are they going to be the stocks that fell the furthest? the stocks that fell the least? Should we look among the large-caps, the mid-caps of the small-caps? Should we look according to industry, for example among the techs, healthcare or consumer staples? What about stocks with a large percentage of foreign sourced revenue and profits? When the time comes, you’ll begin the media trotting out the professional talking heads pushing for their favorites. Do you listen to them … and get even more confused … or do you develop your own strategy and vehicles.
I’ll tell you the type of stocks I’ll be scanning for:
- stocks making new highs (past 12-months, past 4-years and all-time)
- stocks that have positive relative strength
- stocks with fundamental momentum (earnings growth, low P/E, positive relative strength)
- IPOs of 2007-2000
- leading stocks in leading industries
I’ve had a running conversation with a reader about whether the timing is right to buy one particular stock, ENS (Enersys) who, according to Google Finance,
“is a manufacturer, marketer and distributor of industrial batteries. The Company also manufactures markets and distributes related products, such as chargers, power equipment and battery accessories, and it provides related after-market and customer-support services for industrial batteries. Industrial batteries generally are characterized as reserve power batteries or motive power batteries.”
The company’s financials look appealing with sales and profits growing at a fast clip ever since the IPO in 2004. The stock is very volatile having dropped nearly 50% in just 3 short months. While XIDE (Exide) is a competitor, it too has dropped by nearly 50% over the same period. Clearly, the excite for these companies come from all the talk of alternative energy drive systems for transportation and other applications.
I won’t address the question of business fundamentals but I can try to answer the question of what investors should consider when looking at the ENS stock chart:
It looks complex but let me walk you through it. It took two years after the 2004 IPO to break out to new territory. As is common on breakouts of major bottom or consolidation formations, the stock formed another consolidation formation – in this case a symmetrical triangle that extended out nearly 18 months during which the herd decides whether to upward momentum is possible.
When the second breakout is successful (simultaneously with the credit crises), the stock doubled. Ultimately, the stock succumbed to the weight of the soft overall market and retraced the back to the appex of the symmetrical triangle.
I don’t know if this is a good time to buy but I would want the stock to find support at either the apex of the symmetrical triangle or at the upper boundary of ascending triangle. Considering the steepness of the decline from its peak, it will take both a market recovery and the stock finding support before the stock looks like a relatively safe bet.