Weekend Strategy Review October 6, 2013
Posted by OMS at October 6th, 2013
I’m going try something new this weekend as part of my WSR. Most of the time I tend to focus on Big Picture Strategy on the weekend, but because most of you already know that I believe the market is getting ready for a Major rally wave once the ‘cloud’ over the government shutdown and the debt ceiling is lifted. So I thought I would focus on a few stocks that you sent in that could participate in the ride up.
But before I do this I want to say a few things about basic stock selection, because based on a few of the stocks sent in, I fear that several of you have not read my book, or at least the part about my philosophy on stock selection.
Here’s the thing: I don’t do concept stocks or stocks that are being hyped. They are usually sucker bets. In my last Update Class, I talked about the difference between gold stocks and oil companies. This also applies to concept stocks or stocks that are being hyped. For those of you who missed that Class, I’ll go over it again.
When you look at oil and gold companies, they look a lot alike. Both employ a bunch of dirty guys that wear hard hats. Both use a lot of big equipment, either for digging or drilling. But IF you were to look at the actual site where the work is being done, neither would have a pile of gold or tanks full of oil out back. That’s because both sell their produce as soon as it comes out of the ground. This is key. There is no big pile of gold or oil being stored on the site. So when you buy an oil driller or a gold miner, you’re not getting gold or oil. All you get when you buy the company is a bunch of dirty men with hats and a lot of big equipment.
However there is a BIG difference in the price of these companies. When you buy an oil driller, you pay about 8-10 times earnings. On the other hand, when you buy a gold miner, you get to pay about 50-100 times earnings, many times much more, for the same dirty men and equipment. Go figure!
But here’s what you need to know: Let’s say that both companies earn one dollar. In other words, their entire profit for the year is one dollar. The oil driller would cost 8-10 dollars. On the other hand, the gold miner would cost 50 to 100 for the same dirty men and equipment. This is why I’m comfortable holding oil companies longer term and not owning gold companies unless the price of gold is rising.
Think of this another way. Suppose there was only one share available in both companies. And IF you owned this one share, you would own the entire company. And further, if you owned all the shares (one) you would be entitled to collect everything the company earned every year …or one dollar. This means that if you continued to own the company for 10 years, you would pay for your entire investment in 10 years.
On the other hand, if you owned a gold miner with a P/E of 50, if it earned the same one dollar, it would take you 50 years before you got your money back. If the P/E was 100 or more, it would be more than a lifetime!
This is why when someone sends me a stock with a P/E of 300 or more, I cringe! I cannot and will not put a stock like this on one of my Lists. I know you guys too well. Some of you don’t sell stocks every time the PT indicators turn negative. I know this. It’s one thing not to sell a stock with a P/E of 6-8 when the indicators turn negative. But it’s something entirely different if you’re dealing with a stock with a P/E of 700 or worse, no earnings at all. You could get hammered!
So IF I don’t put a stock you submitted into the data base for the MWL, now you know why. It’s not that the stock could go up; it can. But over the longer term, IF you make a habit of trading these types of stocks, I do not believe it will be in your best interest.
Also, I am always concerned about the management of any company I Buy. In the comments below, I have mentioned several stocks that are not well managed. The principle measure I use to tell me if a company is well managed is Return on Equity, ROE. I like to see an ROE close to 20 percent, and I like to see it for an extended period of time. If I see 20 percent, I know that if the company falls upon bad times, the management team is capable of getting through the difficult times and restoring the company back to profitability. When I see ROEs of 4-5 percent, I have little or no confidence in the management team. No, check that…I have NONE! And IF the company happens to have a P/E of 250 or more, or no P/E because there are no earnings, AND a poor management team…I have to ask WHY? I am NEVER interested in these types of companies. Never! There are just too many great companies out there with great management teams in place that can be bought at relatively cheap prices.
Anyhow, when I make comments on some of the companies you submitted, I hope you understand where I’m coming from and keep these thoughts in mind.
Atwood Oceanics, ATW, was sent in by Dean K. The stock has been in a steady Uptrend, with advances being defined by a series of Hockey Stick Patterns. The most recent high occurred after a 7 point ‘stick’ on 6 August, which was followed by a pullback to the 55 level. Currently 2 of the 3 PT indicators are Red; however the P-volume remains positive and strong. If the DMI and the MACD can turn positive in the weeks ahead, ATW has a target near the 61 level. The old high for the stock made back in July 2008, is 63.46. If it can push beyond the old high, it could enter the Free Willy mode. But this will take some doing.
Whole Foods Market, WFM, was sent in by Linda B. It’s one of those stocks I would rather sell short more than Buy. The stock is currently trading at 59.55. With a P/E of 41, the stock is extremely expensive. And with those Three Highs to a Top, and a decreasing P-volume, the stock appears to be fully valued. Be careful IF the PT indicators turn negative.
I received a request to add LinkedIn Corp, LNKD, to the Member’s Watch List. With a ridiculous trailing P/E of 931, a forward P/E of 111, and terrible ROA and ROE numbers of 2.85% and 4.24% that reflect poorly on management, I simply can’t. This is the type of stock that is likely to get hammered in a future downturn. There is absolutely no room for any set back in the company or a misstep by management at this point.
Linked in is very similar to Facebook, FB, which supports a trailing P/E of 233 and a forward P/E of 53. FB is a typical hype stock. The ROA and ROE are 7.75 and 4.34 respectively which again does not reflect favorably on management. Like LNKD, FB does not qualify for addition to the MWL at this time. It’s just way to expensive and poorly managed.
James C. sent in Helmerich and Payne, HP, which entered the Free Willy mode this week by exceeding its July 2011 high of 73.4. James said he bought the stock at 66 after perusing the middle of the MWL. The stock has a 30 point stick on its weekly chart along with a beautiful HSw/Blade Pattern. HP is currently trading at 73.7 and projects to the 85 level.
Jerry M. says Moody’s, MCO, currently trading at 71.02 has been strong during the pullback. He says it looks like it has a target near 80. I would agree, maybe a point or 2 less. My only concern would be the THT pattern. So IF it turned negative, I would have to kiss it good-by, just like with WFM.
Ron H. asked about Deutsche Bank, DB. Now here’s a stock with a very interesting pattern. Since February, the stock appears to be forming a classic wedge pattern, with the final wave of the wedge, the Wave E, being a very shallow pullback. This is exactly what is supposed to happen in a wedge IF the stock is going higher. The most recent high of 49.14 is likely wave 1 of the next wave higher. The recent pullback on September is likely part of a small wave 2. Here’s the deal: Right now the P-volume is negative, but the MACD and DMI are positive. IF DB can turn positive and move beyond 49.14, I would become extremely interested in this stock. A possible impulse wave could be starting.
Gene S. writes that he likes Halliburton, HAL. The reason cited is because HAL is in an uptrend with its 50 well above the 200 and the stock has recently pulled back to the 50. It has a nice 11 point stick from the 24 June bottom of 40.12 to the 10 Sept high of 50.50. Since then it has a beautiful TLB blade that looks to have completed on 30 Sept at 47.46. The DMI is close to turning positive along with the other indicators. Gene’s target for HAL is $58.46 or $9.40 above the current price of $49.06. You can tell this write up, which are all Gene’s words, that he is an EXCELLENT student, as well as an outstanding analyst.
The only thing I would add to what Gene has to say is that I believe everyone should own at least one energy stock right now. Mine is SLB, but HAL might even have more potential. Right now crude oil has pulled back to the 102 level. But one of the longer term patterns on my crude oil chart…. that I can’t ignore, has crude going to 150, possibly even as high as 170. I don’t have any idea why this could happen as it goes against everything else I’m seeing near term. But if the longer term chart is correct, I want to own at least one energy related stock. And those that I favor are in the oilfield services, and the drillers. BTW, Dean K’s choice of ATW is an offshore driller with a P/E near 10.
Hope this WSR has been helpful. If you would like to see more of this, let me know. After all, this is your web site.
Have a great weekend.
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