About six or seven years ago, I was sitting in the stands watching my son play a junior varsity basketball game at the local high school when, out of the blue, a friend sitting next to me blurted out, "don't you think GE (GE) is a buy here for the long term?" At the time, the stock market was in the midst of the "Tech Bubble Bear" and GE was trading somewhere in the vicinity of $25. My friend had obviously been thinking about this for a while and went on to make an impassioned argument that this was a "great company" and that at $25 and change, it seemed like a "wonderful opportunity" if one had the proper long-term time frame.
Sure enough, after visiting the $22 range in late 2002 and again in 2003, General Electric embarked on a very nice run and closed at $42.12 on October 2, 2007. This means that had John (not his real name) made the purchase of GE he had passionately made the case for, he would have had a very nice trade on his hands as the stock had moved a tidy +68%. Not bad, not bad at all.
John is an engineer and as such, is no dummy. He began investing in the late 1980's and at the time of our conversation; John was putting his first son through college and staring at a second tuition payment in a mere 18 months - so finances and the stock market were obviously on his mind. Like most people, John's frame of reference for the stock market had been the secular bull market which began in 1982. Thus, he was a firm believer in "time not timing" and that, as he told me, the "smart money buys good stocks at good prices for the long-term."
While I am vehemently opposed to this mentality, the reality is that this is the type of thinking that has been drilled into the minds of the investing public. The mutual fund industry has gone to great lengths to convince you that you shouldn't ever sell anything (especially their funds) because; being in good companies for the long-term is the answer. Remember, it's "time, not timing" that matters!
So, although you are no doubt aware of where I'm going with this, I almost made a phone call to my old friend two weeks ago to ask how he was feeling about that long-term investment in GE right about now? If he had purchased the GE we had talked about and held on for the "long term," he'd be looking at a loss of about -61.5%. Never mind the fact that the stock is down -77% in the last 17 months.
Just so we're clear, I'm not picking on John here. He simply succumbed to the fund industry's hype, which seemed to work for a long time. Heck, even today, most investors view Warren Buffett as a hero due to his long-term approach. Yet I'm guessing most people don't realize that Berkshire Hathaway (BRK.A) fell -32% in 2008, is down -24.2% so far in 2009, and has fallen -51% since the peak in December of 2007.
However, with the Lipper Large Cap Growth Fund Index (we use this as a proxy to indicate how the average growth fund has fared) now down -44.58% since 1/1/99 (that's 10 years, 2 months, and 1 week) and the Dow revisiting levels not seen since 1996, I wonder just how long-term one has to be in order for things to work out? (By the way, Barron's tells us that the market has never had a negative 20-year period.)
While I run the risk of talking my book here, doesn't it make sense to manage risk in your portfolio when times are bad (meaning sell a little something) and to stick with the market leaders? Remember, times change and your portfolio needs to be able to change with it - no matter how "great" a company might be.
(Please accept my apology for the brief commercial on the concept of actively managing one's money. We now return you to your regularly scheduled analysis.)
Getting back to the topic at hand, a friend and colleague who is actually in the business of managing client money recently posed the exact same question to me in a conversation just last week. And while I must confess that I am not a fundamental analyst, his point is worthy of consideration.
Curt (yes, that's his real name) presented me with the following facts and even provided the backup to prove his point.
General Electric currently has 10.57 billion shares outstanding.
As of 12/31/08, GE had $48.2 billion of cash and cash equivalents on hand
This means that GE had $4.56 per share of cold-hard cash on hand
Cash flow from operations in fiscal 2008 was $48.6 billion
CFO Keith Sherin said recently that just 2% of GE Capital's capital assets are exposed to a potential mark-to-market devaluation.
GE has funding through 2010 without government support
On Wednesday 3/4, the stock traded as low as $5.73 - and closed last Friday at $9.62
Curt's point is fairly simple and appears rather compelling (even to me). He suggests that as of last Friday's close, you can buy GE for $5.06 over the amount of cash the company has in the bank. Sure the finance arm(s) have issues. But Curt argues the rest of the company ought to be worth something more than $5.
The big point is that the recent stock price just might reflect a worst case scenario. And maybe, just maybe, this might be a decent entry point for those "long-term investors" still out there.
To be honest, I don't really care whether GE is a pound-the-table buy here or not because I don't buy stocks that way. If and when GE becomes a market leader, I'll be happy to pick up some shares. But until then, I'll stick with those companies that are tops in their sectors.
The message that should be taken away from this weekend's missive is that we are getting to the point in the market where values are beginning to crop up. This means that value investors will eventually start picking up shares here, which is a first step toward looking forward.
So, given the massive decline we've seen in stocks and all the pundits telling us why the Dow needs to go to 4000, we think it might be time to start looking for some bargains - because they just might be ringing a bell here.
Wishing you all the best for a profitable week ahead.
( AXP)
Date Sold Short: 03/13/09
Price Sold: $13.07
Buy Strategy: With stocks overbought on a short-term basis, we added a short position in AXP as it moved into resistance.
Active Trader Stop: $15.10
Current Strategy:
We made a total of four moves last week. Among the highlights was the quick profit we took in our China position (FXI) for a gain of +7.5% in three days. On Wednesday, we added a position in the Ultra Russell 2000 (UWM), which we turned around and sold on Thursday for a gain of +11.46%. And finally, on Friday we added a short position in American Express (AXP) in response to the big run in the market.
KMP (Kinder Morgan Energy Partners, L.P.)
Company Profile
Our Success Trading Group members scored 2 more wins this week. We sold a position in Kinder Morgan Energy Partners, LP (Ticker: KMP) for a relatively quick 7% gain. We also closed a position in RPM, Inc. (Ticker: RPM) this week for another quick winner. We currently have a position in McDonald's (Ticker: MCD) which we like for new positions at its current price.
Our Success Trading Group scored 52 Wins in 52 Weeks and has closed over 370 winning trades with 95% winners on our Main Trade Table.
RIMM (Research in Motion--$40.18; -1.28; optionable): PDA's
Company Profile
After Hours: $40.90
EARNINGS: 04/02/2009
STATUS: Double bottom w/handle. After surging in January and early February, RIMM tanked back to the December lows. Over the past three weeks it has put in something of a double bottom at the December low, rallying to start last week then taking a breather Friday. RIMM broke higher Wednesday and basically held the gain to end the week, moving laterally. Looking for RIMM to take another couple of days of lateral movement and then make the break higher to play catch up with the other large cap techs.
Volume: 17.364M Avg Volume: 22.534M
BUY POINT: $41.55 Volume=28M Target=$48.85 Stop=$38.88
POSITION: RUP FH - June $40c (59 delta) &/or Stock
GEL (Genesis Energy LP)
Company Profile
GEL provided a 4.7% gain before commission in a day this past week. This MLP, which has been paying very nice distributions is now dealing with a support/resistance in the $10 area and a break above that level might suggest an entry particularly when we consider that it has been paying distributions at an annual yield around 13%.
ISIL (Intersil Holdings)
Company Profile
Once again the semiconductor stocks are out in the early lead as they were in December off of the November lows. As a group they did not make the breakout due to the January fade and then the overall market tank in February. Even in that selling, and indeed whenever there is a selloff, we watch what stocks hold their own and continue setting up good bases. As we wrote at the time, these stocks will jump quickly when the market bounces back. Remember back to October 2002 as well: semiconductor stocks led the move off the lows, the first group to rally sharply at the end of that bear market. Even more reason to keep an eye out for these stocks.
There were many chips to choose from and we bought several last week. They were not, however, the household names that most are familiar with. We were watching ISIL once again as it continued its trend higher, yes higher, off of the December low. It rallied in early February off its up trendline and bumped into the top of its channel. It sold back as the market sold that month, but it simply faded to the bottom of its channel and then bumped along laterally over that level as the market sold off hard. A leader off the lows, great relative strength, holding its pattern during the market dive, tightening its range.
Naturally that caught our eye and we put the play in the report again on 3-5-09, waiting for ISIL to show a break higher and give us another run toward the top of the range, maybe farther. ISIL remained in its very tight lateral move for two more sessions, and then on Tuesday it jumped off the lower trendline. We jumped in with some stock positions at $10.48 and some April $10 strike call options at $1.20.
ISIL finished the day at $10.84 then added another 5.35% to $11.42 the next. Thursday ISIL blasted through the upper trendline of its channel, surging to $12.16 on the high and closing at $12.05, up another 5.52%. Three strong days higher, breaking through the top of its channel, a 14+% gain in hand. After a channel break a stock will often come back to test that move. So, we sold half our stock position at $11.99 for a 14.4% gain. We sold half our option position at $2.1 for a 75% gain.
Friday ISIL gapped a hair higher, edged a bit higher, but then started to sell, undercutting the Thursday close. That is a classic sign a leg higher is going to take a breather. If we had not sold some positions late Thursday we would have sold them on that signal. Now we are looking for ISIL to continue the test of this break out of its channel. If it cannot hold we will sell some more positions and bank the gain. If it does hold we will let our positions continue higher as ISIL will have new ground to plow as it makes more new highs off of this breakout as it has changed its pattern.
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