Not Every Stock Is Crashing, However . . .

During a market correction, your number one priority is to protect capital.  So most investors should limit their exposer to this downward trend.

Some, cash out and wait.  This is perfectly acceptable.  Cash is king and it takes money to make money.

Some, play the inverse trend to “balance” their portfolio or “hedge” the market.

Some rely on stop loses to limit their losses to help “keep” their strongest stocks.  These, in theory are the stocks in their portfolio which hold up better than the rest and are worth keeping.

Some, also look for new stocks to watch.  These new stocks are ones most likely not in their current portfolio but are holding up well in this terrible market.  Often, according to IBD, stocks holding up well in a market in correction are first to break out once the market rebounds.

Going back more than three years and not including the current correction, the Nasdaq has had corrections of about 19%, 18%, 10% (rounded up) and 11%.

The deeper corrections lasted six to 10 weeks, while the shallower corrections ran four to six weeks.  Traditionally a correction is defined as a pullback of 10% or more, and a bear market 20% or more.  The current correction has burned through a lot of capital in just two weeks. The quick decline might suggest that the battle between the bears and the bulls has further to go. Volatility is likely to remain for a while.

Yet, the individual investor should not get locked into a prediction. Stay flexible and be ready to buy a stock if a follow-through day develops.

A follow-through day involves a big index gain in rising volume on the fourth day or later of an attempted rally.

Friday’s action constituted Day 1 of an attempted rally. The indexes have to stay above their intraday lows in order for the count to continue.

So I ran a screen looking for stocks which have fallen less than the three major indexes, have positive EPS and Sales ratios, and are finding support and or above the common trend lines (20, 50, 200 MDA).

And came up with this list of stocks.

Ticker Company Sector Industry Market Cap P/E Price
COLM Columbia Sportswear Company Consumer Goods Textile – Apparel Clothing 5.42B 27.5 76.7
CUDA Barracuda Networks, Inc. Technology Communication Equipment 1.48B 98.71 27.54
EL The Estee Lauder Companies Inc. Consumer Goods Personal Products 49.68B 36.43 134.75
EZPW EZCORP, Inc. Financial Credit Services 742.84M 18.87 13.15
FTNT Fortinet, Inc. Technology Application Software 8.26B 97.16 46.54
GFN General Finance Corporation Services Rental & Leasing Services 194.18M 7.4
INST Instructure, Inc. Technology Application Software 1.10B 36.75
INVA Innoviva, Inc. Technology Application Software 1.72B 19.51 15.43
KTEC Key Technology, Inc. Industrial Goods Diversified Machinery 172.63M 42.83 26.64
MBUU Malibu Boats, Inc. Consumer Goods Recreational Goods, Other 703.07M 20 33.4
MC Moelis & Company Financial Asset Management 2.83B 24.9 52.05
NEWR New Relic, Inc. Technology Business Software & Services 3.58B 64.38
PERY Perry Ellis International, Inc. Consumer Goods Textile – Apparel Clothing 417.00M 15.48 26.21
SKX Skechers U.S.A., Inc. Consumer Goods Textile – Apparel Footwear & Accessories 6.57B 25.41 41.06
TSG The Stars Group Inc. Services Gaming Activities 3.75B 19.9 25.45
WING Wingstop Inc. Services Restaurants 1.32B 62.62 45.15

These are not necessarily stocks to buy right now.  After all, the market is still in correction.  However, this correction will not last forever (watch for a confirmation follow-thru signal or for price trends to close above moving averages signaling a potential return to a bull market).  When the market does reverse back up, there will be bargains out there to purchase.  So it is prudent to build and maintain your watch lists to be ready for a recovery.

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Bear With The Bitcoin

Just how crazy is this Bitcoin craze?

  1. Shares of The Crypto Company (CRCW) have surged more than 1,800% in the past month and 17,000% in the past three months, as investors and traders have bid up the price of bitcoin (XBT) higher and higher. The Crytpo Company describes itself as a business that “offers a portfolio of digital assets, technologies, and consulting services to the blockchain and cryptocurrency markets” with plans for a “rollout of a full scale, high frequency cryptocurrency trading floor.”
    The SEC started an investigating and suspended trading on their stock.
  2. A small financial tech company that just went public called LongFin (LFIN) has skyrocketed from a low of $4.69 a share in the past week to a high of $142.82 after it announced it was buying a blockchain microlending company named Ziddu.com
  3. And then there’s Riot Blockchain (RIOT), a company that up until recently was a biotech firm and has decided to get into the crypto business. They added “blockchain” to the company name and now its stock is up more than 300% in the past month.

So, maybe I should change my blog’s name to Bear with the Bitcoin and my tag line to An Alternative Cryptocurrency Blog!

My viewership and followers count could literally explode!

Hopefully WordPress will not suspend my account….

But exactly what is this Bitcoin and cryptocurrency thing anyway and is there a safe way to invest in it?

My wife calls it Monopoly Money because it is not backed by anything like gold or a government.

And in that context, she is correct. Bitcoin and cryptocurrency is a worldwide payment system.  Bitcoin is the first decentralized digital currency, as the system works without a central bank or single administrator. The network is peer-to-peer and transactions take place between users directly through the use of cryptography, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called a blockchain. This is where blockchain technology comes into play.

What is Blockchain?

Blockchain, the tech behind Bitcoin, is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer as a link to a previous block, a timestamp and transaction data. By design, blockchains are inherently resistant to modification of the data. The Harvard Business Review describes it as “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority. This makes blockchains potentially suitable for the recording of events, medical records, and other records management activities, such as identity management, transaction processing, documenting provenance, food traceability or voting.

All of these computational transactions require a lot of processing power. But more on that later.

Investing in Bitcoin:

For me personally, I first heard about Bitcoin back in the spring of 2016. Back then it was less than $500 a coin and a coworker of mine was telling me all about how he was buying some coins in anticipation of the upcoming split or fork in the code. Last time this happened, he said the price went way up. He tried to convince me how easy it was to invest. Just open a virtual wallet on Coinbase, link it to your bank and fund the wallet with some bitcoin. The security person in me said no way am I putting and linking my bank account money in some unregulated international open (somewhat shadowy) platform.

Now Bitcoin is over $16,000 per coin as of this writing.

UPDATE: OK, it was over $16,000 but has since lost about a third of its value in less than a week because other well-known backers of Bitcoin have recently moved their stash to Bitcoin:Cash which is known as a hard fork and a separate cryptocurrency / blockchain not recognized by Bitcoin. That and many online platforms like Coinbase are now accepting other cryptocurrencies. But still well north of $10,000 per coin.

Not investing in actual Bitcoins is perhaps my biggest missed opportunity . . .

And yet, there have been a whole host of security breaches and entire exchanges shut down because they were hacked and millions of bitcoins were stolen.

Still a risky trading platform. IF you are set on buying any crypto-currency, I would highly recommend buying a physical encrypted hardware wallet to secure your PII and money.

GBTC:

And yet, I have not been completely out of the “bitcoin” craze. I admit, from time to time I have bought one share of GBTC (Bitcoin Investment Trust) stock with a wide trailing stop whenever I was in. I was stopped out the first day of the latest pull back this past week, but not before more than doubling my money. So all in all I can’t complain.

Note: This is still a risky way to invest in Bitcoin (any stock or investment vehicle that can lose 1/3 of its value in less than a week is definitely risky) and yes, it limits you to investing in just Bitcoin. That is why I definitely had a trailing stop on this bugger to protect my losses and gains.

Another way to invest now is in the futures market through your broker. I find it interesting that many big financial names were calling the Bitcoin craze a bubble, or even not a real currency, and even worse, a type of Ponzi scheme; and yet, they feel the need to get in on the action by allowing trading.

Blockchain by nature eliminates the middle man and any controlling financial institution, so guess who felt left out of all the action….

Then of course, one could also invest in the crypto craze by becoming a miner. Miners are the people / machines in the peer-to-peer network which validate the blockchain transactions. Most miners get paid a small fraction of which ever cryptocurrency they are mining for each successful transaction they complete. The more machines you have and more computing power you have, the more transactions you can do, and, in theory the more money you can make.

There are a whole host of articles such as this one, and this one, which highlight just how much this craze has taken off.

One Consequence:

The world-wide power consumption dedicated just to mining is huge.
And so is the quest for more, affordable, power.
So that got me thinking about another possible investment strategy, loosely based on the blockchain craze.

Power.

Here one usually has two choices. Make your use and consumption of power more efficient or buy more.

DPW is developing and marketing an energy efficient power system for mining computers and datacenters. Their stock has seen similar hype action as those of Bitcoin and GBTC. Still quite risky in my opinion.

A potentially less risky investment strategy is to invest in companies or ETF’s specific to the energy sector.

Miners have already sought out remote locations with cheap hydro-electric power. One could invest in a utility such as POR which runs hydro-electric plants or one could invest in energy companies involved with supply side of generating electric power such as coal.

Datacenters:

Entire datacenters dedicated entirely to the mining of cryptocurrency are being built around the world.

China and Japan are the largest areas of miners and entire datacenters dedicated to mining activities.

In a way, I have already been investing in this indirectly due to The Donald and his tax reform policies with XLE. But BTU and KOL would be viable alternatives as well.

To me, this is a far less risky investment vehicle than trying to time the ups and downs of hyped stocks and currencies, provide potential income (dividends) and are influenced by other stimuli such as tax reform.

The Donald and Tax Reform:

Speaking of The Donald and Tax Reform, I have also put together a list of the most commonly referenced companies expected to benefit from tax reform, re-patriotization of overseas cash and stock buybacks on the right sidebar.

As always, any stock, ETF or fund mentioned is merely a suggestion and IMHO worthy of additional research on your part to see if it fits your investment profile and risk tolerance.

Hope everyone has a safe and happy holiday season.

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.

 

The Amazon Effect

Amazon is, and has been, transforming the way we do business.  They have been doing this for years.  At the core of this transformation is what I will say is the Online World.  Yes it is a generalization, but from being able to buy books online to a cloud service provider to a mobile payment platform and even a one click buy it now system to most recently high profile deals with NIKE, SEARS, and Wholefoods; Amazon is transforming the way we do business from traditional brick and mortar to online.

According to Millennial Marketing, Amazon rates highest in satisfaction and experience not only with Millennials, but across other generations because of “its consistent ability to reduce friction in the consumer journey and stay at the forefront of market innovation.”

It even beats out other brand names such as Apple and Netflix in customer satisfaction and both Apple and Netflix do an excellent job with online marketing and innovation.

And how has practically the whole retail sector, and investors, reacted?

The retail sector has taken a nose dive.  Both investors and publicly traded companies have stuck their heads in the ground and proclaimed that Amazon is taking over the world and the end is near.

Grocery stores such as Kroger and even Walmart took a dive when Amazon bought Whole Foods.

Blue Apron IPO took a beating because Amazon now has a potentially huge food delivery network.

Home Depot and other similar stores took a dive when Amazon agreed to sell SEARS Appliances.

Even NIKE has agreed to add Amazon as a delivery channel for their product.  But NIKE is smarter than some of the other retailers.  Part of their agreement is for Amazon to crack down on fake NIKE knock offs.  Not only do these cheap imitators take revenue away from NIKE, but they also damage the NIKE Brand and the NIKE reputation.  So the NIKE deal with Amazon is actually a good thing for them.

Home Depot does sell appliances.  So does Lowes and Best Buy.  HHGregg went out of business because they failed to adapt and could not compete.  But stores like Home Depot and Best Buy are more than just appliances and they happen to have good online presence and customer loyalty.  A fellow blogger recently wrote about this here.  Check it out.

I think the entire retail sector has over reacted and the recent Amazon effect on the retail industry has created some good potential bargains.

The key to retail success today is how well do you market to and retain the mobile online consumer?

A company basically has three options.

  • Agree to be bought out by Amazon.
  • Develop a successful one stop shop and buy mobile campaign and customer loyalty program similar to Amazon.
  • Or join Amazon to make your product and your brand stronger and more available to the online world making it easier to buy.

I’ve already mentioned how NIKE has taken advantage of Amazon.  Here is another company which I have written about in the past and has done remarkably well recently.

GRUBHUB.

They make online ordering, and reordering, quick, simple and easy.  It fits the millennial mobile mode of online shopping perfectly.

However, on the surface, their business could appear to be threatened by Amazons move into the food and food delivery business much like Blue Aprons.   But they too have “joined” Amazon in a very interesting way.

You can use Alexa to order food from GRUBHUB.  They have taken advantage of the Amazon effect and incorporated it into their business model with hands free ordering.   This is not without possible risk.

Amazon has been accused of poaching sales from retailers.

“A study by Upstream Commerce, a retail intelligence firm that tracks pricing, suggests that Amazon will use the pricing data from outside merchants who sell through it to ultimately compete with them.  In women’s apparel, 25 percent of the top products initially offered by marketplace vendors were sold by Amazon within 12 weeks, according to the report.”

Other retailers have directly and indirectly acknowledge “competition” as a future risk and as a result, many good quarterly reports have sent stock prices down instead of up solely because of this “competition” in the market.

GRUBHUB reports this week.  They had an outstanding report three months ago.  It will be interesting to see if the Amazon effect is viewed as a boost or a bust for their business.

Disclaimer:  This post is meant for informational and conversational purposes only.  It should not be viewed as a recommendation to buy a particular stock or fund.  As always, please do your own additional research before buying stocks.

Will Prime Day Be A Good Day For Amazon Stock?

What is Prime Day?

Amazon started Prime Day in 2015.  It is typically a one day special event of deals and discounts on just about everything available to amazon prime members. This year, It will be held July 11th.

However, as it is with most special commercial celebrations, and yes – Prime Day was started to celebrate the anniversary of Amazon, this year Amazon Prime Day starts at 6pm the day before, July 10th.

Of course the real reason for Prime Day is to generate more Prime memberships, to build a base of consistently returning customers and, therefore, reoccurring revenue. Amazon is even expanding their event to more international customers to the count of 13 countries around the world.
Many consumers will use this day to test Amazon’s Prime service, and many of those customers will remain Prime members once their trial membership is done.

Studies have shown that Prime customers spend more than twice what nonmembers do, so it’s no wonder Amazon is trying to spread the Prime love as much as it can.

I’m sure Jeff Bezos would say it is a “Win + Win” deal.

How popular is it really?

Amazon doesn’t disclose precise numbers, but some analysts estimate that Prime Day 2016 may have generated $525 million in sales for Amazon, up 26 percent from Amazon’s projected sales of $415 million in 2015.

According to Amazon, the company sold more than 90,000 TVs, over 1 million pairs of shoes, 200,000+ headphones, 23,000+ iRobot Roombas, and more than 14,000 Lenovo laptops on Prime Day alone. That beats the number of sales the retailer generated on Black Friday, which for most retailers is considered to be the biggest shopping day of the year.

How easy is it to find deals, shop and buy?

This year, with the added global access and even greater push for trial access to Prime, the Amazon App (which is always free) and Amazon gadgets (Echo – Echo Dot w/Alexa, Kindle, Audible, Dash, etc) there promises to be yet more Prime Day records broken. Amazon will be running specials not only online but through their mobile channels (Echo, Kindle, Audible) with specific deals targeted for users of these devices.

How easy is it? Just ask Jeff Bezos . . .

Just kidding, but it is getting easier and easier to purchase not only what you need for day to day living but for all those impulsive moments as well.

The power of ecommerce has even forced the worlds largest sport and leisure shoe manufacturer, NIKE, to re-think their strategy and start selling directly to consumers thru Amazon and Instagram. It’s an online world and most consumers have mobile devices which they care with them for instant online access.

Mobile ecommerce only makes sense.

I wonder if NIKE will be “online” in time for Prime Day? As of this writing (July 4th) I did not see their direct link listed on Amazon yet.

Are there Prime Day issues?

Yes, with this popularity there have been issues with finding good deals on products you actually want as well as general supply and demand. There have been many instances of consumers complaining that many of the special deals are not always on things they want, or are of cheaper quality than they expect, and for the items they are searching for, difficult to find and then when they do find them the deal is either over or sold out.

This year Amazon is helping you out by suggesting to download their app from which you can look up the schedule of daily deals and place a watch on the ones you want. This way the app will alert you when the special is about to start.

You can even download an Amazon Assistant to your desktop to help you stay up to date on your wish lists and orders.

How does Amazon stock react to Prime Day?

This one is a bit more difficult to answer. For one, this is just the third year that Amazon has hosted Prime Day. And two data points, or data sets, does not a pattern make – other than a straight line.
However, in 2015 the stock price increased the week before and kept increasing the week after.

In 2016, the stock price increased the week before but then went down the following weeks.

So what will happen this year?

Lately tech stocks, including Amazon, have been beaten down by the market. Will Amazon’s stock price continue its downward trend or will prime day provide the opportunity for investors to look at Amazon stock as another online bargain and reverse the trend?

My personal opinion is that Amazon, as well as many other tech stocks, has a bit more to fall. There may be a few fake reversals but to date the stock is only down 5%. Hardly the correction needed to inspire investors to scoop up a bargain.

What are your thoughts?