February 15th, 2012

Don’t Let A Stock’s Price Scare You

Traders frequently harbor an aversion to high priced stocks, however, that shouldn’t necessarily be the case.  A perfect example would be a stock that I purchased for my portfolio on January 17 at 189.48.  The stock was TNH (Terra Nitrogen) and I informed members of the trade through an Instant Alert as follows:

TNH produces nitrogen fertilizer products. Although the Group doesn’t appear to be among the top tier, TNH has a 7.55% dividend yield. The stock looks like it may be on the verge of clearing out of an ascending triangle form of congestion and begin moving higher.

TNH was a stock captured in the “Stocks on the Move” Watchlist of January 6.

TNH did break out of the triangle and as of this morning is up to 236.99 for a 25.07% gain in a little over a month.

Fortunately I wasn’t scared off by the stock’s high price.  That high dividend yield is still locked in and looks even better now; the question now is whether to lock in the profit or let it ride?  What say you?

But the way, I’ve added 17 stocks to my portfolio since the beginning of February in an effort to put more risk on the table.  Members were alerted minutes after the trade for my own account is completed.  If you’re interested in seeing what I’m doing for my own account, click on the Membership tab at the top or the Subscribe button below.

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January 18th, 2012

The Challenge of Assembling a Watchlist

Since the market looks like it’s firming (my opinion and, yes, I’m aware that many believe the market is actually topping out and will soon be making its final leg down to new lows), now’s a good time to begin assembling your watchlist of stocks that may be ripe for the picking as soon as a bull market begins unequivocally.  I’ve assembled four such Watchlists for members of Instant Alerts, each based on one of the following four scans:

  • 5-yr Highs(scan run on December 23): a truly momentum-based scan that produced a list of 51 stocks that crossed into all-time new-high territory .  The premise is that a stock that has made “all-time new highs” has a low risk of reversing course and is likely to continue making new highs.
  • Relative Strength (scan run on December 30): another momentum-based scan that produced 22 stocks that had a the top 10% relative strength vs. the S&P over the past year plus were in the top 10% in shares traded over the previous five days.
  • “Stocks on the Move (scan run on January 7): a scan that produced 53 stocks based on a combination of both fundamental and technical indicators as follows:
    • Price > $15
    • Price % change today > top 25%
    • Relative Strength Indicator (RSI) > top 50%
    • “Moneystream” Surge for past week > top 50%
    • EPS % change for past 4 qtrs > top 50%
    • Volume Surge today > top 50%
  • Momentum (scan run on January 13): another stab at a combined fundamental and technical scan that produced 128 stocks
    • Earnings Growth Rate over 5-years – top 25%
    • Sales Growth Rate over 5-years – top 50%
    • P/E Ratio – top 50%
    • Price > $10
    • Volume ($) for the day – top 50%
    • Relative Strength vs. S&P 500 past year – top 50%

You would expect that the same names would appear on multiple lists because the criteria overlapped to some extent. Interestingly, that didn’t happen.  While 254 stocks appeared on all these lists, there were 237 unique stocks …. only 17 names appeared multiple times.  In other words, each scan produced pretty much different names.

To see how this list compared to stocks that have performed well, I produced another scan: stocks whose four moving averages (50-, 100-, 200- and 300-dma’s) were in a perfectly bullish alignment from the fastest on top to the slowest at the bottom.  Out of 5100 stocks,  436 met this criteria.

You would expect that many if not all the stocks in the previous scans would be on this broader list of stocks with favorable price momentum but this wasn’t the case:

  • Only 89 of the 237 stocks in the previous scans, or 37% had bullish price trends as indicated by their moving averages.
  • Fully 80%, or 347, of the 436 stocks with bullish price trends weren’t caught in the previous technical/fundamental scans.

There actually was little correlation or overlap between the different scans.  It’s actually very difficult to narrow the field down:

The conclusions I draw from these statistics are that:

  • scans are a good place to begin but there’s no substitute for good judgmental chart reading and
  • good market timing always trumps stock selection.

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December 28th, 2011

Big Pharma: Industry Group with Upside Potential

While market direction and momentum trumps everything else, the Industry Group in which a stock belongs ranks second in importance.  A subscriber to Instant Alerts last week brought to my attention a stock that, on further research is in an Industry Group that is worthy of taking a nibble into if the market will be able to sustain some sort of upward bias as we enter the New Year.

“Big Pharma” stocks, or the larger stocks in the Ethical Drug Industry Group, all seem to be forming nice size, well formed (so far) bases which could, with a good tailwind, be among the leaders in next year’s market.  The Group has consistently ranked among highest among IBD’s 197 Industry Groups: Among the largest firms in the group whose charts show the early makings of nice bottom reversal patterns (a few have already broken above the top boundaries) include (click on images to enlarge):

  • BMY (Bristol Myers): crossed above a nearly 10-year long resistance trendline
  • LLY (Eli Lilly): crossed above upper boundary of an ascending triangle but is now facing a nearly 10-year descending resistance trendline which it failed to cross over in 2007 and may fail again next year.
  • GSK (GlaxoSmithKline): Let’s not split hairs. Was it an ascending or symmetrical triangle or was it an ascending wedge? It doesn’t really matter that much since stock is clearly trudging higher.
  • PFE (Pfizer): Same as GSK, ascending triangle or wedge? Same as LLY, facing a long descending resistance trendline.
  • NVS (Novartis): An nice inverted head-and-shoulders which, since it’s not at the bottom of a trend but at the top might be called, in IBD parlance, a cup-and-handle.

Others with patterns that are not as fully developed and still in progress include:

  • SNY (Sanofi-Aventis): an ascending triangle
  • AZN (AstraZenica): a 10-year horizontal trendline that needs to be crossed.

A lot to digest but, with a more cooperative market, some potentially good fruit to pick from.  Note: all of these stocks pay dividend with yields currently 3.6% up to 4.8% for GSK.  They are about the only stocks among the 45+ in the group that do pay dividends.

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December 7th, 2011

New Highs + Dividends; Unbeatable In This Market?

I know it’s frustrating having to sit around waiting for the market to show its hand as to future direction.  But for me, it’s the cautious and prudent thing to do.  I’ve just been disappointed and have lost too much in the past by thinking I can pick the few stocks that are able to hold their own against the forces of a declining market.  But I am beginning to put together a watchlist of stocks with interesting technicals but have decided not acting on them yet.

One place I began my search is to comb through stocks that are in all-time new high territory (because of system limitations, I’m limited to stocks moving to new 5-year highs as a surrogate metric).  A measure of how poorly stocks have performed over the past 18 months is the fact that only 118, or 2.4% of all stocks, meet the criteria. The distribution of these 118 stocks by Industry Group includes:

Stocks in All-time New High Territory by Industry Group 12/07/11

Not knowing how long it will be before the market gained some upward momentum, I decided to zero in first on the stocks paying the largest dividends.  For those itching to hit that “Buy” button, here are a few stocks I came up with you might be interested in:

Top Dividend Payers + All-Time New Highs 12/07/11

Dividends and continuing their ascent into all-time new high territory.  Almost an unbeatable combination?

October 28th, 2011

The Futility of Fundamental Analysis for Us "Home Gamers"

We’ve heard it often recently, especially after the last nasty Republican debate, the gospel known as “Republican Eleventh Commandment” originally set out by gubernatorial candidate Ronald Reagan during a particularly feisty 1966 California primary: “thou shall not speak ill of a fellow Republican”. It may also be true of bloggers, especially those of the stock, investment or financial variety: “thou shall not speak ill of another blogger”.

But I just can’t resist and am aware that I risk rebuttal or criticism from other bloggers in return. The article in question came in my daily update from Greenfaucet, a piece by Chuck Carnevale, a long-time investment manager and creator of something he calls the F.A.S.T. Graphs (Fundamentals Analyzer Software Tool™). Carnevale applies his F.A.S.T. Graphs to 10 of the Dow-30 stocks and derives the following sort of chart with accompanying financial fact data sheet for each:

The F.A.S.T. approach apparently takes earnings and dividend streams and, like good fundamental analysts, comes up with a fair value for the stock to determine whether the stock, at the time of the analysis was under-, over- or fairly-valued.

His conclusions:

“….we are discussing the valuation of the markets based on the intrinsic values of the underlying companies that make up the markets. In short, based on fundamentals, we believe that many quality companies are on sale today…..

As long as valuation is reasonably aligned with fundamental value in the beginning, comparisons are primarily driven by the rate of change of earnings growth achieved, and how consistently they were achieved…..

in an instant, the investor can determine what kind of company they are looking at and whether or not it is capable of meeting their specific investment objectives and risk tolerances. We believe a specific insight on individual companies is more beneficial and productive than a more general view…..

The fact that markets can and will often misprice stocks is undeniable. Furthermore, we have always felt that it is an exercise in futility to attempt to quantify why a market is behaving the way it is when it is behaving irrationally. In other words, irrational behavior is unquantifiable, and therefore, precisely what it is – irrational. Rather than try to explain it, we believe it’s more important to recognize it and behave accordingly.

And this is where my criticism comes in. The chart of MRK above speaks for itself as to why fundamental analysis doesn’t work …. in fact, it’s worthless (the same can be said for each of the 1o stocks for which he offers similar graphs). One might not have bought MRK at 40 in 1996 when the F.A.S.T. Graphs indicated it was over-valued and missed out on a move to 92 in 2000 (when it was way over-priced) or bought MRK at 55 at the end of 2002 and still be waiting for the dividends to compensate you for the stocks erosion to 35 today.

Rather than proving his point, his charts and data only prove to me, at least, how little fundamentals have to do with valuation for the individual investor as contrasted with the proper execution of market timing, industry selection and the timely entry and exit of individual positions.

July 6th, 2009

Aiming for Dividends + Appreciation with REITs and Pipelines

Hope everyone had a wonderful 4th of July weekend holiday. I know we did because it was probably the first weekend without rain in about 3 months and, this morning, the sun’s shinning, the sky’s blue …. how bad could life be?

And then, of course, there’s the stock market. The correction everyone expected back in May and early June (see “Is it déjà vu or something new“) seems to have finally arrived:

“We’re now stuck with the toughest question in stock market investing/trading – when should you sell? Accepting the proposition of a 10% market correction to around 800-810, what should we do with stocks we now own?…..More importantly, the question you should ask yourself is whether there are strong, compelling reasons to not sell a stock……

As a general rule, I would say that market direction and momentum rules; if the market is starting to trend down, you should sell nearly everything…. Because you think it’s a good company, pays a good dividend, you already own it and believe it will come back or because Cramer just mentioned it on his show are not good enough reasons to continue holding a stock……

I know this sounds extremely conservative, some might even call it pessimistic. But I’m actually quite optimistic. I, like many others, have been waiting on the sidelines and are anxious to jump in with both feet. There are reports of huge amounts in money market accounts waiting for just that opportunity.”

Those who claim to see an emerging right shoulder to a h-and-s top and those who see it in an inverted h-and-s bottom (see “Half-Full or Half-Empty Views: A Head and Shoulder Market Top?“) are both going to be right. It’ll be a long, trying summer fending off the shouts of the bears claiming vindication in their warnings back in April of a “suckers’ rally. Also, the naysayers will harkening back to the notion that the economy is following the 1930’s Depression-style market pattern.

What most gives me agita are claims that the end to the era of living off of asset price appreciation has arrived. No more counting on your house appreciation for retirement, no more for selling hand-me-downs and junk on eBay for exorbitant prices and …. here comes the bad news ….. no more 15-20% per year appreciation in your portfolio. Just look at the volatility in prices for individual stocks in the July-March period vs. the volatility for those same stocks since March. The left shoulder of the inverted head-and-shoulders last November might have been 25% (from 980 to 750) but I’ll bet that the right shoulder will be between 10-15% due merely because of less volatility.

So what’s the strategy? Adding dividends to the total return calculation. While I, for one, would rather catch a stock’s 10-20% move up than collect $.25 in quarterly dividends off a $40 stock, having both dividend and price appreciation is like having your cake and eating it too (beating the birthday theme to death). So begins the quest for high dividends with price appreciation potential.

And what better place to begin the search than with REITs, natural gas pipelines and utilities. Many of these stocks have been beaten down in this Crash so their dividend yields are quite good; if the economy does show any signs of bottoming out, then the risk of dividend cuts at this late stage in the recession should also be reduced. Up the upside, many of the stocks are in the late stages forming excellent reversal patterns similar to the patterns of stocks included on the spreadsheet lists posted here earlier (like the stocks with bullish perfect moving average alignments). A spreadsheet list of 37 candidates (including dividend yield and volatility as indicated by Telechart) is available by clicking here. Examples include:

  • REITs
    • SUI (Sun Communities)
    • NLY (Annaly Cap Mortgage)
    • MFA (MFA Financial)
  • Pipelines
    • BWP (Broadwalk Pipeline)
    • MMLP (Martin Midstream Partners)
    • TPP (Teppco Partners)

Life might get less exciting but, just perhaps, we’ll wind up at the same bottom line.