Wednesday, May 26, 2010

BAGAKOAA May 26, 2010 Starting Over Again


May 26, 2010 Starting Over Again

After my stupid moves on Tuesday, I could have cried in my beer and drank cheap scotch. Instead, I decided to get back in the game. I have told a few of you that I was going to sit on cash a while and sit on the sidelines, BUT I still believe there are great values out there, and I am slowly going to get back in the game, but very cautiously.

For my own historical purposes, I am going to document my game plan and that should help me stick to it.

First I want to define my goals. In the blog on May 22, I described what the 10 Year treasury yield should means to the average investor. It is a gauge of the return of ultra safe money. The current 10 year Treasury Note Yield is 3.18%. I am looking for an annual return of at least 2 times the ten year yield. That not only defines my return goal, it helps define my risk tolerance. In essence I am looking for an annual return on every dollar I invest of 6.36% which I’ll round to 6.5%.

Our current situation is 56% cash, 33% in mid term corporate bonds averaging a yield of 8.2%, The balance is in the gold ETF GLD and few poor performing long term 2011 calls.

We want to put 80% of the cash at hand to work, but want to enter the volatile market slowly. So at the end of this journey we will still want a 20% cash position.

By the end of this week we want to put 20% of the cash position back in equities. Keeping in mind we want to end up with a balanced portfolio, we want 20% of that 20% in the broad category of Banks (or finance), Oil (or energy related stocks), Aerospace (or large indstrials), Tech, and Speculative. Remember the acronym BOATS. Thank you Cramer. Now we can’t clearly identify every single stock I want to by into one of those categories, but the point is simple, don’t put more than 20% of your portfolio into any one given sector for any length of time. Please remember that more than 50% of the value of a stock is dictated by the market sector directions. I kinda cheat and use an acronym BOATERS which is Banks, Oil, Aerospace, Tech, Electonics, Retail, and Spec. Which means you put about 15% into each sector for a balanced portfolio.

So here we go, we want to get back in AAPL, so I want to do my research on the Tech sector first. First I go to Schwab which is my trading platform for all the equities. Schwab’s is a real time trading and a bunch of nice trading and charting tools. First I go to the main Schwab page for AAPL and read the Schwab equity ratings report. Schwab gives AAPL a C rating today. That means it is a market perform or, as the market goes so goes AAPL. I don’t understand the C rating, because almost all of the info reported is very favorable. One of the key elements I look at in this report and it is available on most free public finance pages is the Analysts forecast for the next 12-18 months. (Remember an analysts does not care if a stock is going up or down. They are compensated on their accuracy. The do not like surprises.) There is one analyst who has 2011 earnings pegged at 13.40 a share meaning a P/E ratio of 18.65. There is another analyst pegging 2011 share at 18.85 generating a forward looking P/E ratio of 13.26. the current P/E ratio for the entire S % P 500 is about 18.00. There only negative comments involve some changes in the balance sheet. Oh yeah, this is a big one AAPL DOES NOT PAY A DIVIDEND.

So we go to the last reported quarterly financials for AAPl and we find that at the SEC’s Edgar on line page Just type in AAPL in the company ticker search line and click on the 10-Q filed in April and you will then be presented with all of the relevant documents associated with the last quarterly filing for AAPL. One of the first documents is 10qdtm.html. Click on it and you have the complete 1st quarter filings with all the relevant data to confirm or criticize the analysts comments. There was nothing substantial to warrant the negative balance sheet comments. Their cash flow did drop, but they were gearing up for the distribution of 8.1 million iPads. So the rest of the Schwab report was glowing so let buy right? NOT. More homework.

Also in Schwab, they provide research from very prominent firms such as Credit Suisse, Ned Davis, Argus, S & P, and Rueter’s. It would be painful to walk you though all this detail but please look at reports like this. Many of you trade through Schwab, so the reports are free. There is no reason not to look at the data. Here are the highlights I discovered.

Credit Suisse terminated coverage on AAPL because their top analyst for AAPL Bill Shope, has apparently moved somewhere else. His last report dated April 21 (AAPL was at 272 at the time) is glowing. His target price was 315.

Ned Davis research is also glowing and has been a buy on their list since August of 2009. They do a good fundamental analysis as well as a technical analysis. Both have the stock rated as a buy and that was a May 21st report.

The next report is today’s Argus research report. It is absolute glowing so much so you would think Jobs wrote it himself. Their target price is 300. Keep in mind that this information is for Schwab clients or Argus clients so I cannot provide this info on all the picks, but wanted to show the process.

Today’s S & P report for AAPL is also amazing. They see revenues more than doubling 2010 and their obscene margins to remain the same or improve. All good stuff and their target price is 300 as well.

A quick review of The Market Edge report and Schwab’s earnings report confirm that we want to get back into AAPL. Now how do we determine the entry point. Ideally the best place to get into a stock is at the bottom end of its lower control limit on a six month chart. Now before you freak out, most financial websites have charting features that let you easily determine this lower control limit. Let’s take Yahoo Finance for example. Type in AAPL, click on the AAPL Chart. Set it for 6 months. Choose technical indicators and pick Bollinger bands 20,2. Don’t worry about the calculus here just look at the chart at the link above.  You can see the channel that the upper and lower control limits that the Bollinger Bands create. AAPL lower control limit is about 239. The upper is about 271. We will accumulate at 250 or below.

Keep in mind I will be adding to the position until I hit my balanced allotment of the stock. The portfolio will buy on dips. Our goal will be to make at least 6% annually on this investment, but expect to do much better. That means at 265, we need to do a lot of this homework again to be sure all the fundamentals remain the same and decide whether we take 6% profit to get us back to our original investment.

Staying with the tech sector, we go through our Schwab history and look at techs that were in the portfolio and look at our watch lists. Our watch list currently has about 7 stocks in it. They are from ideas from Cramer, Barron’s, our own ideas, and in all the information we glean from all this damn homework.

Here were our other two tech picks to fill the balance. IBM and INTC.

I liked IBM after reading a great Barron’s article in March 2009. Then after a lot of homework later we got in at the 103 level. We then took some profits at the 128 level. The Flash Crash caused me to stop out at an 8% loss. Though the stock recovered most of the 8 % a few minutes later. So the research tonight as described above has us back in it again at 123-124. The bottom of the Bollinger range is 120 so I am hoping to catch the 123 in the morning. Again we will slowly establish this position over the next few weeks and buy on the dips to 120ish.

We like all the homework on INTC as we did well with it over the last 14 months. Right now any entry below 21 looks interesting for a 12- 18 month investment.

So our tech position is IBM, AAPL, and INTC. As I mentioned, this kind of exercise turns over a lot of interesting possibilities. Here are some I have added to our watch list. CTSH, LIOX, SYNT, and ACN.

Ok now lets look at the banking finance sector.

We will go through the exercise with some old favorites. HBAN, BAC, C, and WFC. I have not owned Well Fargo despite Cramer pimping it almost once a week. I enjoyed reading the 10q for Citigroup .
 When all the homework was done we got into BAC, C, and WFC. Personally if you wanted to be a bit less aggressive, we might have wanted to wait a few weeks to get back into banks. I am betting that Barney Franks will balance the needs of the industry with the current witch hunt mentality when it comes to putting the final touches of the banking regulation bill. This is a bit of a gamble, but long term we have what I thing are three winners in the sector. Others to consider would be HBAN and ZION.

Then we need to look at the oil sector. I watched this and did so much homework before, during, and after the Deep Horizon Spill; it was easy for me just to get back into CVX. Now I caution as recent oil values due to the strong dollar have driven the commodity below 70 dollars a barrel. The BP spill will cause more oversight by the US government as well as others. New standards will be put in place and this will drive the cost of production up. There is confidence that the increased cost will be passed on to consumer which means most oil companies will see the same margins on a higher priced product, but this will all take time. The opportune price would be about 71.35 so we will wait with that limit order in place to see if we get it.

As far as Industry and big industrial, we have to go back to BA. We liked it at 70 and after the homework I love it at 62. We also want to look at the apparently cheap Flowserve at 94.

Now once all of these get executed, I will still go back and place 8% stops on all of these positions. Even though we have been burned over the last three weeks due to stops, their protections outweigh the cost. We only need look at RIG and BP to see that. Without my stops we would have lost all of the profit in those positions waiting figure out how bad a spill we had.

That does it for me tonight.  More work tomorrow night.

Salve Lucrum


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