Anatomy Of A Trade

I’ve been asked by my investment group to present an anatomy of a trade I made last month.  It was a trade based on a company with a good business model but trading on what I can only say is a lot of hype.  A dangerous combination but the plan and the rules I followed can apply to any trade or investment.

The key to any successful trade is having a plan and following your rules.

For this example, depending on how one looks at it, I broke at least one rule and followed many others.

Wednesday November 8th:

ROKU closed at $18.84 per share.  They were due to report their first quarterly report since going public and most everybody was pessimistic.  The company had yet to make money and were set to continue their losing streak.

I considered them a popular, trendy streaming, cord cutting alternative product that had a good business model.  I have been exploring cutting the cable cord and have purchased a long range HD antennae as well as one of ROKU’s streaming sticks.  The tech is not what impresses me.  In fact, they are practically giving it away.  That is not where they plan on making their money.  Roku intends to make their money on programming and selling advertising.  In order to do that successfully, you need market penetration.  Roku is making their hardware cheap to get it into people’s homes and build up market share.  But Roku is also teaming with HDTV makers and having their streaming service imbedded in today’s popular smart TV’s.

If you think about Microsoft in the early years of the PC, they basically gave away the OS so that they could gain market share and sell software and ultimately services.  ROKU is attempting to gain market share with the adoption of HD 4K smart TV and imbedding their platform (the OS) in each TV sold.  From there, they focus on selling content and advertising.

So I was really torn.  On the one hand I really liked the company.  On the other, they were still young and had yet to prove that they could succeed in this highly competitive online content streaming world.  So I held off on buying until I saw which direction the stock moved based on their report and outlook.

Well, it turns out that ROKU is still not profitable but they lost a lot less than expected and absolutely killed it on user activations and loyalty.  So much so that ROKU even tossed out the possibility of becoming profitable as soon as next year.

What happened next was Simply Amazing.

Thursday November 9th:

ROKU opened at $24.75.  A 31% increase over the previous day’s close.

I bought 100 shares.

Here are the rules I broke.

  1. Chased the money
  2. Bought after the stock had already passed profit taking zone. (see notes below)

Here are the rules I followed or (at least) did not break.

  1. I bought on volume.  Institutional confirmation
  2. I bought at an early entry point below the buy point.  IBD had the buy point at $30 per share based on previous highpoint shortly after initial IPO.  But this early entry is OK based on institutional buying.

Yes, these rules are a little fuzzy and subject to interpretation.  Here is my point of view.

Depending on how one looks at this, from an IBD perspective, I may have broken 3 rules…. or not.  Technically the profit taking zone (20% – 25%) is after a breakout past a buy point.  Sometimes it is OK to buy a small position before a buy point if institutional buying is there.

As soon as I bought my shares and saw that they did not stage a reversal, I placed a trailing stop.

Rules I followed:

  1. Protect capital and gains.  At this point I was protected from taking a loss.  –  Unless the stock happened to gap down at the next open….

Friday November 10th:

I canceled my trailing stop and sold 50 shares shortly before close at $35.16 for a 41% profit.

Note: The stock closed at 33.21 which would have been below my trailing stop, but because I had cancelled it to sell half my gains, I still had 50 shares invested.

Rules that I broke:

  1. Changed my rule of setting and keeping my trailing stop to protect profits.

Rules that I followed:

  1. But this was done to protect my profit from the downside risk of a gap down.

I reset my trailing stop right before close.  I fully realized this would not protect my remaining shares from a gap down on Monday’s open but I truly believed that the “hype” was not over.  After all, we still had all the weekend traders (those who only follow the market and their stocks on the weekend).  Sure enough, there were many articles hyping the breakout stock.  Even IBD got in on the action and published a “hype” article.

Monday November 13th:

No gap down at open!  Hype and irrational exuberance was still in full force!

But even hype has it’s limits and …

Sometime during the lunch hour my trailing stop got activated for $45 a share.

And… I was out with a 81% profit on those remaining 50 shares.

And an overall profit of 61%.

 

Lessons Learned:

Rule #1 to investing is not to lose money.  Or at least minimize your losses.

  • I utilize trailing stops on almost all my trades.

Rule #2, see #1  😉

  • But seriously, I also use trailing stops to protect my profits.
  • Yes, I sometimes get stopped out of a stock on a sudden drop or as those who think of conspiracy theory, on a sudden drop by MM to flush out weak hands.  But, hey I usually make a profit and if I still like the stock, I can always get back in.

Rule #3 I base a lot of my buy and sell points on percentages and not dollar values.

  • For me this is a pure psychological rule.  I learned early on that I could get hung up on “making money”.  Sometimes people start seeing all the $$$ signs and let their emotions rule their investment and trading decisions.  I am no different.  So I try and base all my buy and sell decisions on percentages.
  • Do I ever sell too early and miss out on future gains?  Yes, but if my goal is 20% profit, then I am happy.  Would you be happy with a 20% gain on your investments?  The percentages are there to manage risk and avoid letting my emotions (such as greed) take over.
  • Do I ever sell too early and get stopped out of a loss before the stock recovers?  Yes, but not all stocks immediately recover and the stop loss is there to minimize my losses and protect my capital.

Rule #4 is you need money to make money.

  • Don’t lose all your hard earned money to the stock market, irrational exuberance, or emotional trading decisions.
  • Follow rules # 1 and # 2.

 

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Looking For Bargains

First of all, I hope everyone had a safe and happy Thanksgiving, or Friendsgiving, or if you don’t happen to celebrate either one of these events, a good week.

This is the time of year that we, as Americans, give thanks for what we have;  and then promptly go out and buy things we don’t have;  or things we feel that our friends and families simply must have.

Retailers love this and have created their own celebration events for which they are thankful.

Black Friday and Cyber Monday.

And nobody does it better than Amazon. Look at this heat chart from Friday.


Investors seem to know who is winning the online battle.
And, based on internet traffic, it appears that Amazon has captured over 50% of the Black Friday shopping traffic.

Out of curiosity, I took a look at what the top 5 Black Friday items sold on Amazon.

  • Amazon Echo Dot
  • Fire TV Stick with Alexa voice remote
  • TP-Link smart plug
  • Instant Pot DUO80 8-quart 7-in-1 programmable pressure cooker
  • 23andMe DNA test

The two which caught my interest of course were the ones that were not Amazon related. (Anything Echo/Dot or FireTV related was a lock to be on the list) – The pressure cooker and the DNA test by 23 and me.

I mentioned these to my wife and, thinking I was looking for gift ideas, promptly said she did not want the DNA test kit. After being married to her for nearly 30 years, I knew the last thing she wants to do is send PII to some company on the internet.

So maybe I’ll buy the pressure cooker….

But really, I was more interested to see if there might be some potential investment opportunities.

The Instant Pot pressure cookers appears to be a privately held Canadian company and 23 and me is a venture capital company funded by some publicly traded companies such as Johnson & Johnson (JNJ), Roche (RO.SW), Google (Googl) and Illumina (ILMN).

From purely a sales perspective, Amazon (AMZN), and these other companies might be an interesting place to start your investment research. However, one would be hard pressed to classify AMZN (with a P/E of 300 and a PEG of 5) as a traditional value investment stock.

Of course, as investors, there are many more ways to look for bargain investments. A month from now, one of the more talked about strategies will be looking at the Dogs of the Dow. This is generally a list of the highest dividend companies of the DOW30.
The current list has some very interesting names on it.

Ticker Company Yield
GE General Electric 5.28%
VZ Verizon 5.02%
IBM International Business Machines 3.95%
XOM ExxonMobil 3.78%
CVX Chevron 3.71%
PFE Pfizer 3.61%
MRK Merck 3.46%
KO Coca-Cola 3.23%
CSCO Cisco Systems 3.18%
PG Procter & Gamble 3.12%

Some, such as Cisco, I already have positions in. Others, such as GE have been so beat down this past year they may be compelling to invest in but GE is a mess right now and is not without risk. Long term, however, it may present an opportunity.

I also ran my own version of a “value” screen on Finviz and came up with stocks. Some, like the Dogs, pay dividends, some don’t.

Ticker Company Country P/E
HMC Honda Motor Co., Ltd. Japan 10.45
LM Legg Mason, Inc. USA 15.22
NUE Nucor Corporation USA 15.57
RIO Rio Tinto plc United Kingdom 14.41
SBS SABESP Brazil 8.13
STX Seagate Technology plc Ireland 15.24
TKC Turkcell Iletisim Hizmetleri A.S. Turkey 14.51
TS Tenaris S.A. Luxembourg 61.1
VLO Valero Energy Corporation USA 17.85
WDC Western Digital Corporation USA 19.37
WOR Worthington Industries, Inc. USA 14.38
CFG Citizens Financial Group, Inc. USA 15.3
COHR Coherent, Inc. USA 37.85
ESNT Essent Group Ltd. Bermuda 14.97
GGAL Grupo Financiero Galicia S.A. Argentina 17.41
HCCI Heritage-Crystal Clean, Inc USA 21.95
INVA Innoviva, Inc. USA 16.76
MDC M.D.C. Holdings, Inc. USA 11.62
MTZ MasTec, Inc. USA 14.45
OCLR Oclaro, Inc. USA 7.93
PNFP Pinnacle Financial Partners, Inc. USA 20.11
PZN Pzena Investment Management, Inc USA 15.9
RICK RCI Hospitality Holdings, Inc. USA 27.88
SUPV Grupo Supervielle S.A. Argentina 17.66
WPPGY WPP plc United Kingdom 9.33

I think I will keep these stocks on a special thanksgiving value watch list to see how they perform and conduct some further research..

What “value” stocks do you like or follow?

Is The Stock Market Setting Up For A Fall?

One thing every investor should do is look at current market conditions.  Our investment club starts off each meeting doing just that.  We look at a lot of different charts which track trends and patterns.

Some are in confirmed uptrends.

–          The momentum players see this as strength in the market.

Some are indicating possible over bought conditions

And others are close to inflection points with percentage of stocks hitting new highs, or above their 20, 50, 200 moving averages, etc.

–          The contrarians look at the last two groups as signals for a correction.

I’m going to mention one more indicator group which is not usually mentioned.

The IBD50 list of stocks contains a list of growth oriented stocks with good fundamentals and positive chart patterns and setups.

In the latest weekly issue of the IBD paper, half of the stocks, 25 of them, have one or more of the following comments associated with them.

  • Extended from last breakout.
  • Late stage base.
  • Take profits.

Stock

Extended

Late Stage

Profit Taking

OLED

X X

LAM

X

X

NVDA

X

X

ALGN

X
AMAT X

X

WGO

X

X

TRU

X

CGNX

X

TEAM

X

THO

X

X

PYPL

X

CBO

X

X

RHT

X

ON

X

X

CAVM

X

SUPV

X

MA

X

X

ADBE

X

PLNT

X

MNST

X

SITE

X

CBG

X

AVY

X

FLT

X

MSCI X

 

Four of these stocks I am either currently invested in or have been within the last couple weeks.  Five others I have on watch lists and or have been invested in within the past year.

Interestingly enough, AMAT, which is listed as in a risky late stage base and in profit taking zone is also listed in an article, in the same paper, as a possible upcoming earnings call option play.   I wonder if these IBD analysts spend much time talking to each other or reading each other’s work…

Are we due for a correction?

–          The contrarians would say that the risk is higher with so many IBD stocks over extended and in profit taking zones.

Are stocks and the market in full acceleration mode?

–          The momentum traders would say that hitting new highs and either continuing momentum or hitting new buy points is a strong growth indicator.

Regardless of the market direction, it pays to do your homework and look at risk reward ratios.

One possible strategy would be looking at the IBD50 again but this time at the other 25 stocks.  The ones not over extended, in a risky late stage base, or in profit taking zone.  Do any of these show signs of weakness and failing?

Yes, there are a couple which are showing sell signals.  So this is a definite sign of weakness.

Others are testing support which can be a sign of showing possible strength (if it bounces off of support) or weakness (sell signal, if it fails).

Here is the breakdown as I see it.

Testing 10 week line: 

IBD views this inflection point as a test of support and confirmation of upward trend of a growth stock.  Often viewed as a possible secondary entry point if it bounces off of this supporting trend line or a possible sell signal if it falls below the trend line.  I would put these into a watch list:

ICHR, YY, HTHT, PAYC, MCHP

Failed Breakout but still testing 10 week line:

This is a subset of the previous 10 week support line indicator.  These stocks pulled back after passing a buy point and are now testing the trend line.

GWRE, ESNT

Flat Base: 

An IBD consolidation pattern which can signal strength if the lower support range holds and or the stock bounces off of a trend line or passes top level resistance (a buy point).

FIVE

Base on Base:

Another upward trend IBD pattern which investors can view as another secondary buy point.

COR

In Buy Zone: 

IBD defines this as within 5% of a breakout buy point.

FB, MFGP

Double Bottom:

IBD version of a potential reversal pattern and or test of support before a breakout.

VEEV

So of the remaining 25 within the IBD50: 14 are in noteworthy patterns

–          5 stocks are is possible strong buy point patterns:

–          2 are showing weakness but still showing support

–          5 are testing support and at a possible inflection point.

–          2 have flashed sell signals.

So, do you see the market at an inflection point?

Setting up for a correction?

or

Confirming strength and momentum?

Regardless, it is good to do your homework and be ready to action no matter what happens.

 

Lots Of Options With A Broadcom Qualcomm Merger

If you believe the news, a Broadcom / QCOM merger makes for some interesting and complicated questions.

  • An unsolicited $100 billion plus-offer to buy Qualcomm Inc. — a company that’s trying to close a $47 billion deal to buy NXP Semiconductors NV (NXPI) — is pretty stunning.
  • I see a lot of cost and product synergies and cost saving for Broadcom
  • Add in the QCOM and NXPI valuations, and the proposed $70/share could be a bargain in the long run.
  • But, Broadcom may not even want to pursue or finance the NXPI deal.
  • And there are potential settlements with Apple on QCOM’s side which would affect the price. Since Broadcom is already such a big Apple supplier, a merger might work in AVGO and QCOM’s favor.
  • One can count on a lot of push back from the anti-trust encampments. There will most likely have to be some concessions in the form of asset sales to make this deal work.
  • AVGO recently announced it would re-domicile from Singapore to the U.S. regardless of the fate of proposed corporate tax reforms.
  • My guess is, regardless of the outcome, their rates will go up.
  • I think this deal aids in the good PR factor for any questions regarding approving the merger.

This potential merger also creates some very interesting option strategies.
When the news was announced Friday afternoon during trading hours, both stocks witnessed volatile price movements. Interestingly, both ultimately went up on the news. Sometimes, the price of the company making the offer goes down. But in this case, most investors seem to think this merger could be beneficial to both Broadcom and QCOM.

However, with a potential buyout price of $70 per share, QCOM’s price action stopping at $61 makes for some opportunity in my opinion.

If you believe the news and believe this will happen then it is safe to say that a minimum price of $70 for QCOM is very attainable.

If you don’t believe the news, or think this is an impossible deal, then the price movement on QCOM from $55 to $61 is not sustainable.

Based on the price movement alone, I think the rest of the investment world is more than slightly skeptical. This would warrant looking for the price of QCOM decreasing.

  • One could sell out of the money calls and purchase out of the money puts.
    Conversely, believing this is a done deal, one could anticipate QCOM’s price increasing to $70 per share.
  • One could sell out of the money puts and buy out of the money calls.
  • One could also buy 100 shares or more of QCOM, (remember you believe the price is going up) and sell covered calls and puts to reduce your cost and collect the premiums.

Taking a look at various option dates and prices, I am particularly interested in the short term play with the December monthly pricing.

Personally, I think buying a December 15 $70 Call and a $55 Put is worth the gamble.

But other time frames, such as April ’18 and January ’19, would make worthy candidates for options trading. At this point in time, I am really on the fence believing the validity of the buyout/merger actually happening.

I think if the rumors aren’t killed soon or if the news is confirmed, then hype and bidding wars will help drive this up in the near term but, with all the regulatory and legal hurdles involved, the deal will ultimately fail.

So what are your thoughts on this? How would you play this scenario?

Swing Trading

IBD has a relatively new investment service called Swing Trader.  Now, to be fair, there is nothing new about swing trading.  What makes this slightly different is that their swing trades are based on IBD CANSLIM investing.

What is CANSLIM?

It is an investment system based on both fundamental and technical analysis.  CANSLIM is an acronym for the seven traits winning IBD stocks have before they breakout.

  • Current Quarterly Earnings – increasing quarterly sales
  • Annual Earnings Growth – at least 25% or more for the past 3 years.
  • New Product, Service, Management or Price High
  • Supply and Demand – high demand for limited supply of shares.
  • Leader or Laggard – industry leaders with superior earnings and sales.
  • Institutional Sponsorship – funds account for 75% of all market activity.
  • Market Direction – 3 out of 4 stocks follow the market’s trend.

IBD has a 30 day free trial for their Swing Trading service.  I decided to sign up.  Not necessarily to spend even more of my hard earned money but rather to see exactly how well they are doing.   To be honest, one could consider some of my trades swing trading.  My style of investing is quite similar to IBD in that I look for good technical setups and momentum trends of well-run or popular companies; but above all, when it comes to truly short term trades, I look for opportunity.

Case in point, some of my more recent trades were based on what I thought was opportunity.

  • When Amazon announced buying Whole Foods, and selling SEARS Appliances; Home Depot, Walmart, and Best Buy took a price hit yet recovered quite nicely.
  • When Disney announce they were leaving Netflix, NFLX took a price hit, and interestingly enough, filled the gap from their recent quarterly report breakout and found support.
  • And more recently Hurricane recovery trades with Home Depot, Restoration Hardware, Lumber Liquidators, Owens Corning, Generac Holdings and General Motors.

None of these stocks, except NFLX, made it on to the IBD Swing Trader alerts.

Looking back over the IBD Swing Trader alerts for the past year, I am less than impressed with the overall average return of .50%.  However their two currently active trades are based on classic setups and are performing quite nicely.

So, do you ever make short term trades, and if so, what are some of the triggers you look for?