Sunday, October 04, 2009

BAGAKOAA October 3, 2009


October 3, 2009

Thursday was a great day. The 2% adjustment during the day triggered some stops and forced me to take some profits and a couple of losses. Managing your accounts is much easier when you take yourself out of the picture.

Here are a few examples as I have mentioned these in the past.

In early July I started acquiring BEZ, they make industrialized motors and transmissions. What I liked about the company was strong 5 year earnings growth, decent cash flow, management debt (8 year payoff based upon current earnings), the belief we were at an economic bottom, but what I really liked was a paragraph that the company had instituted an very aggressive “bounty” program to get new quality accounts. This was buried in the management discussion notes in the second quarter 10K filing.( I was a peddler. We all know salespeople brains are in their wallet. (Sorry if I offended you salespeople, but you know it’s true.) Anyway I am out and took a nice 14.7% profit in 90 days. I also entered a limit buy for 22.50. If it returns to those levels, consider getting back in, but do your homework.

Early in September I asked you all for a play on lithium. I did not get any responses because there are very few pure plays on the commodity. I made a speculative entrance in FMC, SQM, and ROC. ROC got knocked down by Credit Suisse on Thursday and FMC was guilty by association. I got out of both making a small profit (4.1%) on FMC and taking an 8% loss on ROC. These were speculative and ROC was a stinky stock to buy into but a possible play on lithium. SQM is the best of breed on this commodity, but they mine other things as well. I still have SQM and am up 2.1%. I have put a limit back in to FMC at 50.25 because they have a great 5 year history of earnings and cash flow, can pay down their LTD in 1.3 years, a decent ROE of 25.3% and it’s forward looking earnings estimates places the PE at about 11, which appears to be cheap compared to legitimate competitors. (If you can get the Ned Davis 9-25 report on FMC, you’ll see what I mean.)

Last week I told I would go back and look at GVA, the large highway construction contractor. I am not impressed. The only reason I got in was because a neighbor of ours is an employee and they are getting some huge contracts due to the economic stimulus. I was way to early on this and feel they will do well, but not for a while. The high end 2010 estimates are pricing the stock at 28-29 dollars based upon current multiples (about 12). If I lost any of you, there are 11 analysts covering the stock. The guess is that the company will make (at the high end), $2.45 a share in 2010. Their current multiple aka PE ratio is 10.61, so you could prognosticate a forward looking 2010 price of 26.00 or if the company heads towards a typical S&P 500 PE, you could see a 30.00 stock. No one is a fan of this stock. IBD gives it a 9, most analyst have as a hold or neutral. This is going on a watch list and when it gets to 27.00 I will look again.

FYI, I took advantage of the down turn this week and increased my position in AAPL. I added share on three days in the last week. It is my largest holding.

I also increased my position with HAS. The Toy maker is well positioned to take advantage of the lower dollar consumer spend this holiday season and has yet to see bottom line results on the Transformer III toys. I’ve been buying into this since June and have an average cost of 25.66. I am looking for a 32 dollar range first quarter 2010.

I also increased holdings of CHU, as the Apple iPhone goes on sale October 15 in China and this should give the company a leg up on China Telecom. Also there was a related story about a deal between India’s Bharti Airtel and SA MTN Group collapsing took a competitive threat out of play. (I own MTN group and it had a nice bump today. MTNOY).

I added to my media ETF PBS, as increased multi-media spending is coming back to the market, Please be careful though as this is a bit squishy market right now. Money once spent in TV and Newspapers is migrating elsewhere, but all indications are that media spending is starting to return. The ETF Top holdings are Liberty Media, Direct TV, (a little incestuous if you look close LMDIA has quite a few shares of DTV), Comcast, Google, and Disney to name a few. My average cost is 10.26 and I am looking for 12.00 by end of quarter 1 2010. I am out at 9.20.

Hope that helps you know what I am doing. I welcomed the chance to take some money off the table Thursday.

If you a really experienced investor, skip this part and I talk to you soon.

This last weekend, I got to spend some time with someone who has always wanted to get in the market and did not know how to begin. The conversation we had helped me immensely as it reminded me to refresh some basics. In my journal (yes I journal and have for about 15 years), I made some notes about the advice I gave this person. Though some of you might appreciate.

Their biggest fear was loosing it all in the market. After reviewing some ideas about if they should invest, did they had good medial insurance, did they have good disability insurance, did they fund their 401K or IRA as much as possible and made sure we were not talking about their “Retirement” nest egg, I explained how protecting gains and limiting losses actually worked. I explained my approach of getting out after an 8% drop. Then we discussed reviewing every 20% rise and resetting that 8% stop insuring a 12% gain. I then explained that I had read somewhere that a 7% loss takes a 7.5% gain to break even. Any loss greater than that takes a lot of really hard work to get back. A 25% loss takes a 33% gain to break even and a 75% loss takes a 300% gain to brake even. Once they grasped that, it made them a bit more comfortable about how to handle losses. In fact I explained by using the 20% 8% formula, (preached by IBD, Cramer, and others), you can have one win at 20% and 3 losses at 8% and almost breakeven so you only need to be right 25% of the time.

Next we talked about how many stocks they should own. I asked how many hours a week were they willing able to do homework. They said 10. I suggested they start out with about 10 grand, (Much less than they were considering) and limit it to 5 stocks. I suggested a balanced portfolio of Bank and Fincance, energy, industrial, tech and a gold ETF. OK if you are a Mad Money Fan you’ll see I am just using Cramer’s approach called BOATS. Banks, Oil, Aerospace (Industrial), Tech and Speculative. With this couple I did not think Speculative would serve them well and the timing for a gold ETF seems reasonable. I know these people and if they spend 5 hours a week doing the right home work, I would be surprised.

They then asked how long to hold a stock. I have had so many friends take an investment tip from me and then “collect” the stock and not get out that this is a sore subject of mine. Timing of a stock sale is not a timing issue, it is a value issue. Before buying a stock, I suggested the have an idea of where they want to get out not when they want to get out. This seemed to help.

They asked me some of the dumbest things I have ever done in the market. I told them about a bet I just made about where certain stocks would end up on September 30th. That bet cost me a grand and made me realize how arrogant I had become.

Then I answered their question with some mistakes we all have made like buy “cheap” stocks because the price was low. Not making decisions on a timely basis. (Right now I know I should sell my BAC because of the CEO change, but its hard. This stock has been very good to me. Can’t wait for my stop to trigger so I don’t have to think about it, but it mean loosing that 6% to my stop. What does everybody think? BAC sell on the news of Ken Lewis or hang on?)

Anyway I hope this was helpful.



*New comers that means Boys And Girls And Kids Of All Ages

** New comers that is a rough translation from the Latin “Hurrah from Profit”


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