18 March 2011 What A Difference A Day Makes
We did not race home this morning to check the market as we mentioned there is not much there to check. We did get in on the LULU puts and this morning moved a few of or friends into that position as well. LULU was down over a point today so we are seeing the downward movement we were expecting. We did break through that $75.50 mark, but we closed above it ($75.59). IF and it’s a big IF, we can break through the $69.50 range this could fall to a 35.00 price.
It was kind of a good day in a whacky way. It started out really hot because a mad man promised to stop shooting his fellow countrymen. Ok let’s believe him. Then we had some voices of reason concerning the nuclear situation in Japan. Then we had the G-7 (I always remember it as FIG JUK US In Canada France, Italy, Germany, Japan, the UK, the US, and Canada) step in and sell off some Yen to create a little support safeguard for their currency. Then some major global banking brain trusts identified that of the Japanese prefectures destroyed it only equates to about 5% of their total GDP. So the market was strong today and volume was 40% over the average so this is definitely an accumulation day. In the back round, we have the noise of a yet to be addressed debt extension that the parliament of whores in Washington has to address. We also have sovereign debt issues in Europe lingering and the word deflation has disappeared from our vernacular and been replace with the I word, Inflation.
We are glad to see our first accumulating day in 14 trading days. We want to get back in the game, but we ain’t there yet. Give me about 4 or 5 more accumulation days in the next 10 trading sessions and we will be sittin’ on ready.
There I was in 1996-1997 and everywhere I looked I was bombarded by e-mails and pop ups from this new company called NFLX Netflix. Mail order movies. How corny was that. They ended up doing an IPO in May 2002 and raised some money. By that time I was not only an avid user of the service but was giving gift certificates to friends, family and employees. In the fall of 2002, we bought our fist position in Netflix and told several of my Stock Buddies (Long before the blog.) We all got in the $5-7 dollar range. In October 2003, I read an interesting article about Comcast and Cox offering a new service call onDemand. My gosh the very service that was causing all the angst for Blockbusters was now going to get clobbered by onDemand service.
I ran down the streets yelling “SELL, SELL, SELL.” After all how many times in your life do you get a triple.
All but one of my buddies sold and took their profit. The one who did not was not insightful they just forgot they had it. One who did sell it to this day reminds me that the stock went from the 22 a share to 35 a share then they did a 2 for 1 split. By early 2005, the stock was at a split adjusted 10 dollars a share. That was when my one buddy who kept the stock was really happy he had shown a 30% gain, not realizing that if they had put some stops in they could have made 320% gain in the stock.
There were several lessons on this stock. The first would be, don’t buy into a stock just because they are promoting the product or you are seeing the product everywhere. Had I done due diligence, I might not have gotten in as early as I did, In looking at historical earnings records and SEC filings we would have found a $7.10 entrance point on positive pricing and volume (that would be accumulation and funds were beginning to buy the stock in early 2003) on or around February 24, 2003. So we would have lost a little on the front end.
The real lesson learned was the sell transaction. I sold for two reasons. GREED and FEAR. GREED, because we had nailed almost 400% on the stock. FEAR, because another product was going to suck away the profits of the company. Had we been watching the stock, reading the quarterlies, reading the SEC filings and watching the charts, we would have stayed with the stock through the thick and thin (We will admit it would have been iffy in August 2006 and November 2008.), we would have had the stock up to and including the market melt down because the bad economy actually had a positive impact on the rentals of movies. Most of that business left Blockbusters and went the way of Netflix. In August 2010, Netflix announced plans to start streaming movies into our living rooms via several gaming platforms. The very reason we got out of the stock in 2005, was now a reason to look at the stock again.
If we had followed our newly found rules for investing, we would have gotten out of the stock at a very obvious resistant line of 206 as it was broken on March 1, 2011. Our gains would have been 1,471% over 7 years. That is about 210% a year. Lesson Learned.
Pick Of The Day
First off my anti POTD from yesterday while performing ok today in the market has some new light shed on it. There was a cover story in today’s IBD about the inventory shortage at LULU. While this is a good problem to have, the company is being forced to fly product in to satisfy current demand. This will impact Q 2 earnings negatively, so the PUTs seem like a good bet, but our trade was based upon longer term drop in demand because of the economic concerns of 5 dollar gas on disposable earnings. Tile will tell, but if you played the PUT strategy with us, watch it like you do a stock. Your stops might be a bit more leinient than a typical equity stop. Perhaps you look at getting out at a 20-30% drop.
So of all the stocks on our watch list, if we had a gun to our head and were told we had to buy one, CAT Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. It operates through three lines of businesses: Machinery, Engines, and Financial Products. The Machinery business offers construction, mining, and forestry machinery, including track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, skid steer loaders, underground mining equipment, tunnel boring equipment, and related parts. It also manufactures diesel-electric locomotives; and manufactures and services rail-related products and logistics services for other companies. The Engines business provides diesel, heavy fuel, and natural gas reciprocating engines for Caterpillar machinery, electric power generation systems, marine, petroleum, construction, industrial, agricultural, and other applications. It offers industrial turbines and turbine-related services for oil and gas, and power generation applications. This business also remanufactures Caterpillar engines, machines, and engine components; and offers remanufacturing services for other companies. The Financial Products business provides retail and wholesale financing alternatives for Caterpillar machinery and engines, solar gas turbines, and other equipment and marine vessels, as well as offers loans and various forms of insurance to customers and dealers. It also offers financing for vehicles, power generation facilities, and marine vessels. The company markets its products directly, as well as through its distribution centers, dealers, and distributors. It was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. Caterpillar Inc. was founded in 1925 and is headquartered in Peoria, Illinois, is looking like a decent pick.
Again we are in a market correction and even though we have had two up days in average volume ranges, CAT does seem like a nice position to consider. In the last 10 trading sessions we see 4 accumulation days and 3 distribution days. That is in a downward market, so the CAT is beating the trend, a good sign. In a news brief today (but we know we don’t buy because of new releases) their dealer network is indicating a 59% increase in revenue for the 3 months ending February. CAT has a lot of debt, but it goes with the category. The most negative things we could find were the challenge of integrating their three latest acquisitions into the CAT family (German engine maker MWM, locomotive manufacturer EMD, and mining equipment OEM Bucyrus). Please read the SEC filings as they are very informative and interesting. You know the big yellow cat like you never have before.
The play would be to look for one more day of accumulation with a new distribution day and catch and entry point below $106 a share. Put you stop in at 97.50 and look for $127 by mid June. Keep a special eye and stops in place for the April 26th earnings call. They should beat and if Owens (Chair and CEO) does not throw out any scary forward looking comments, you could see the 127 a lot sooner. DO YOUR HOMEWORK.