The market did well last week, and so did we, overall. Pfizer is recovering, Sun is percolating higher, the semiconductors are looking alive, Maxtor has thus far not raced back below $5, and the Dow portfolios are on their way to another nice year after a rough start in January.
I mentioned last week that I had placed a stop limit order to sell half of my remaining Maxtor position at $5.50 (that's a quarter of my original position). A stop limit order has two components: the activation price and the limit price. My activation and limit prices were both $5.50, thus when the stock plunged through $5.50 without ever getting back up to that price again, my order never filled. That's why I'm still in.
I have since cancelled that order and now have nothing outstanding. It looks to me that some positive momentum remains and that we may be able to pick up a few extra dimes per share before clearing out in hopes of buying again later at a lower price. Stay tuned, and get on the email list if you're not already on it. Just type your name into the field at the top of this page.
The Fibonacci market prognosticators are back at it, clinging to their belief that the market moves in predictable series of waves, seemingly never bothered that none of them can agree on the size of the waves or the depth of the current set of waves, and so forth. Still, if you're looking for reasons to be bullish other than the overwhelming factual record that the market rises about twice as often as it falls, then the Fib folks are currently on your side. From BusinessWeek:
The 20-week cycle just bottomed out in late January, so the next 20-week cycle low is not due until the middle of June. The more dominant 77-week cycle is due to bottom out in February, 2006, so we continue to see some type of major peak during the second or third quarter of this year.
All very well, especially when you consider that oil is now back above $50 for the first time since early November and that we're still way in front of the expensive summer. Expect to see oil above $60 about mid-year. That, combined with summer's usual malaise, should give us the annual bumper crop of cheap stock prices from which to build another profitable winter portfolio.
Oh, and now we have the added comfort of the "20-week cycle low" being scheduled for mid-June. Mark your calendar.
Despite today being a doozy in the stock market, our holdings held up well. The Dow fell 1.6% and the Nasdaq fell 1.4%. That's the largest Dow drop since Sept. 22. The cause, evidently, was higher oil and a weaker dollar.
We did fine, though. Maxtor, my biggest holding and the gains I mentioned being most interested in protecting, never hit my $5.50 stop limit. It got to $5.51, a mere 0.4% decline. Even Ultra Semi did well, dropping only 0.8%.
Disney and Sun both fell 2%. In Disney's case, there's nothing to worry about. We're already up 90% and I have every confidence that the stock will push past $30 to give us a double. With Sun, well, I was early getting in. I put my buy order in at $4.20 when I should have waited for $4.05. It got as low as $4.02 today before closing at $4.07, putting us at a 3% loss so far. I'm still confident that we'll be able to sell at around $4.90 in the near future. One of my readers, Carlos, sent this from Red Herring:
Sun Microsystems' meteoric rise in the world of IT has taken a nosedive over the past few years, and some wonder whether it will be able to survive the long haul. But no one can dispute Sun's consistent commitment to innovation: its R&D budget typically hovers around 16% of gross revenues. No doubt, Sun's challenges are significant, but its recent lab breakthrough called proximity communications is a promising technology for the chip industry. By moving from wired to wireless connections between chips, Sun's clever invention is expected to lead to significant boosts in the transmission of data, and hence computing performance.
We'll see. I've thought for years now that Sun is the best bargain in the tech universe, but trading it has been far better than holding it. One of these days, it'll be a $20 stock again. I don't think that's a day coming soon, unfortunately, which is why I still see the stock as a trade rather than as an investment.
It's interesting that both Sun and Maxtor have been superb trading stocks in the $3 to $6 range. They are volatile, yet each company is real. Often with stocks this volatile, the company is absurd and it's a game of greater fool. Nobody believes in the underlying companies so it's just symbol trading. With Maxtor and Sun, the companies have genuine futures ahead of them and the argument for just buying and holding at these low prices is a good one. In the near-term, though, I'm going to trade them with the added security of knowing that the bottom won't drop out.
We're doing pretty well around here, and that's why I'm a little edgy. January was an unpleasant month, but February has been so good so far that we're well into the black. It's looking iffy again, and that has me ready to protect gains.
The main gain I'm worried about is Maxtor. I already sold half at $5.30 on February 11th, along with my entire UTStarcom position. Following those two trades, Maxtor rose to more than $5.90 last Thursday morning before selling off to close Friday at $5.53. I'm still a firm believer in the stock's long-term potential, but am trading it here for the short term. Thus, I have an order in to sell a quarter of my original position (that is, half of my remaining position) at $5.50.
Selling all of UTStarcom at a 9% loss was a good move. The stock now sits at $13.53, which is 18% below my original buy price.
Last Friday, I bought shares of Sun Microsystems at $4.20. Several readers emailed to ask about the wisdom of this trade. They noted that the fundamentals of Sun are not particularly compelling. That's true, however, they've never been particularly compelling and yet we've been able to trade it successfully in the $3.50 to $5.50 range over the past three years or so. Sun sold off prior to the rest of tech this year, and it seems to be resting at solid support in the $4.15 area. I'm not looking to hold this until I use proceeds from the sale to pay my entry fee into a long-term care center. I'm looking to sell it somewhere around $4.90 before summer. We're not off to a very promising start, though. It closed Friday at $4.16, down 1% from $4.20.
Pfizer, on the other hand, is finally showing signs of life, proving yet again that I'm as fallible as they come. Why, you ask? Because I was just about to recommend that you buy additional shares at $25 to get an average buy price of $26.50 when, lo' and behold, good news about the company's Celebrex and Bextra being able to hit the market again sent the stock to a Friday close of $26.80. While we missed out on the gains from $25, we can take comfort in our original $28 buy being down a mere 4%.
The market is not looking healthy, and technology looks especially ready to take a breather. Technology is where I make most of my money, so I'll be watching carefully. We're lucky in that most of what we need to do is protect our gains rather than guard against losses. If only all of life's problems could be so cherry.
I have a limit order in to buy Sun Microsystems at $4.20. Regular readers know that I've traded Sun over the past few years with some success. It looks as though the stock is sitting near pretty solid support in the $4.15 to $4.20 zone. I'm buying with hopes of seeing $4.90 before we hit the annual summer swoon. Going from $4.20 to $4.90 would produce a 17% profit.
Last Saturday, I mentioned that UTStarcom took a big hit last week and plunged to 6% below our buy price. I wrote: "Looking to the downside, at 8% below our buy price I will sell half, with the other half to follow at 10% below." Unfortunately, we hit both of those, with the stock closing today at $14.26, 14% below our entry at $16.59.
I'll put this on the books with an average sale price of $15.10, a 9% loss, which you can verify here.
Meanwhile, I sold half of my Maxtor position at $5.30, locking in a 63% gain there. The other half is rising higher. Let's hope it sees $6 before sinking over the summer.
Halfway through my discussion of the price-to-sales ratio in The Neatest Little Guide to Stock Market Investing, I compare Anheuser-Busch to Coca-Cola as each company stood at the end of 1995. From page 210:
...if you had bought each company, you'd have paid $5.16 for every $1 of Coke's sales, but only $1.68 for every $1 of Budweiser's sales. By this measure, Anheuser-Busch was the better buy. For curiosity's sake, let's see how each company fared in 1996. On December 31, 1996 Anheuser-Busch closed at $40 and Coca-Cola closed at $52.63. That's a one-year gain of 19.62 percent for Bud and 41.75 percent for Coke. This isn't a conclusive study, but does demonstrate that better bargains don't always come through in the short term. The word "always" should never appear in a discussion about the behavior of stocks.
However, take a longer look. Adjusting for splits, Anheuser-Busch closed 1995 at $14.47, Coca-Cola at $34.47. Anheuser-Busch closed 2001 at $44.72, Coca-Cola at $46.60. That's a six-year gain of 209 percent for Bud, but only 35 percent for Coke.
In other places in the book, I refer readers to Anheuser-Busch as an example of a strong company.
With time, strong companies get stronger and weak companies get weaker. The maker of Budweiser beer just keeps getting stronger. From the end of 2001 to yesterday's close, BUD gained a little less than 13%. Not great over a three-year period, but not awful given the gyrations of that time frame. What I'd like to highlight, however, is the amazing march of earnings increases the company has logged. To the tune of a picture being worth a thousand words, I present the following chart courtesy of Standard & Poor's:
Click the chart to see a larger image. The up arrowheads indicate an increase in earnings over the previous year. Pretty impressive march upward.
What a fabulous Friday to cap off a super week in the stock market. Times like this don't come along often, so when they do I like to celebrate. The traditional response to an up week is to call for bad times ahead, warn that it can't last forever, and make some quip about the gullibility of the average investor. All of which I'll get to in a moment. But first, the celebration phase.
The Dow gained 3% for the week, and is now down just 0.5% so far in 2005. Double The Dow is down 1.4%, exceeding its mandate of twice the Dow in either direction. That often happens when recovering from a loss because it falls twice as much and then has a smaller base from which to grow its recovery. It eventually catches up and surpasses, though, and I see no reason that this time will be different. I absolutely love investing in the Dow. It will never go away. It will always recover. At twice the Dow's performance, I consider Double The Dow to be one of the best long-term monthly investment programs available, and I'm the only one who advocates it. Tells you something about the financial industry. Last year, this portfolio hit a low of about -16% before fully recovering and finishing the year at +5%. Money invested during the low months gained roughly 25% by year-end. That's the general pattern with this reliable strategy. As always, you can learn all you need to know about it in Chapter 4 of my stock book and follow its performance here.
Now to investments that are decidedly NOT guaranteed to never go away.
Maxtor reported a fourth-quarter loss of $70 million. A year ago it reported a $39 million profit, so this is hardly good news at first blush. Analysts were expecting a 15-cent-loss per share, but the $70 million computes to 28 cents per share, almost double the damage foreseen. However, much of the trouble is due to one-time expenses associated with the ongoing turnaround at the company. The whole reason we were able to buy at $3.25 is that the company is having a rough go at it. It's hated on Wall Street. My hope has always been that as the company gets its ducks in a row, it will produce better financial results and garner favorable analyst comments and become a value investor's tech stock. When that happens, it has a chance to re-enter the mutual fund radar and get picked up in a massive buying spree. The single-digit stock price days would quickly disappear in the rearview mirror.
We may be seeing the first stages of that already. In its report, Maxtor exceeded analyst expectations of $990 million in 4Q revenue when it weighed in with $1.03 billion. I feel good to have paid a quarter over three bucks a share for a company with a billion dollars in quarterly revenue. When the new management team gets this recovery into full gear, we should see some sparkling results. After this good revenue news, the stock rose 13% to $5.54 on Friday. That puts us up 70% from $3.25.
I placed a stop-loss for half of my Maxtor shares at $5.10 on Friday and emailed my list. (To join the list, just type your email address into the box at the top of this page, then confirm in the follow-up note that you want to join. It's completely free.) I mentioned that I hoped the stock would not hit my stop, but that I didn't want to ride it back below $5. Thankfully, the stock did not hit $5.10, so I'm still all in and have moved my stop up to $5.30. Being so far in the black allows me the luxury of a wide margin between the current price and the stop. I'm eyeing $6 as a near-term target, but you never know and as the sage says, "You can't go broke taking a profit." Even as Maxtor works successfully toward its recovery, there's danger in the market at all times. Maxtor is not the Dow. It could be cratered in an instant by something completely unexpected. I don't expect that (ha!), but we need to protect against the possibility.
UTStarcom had a rough week that saw it plunge to 6% below our buy price. Forbes published an article that said, "UTStarcom guidance for 2005 may be at risk due to an estimated 30% decline in China's personal access system (PAS)". However, UTSI's
estimates include a 50% decline in PAS, so the reaction seems overdone. My guess is that UTSI will become an acquisition target in the mid-$20s. That's not so great, in my opinion, so I will probably look to sell if we can get back above $20 before summer. Looking to the downside, at 8% below our buy price I will sell half, with the other half to follow at 10% below.
Semiconductor stocks rose 4% on Friday and my pick, Profunds Ultra Semiconductor, rose 6%, in line with its mandate to outperform both up and down by 50%. It's now down a mere 0.8% from our buy price of $18.09.
Finally, the Land of Dreams and Magic continues living up to its name. Disney is now up some 95% from our buy price of $15 on March 11, 2003. Looks like we'll get that double in two years after all. Disney is a Dow stock, of course, and this individual holding serves as a great example of the many ways to use that handy list of 30 global winners. If you did nothing the rest of your life but choose your investments from the 30 stocks on the Dow, you would most likely outperform every investor you've ever met. Excellent work, Disney.
I hope you're enjoying the dramatic change of sentiment in the market as much as I am. Remember that stuff I said at the beginning of this article about the bad news needing to be brought up? Forget it. We all know that the market fluctuates and therefore by definition cannot keep going at Friday's pace forever. Just keep the good stops in place as explained on Maxtor above and keep the bulk of your money in the reliable Dow. You'll do fine.
Maxtor is trading up nicely this morning, currently fluctuating around $5.25. I've placed a stop order to sell half of my position at $5.10. I hope it doesn't hit that, of course, but I don't want to ride this below $5 again.
I'm reading a good book about Japan's little known bad side called Dogs and Demons by Alex Kerr. It tells the story of how Japan is destroying its own country with construction subsidies, its cultural heritage with uninspired modernization programs, and its economy with corrupt bureaucracies. It's a welcome dose of reality instead of the misleading postcard image of a Japan as an idyllic archipelago inhabited by kimono-clad beauties. Anybody who's seen Japan recently knows that what most people think of when hearing the word "Japan" is nowhere to be found.
Mr. Kerr does a masterful job of explaining why Japan has still not recovered from the bursting of its stock market bubble. I expected a cursory overview of basic economics in this mostly cultural book, but was surprised to find a well-researched and well-presented chapter on business gone wrong. It contains a succinct summary of the dollar's and, therefore, America's tenuous situation. It could be pulled off, but what if it isn't? From pages 98 and 99:
It's sobering to realize that the supposedly "rational" United States, too, relies on an artificial system to support its economy, persistently ignoring the mountain of dollars piling up in foreign ownership -- it has been called America's "deficit without tears." For the time being, foreigners continue to finance the U.S. economy with money earned from America's huge trade deficits, but sooner or later they will cash in those dollars and the American economy will suffer severe pain.
Or maybe not. If Japan suddenly sold off its dollars, it would hurt the U.S. economy but damage Japan's far more. Furthermore, Japan is not the only country to hold dollars; all of America's trading partners do, and China, running the largest trading surplus with the United States, is building up the biggest reserves of all. In coming years, Japan may not necessarily exert the determining influence on what happens to the dollar. The very existence of so many dollars abroad is also a plus for the United States, because it makes the dollar the de facto world currency -- so there is less need for foreign nations to trade their dollars in for local money. Perhaps the United States will turn out to have practiced a bit of financial magic of its own, holding those dollars hostage indefinitely -- or, at least, until a time beyond the horizon when economists can make predictions.
Nicely put, wouldn't you say? I'm especially impressed because Mr. Kerr is not a financial writer and this book is not about finances. If you're at all interested in Japan, please add this to your list of must-reads. It will sober you up after all the glaze-eyed pap by westerners trying to pay homage to the land of Basho. He's gone, and so is the land he wrote about. Instead of thinking about temples and Mt. Fuji and tea ceremony, a proper reflection on modern Japan centers around gray cement buildings and nests of power lines and mountains half chewed away for construction. It's not pretty, but it's true. That makes this book worth reading.
That said, I don't think Japan is as bad as this book makes it out to be. I've found pristine areas. I've waded through uncemented streams. I've found lots of old homes and buildings that have not been bulldozed in the name of progress. As for runaway bureaucracies, show me a country that doesn't have something to add to that chapter. I remember the "That's Outrageous" column in Reader's Digest I used to read as a kid that exposed government pork and other dirt in America. The situation in Japan is layered beyond belief with no-bid contracts awarded to companies run by former government officers, but we need not scratch our heads too long to think of a sports stadium in Texas built with taxpayer money but profiting a private businessman who later became president. Back-scratching and good ol' boy networks are not unique to Japan.
Still, there are many good points in this book and it is sorely needed on the Japan shelf. If it occasionally goes too far, it's to provide balance against years of idealistic scribbles by people who stopped in for a look around and decided that great customer service at a Tokyo restaurant meant a country dominated by grace. Believe me, there are bad things going on.
