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Tuesday, February 22, 2005
Market Recap
Crude oil is back above $51 a barrel again. It surged up almost $2.50 today alone. This sharp increase in oil prices caused a sharp sell off in the stock market today. As a result of this spike in oil, the Dow suffered its biggest loss of the year, down 173 points and closed at the lows of the day. The NASDAQ dropped 28 points and the S&P lost 17 points. A few months ago, I said that oil could rise to $60 even $70 a barrel. Of course, these high oil prices will not happen over night. It will take time but I still think it is possible for oil to climb to those levels. If that is going to be the case, then that will no doubt cause a big drag on stocks. Stocks are still in a longer term uptrend but, nevertheless, the double top formation on the Dow and S&P that I have been showing is an obstacle for this market, and higher oil prices will not help stocks get over that obstacle.
Technical, Fundamental or Both?
The word value always comes up when a debate between a fundamental investor and a technical analysis trader get together. This battle has always gone on and always will. The fundamentalist would not “invest” in a stock unless the stock is “undervalued,” meaning it has a low PE of say less than 20 times earnings. I look at it this way, if stocks have PE's at all, then it is most likely a mature business. If the business has matured enough to be making money I then ask how much more can it grow? If the answer is “it has a lot more to grow”, then that would be a stock I am interested in. The key point here is not the PE but the growth rate. I want to know how much a company is growing if I am going to invest in the fundamental story. To me, PE's do not matter at all if a company is so mature that it has stopped its growth. As soon as a company stops growing, the stock stops climbing and becomes stagnant or moves at a turtles pace. Having the best of both worlds is the ideal situation. Find a stock with a great technical chart that also has a growth story and you may just have a gem on your hands.
The Real Value of a Stock
I have always viewed the value of a stock as what someone is willing to pay me for it today. If I own a stock at $10.00 today because the forward PE projections make it valued at $15.00, then that is a good investment if, and only if, I am willing to wait until those earnings do in fact happen. If the analyst is wrong and the company fails to come through, I will have held a stock all that time for nothing. The truth is, stocks are only worth what someone else is willing to pay. I can believe in my heart that I have a $15.00 stock because the forward earnings tells me that is what it is worth. However, if nobody is willing to pay me $15.00 for my $10.00 stock, then I am only fooling myself. If my $10.00 stock goes down to $9.00 tomorrow, then I have a $9.00 stock (not a $15.00 stock) and I have just lost 10% of my investment. Let's face it, my stock is only worth what I can sell it for today because tomorrow may never come.
Some will argue that this reasoning does not apply for long term investors who do not want to sell today. Okay, fair enough. Let's take stocks like NT, LU and SUMW. There are many more examples but I will use just these three. Back in 2000, NT was above $80.00 and LU and SUNW were above $60.00. LU and NT fell to below $1.00 in 2001 and SUNW fell below $3.00. If you check the charts, there were no stock splits and these stocks fell 98% from there all time highs. Today, four years later, they are all still below $5.00. The growth in these companies are over and that is why the stock prices have lagged. They will never return to there highs and anyone who still thinks they will is only fooling themselves.
Stocks Under Quarantine
After a bear market like the one we had between 2000 and 2002, when you come out of it you have to treat the stock market like a big hospital. The bear is a plague and every stock has to be quarantined. They all get checked in the hospital during the bear market. Most of the stocks were sick, some stocks were sicker than others, and some were not sick at all, but they got checked in to the hospital just to be safe. Some stocks will recover faster than others. Our job is to decide which stocks are going to recover the fastest and which stocks got checked in but were still healthy. These are the stocks that you want to own coming out of the bear market because if they were not sick in the first place, they will run circles around the stocks that were really sick before. NT, LU, and SUNW are terminally ill and will not recover, so why would you want to own them? You can check them out of the hospital if you want, but they are not ready to come out because they are still sick. They will just come home to your portfolio to die or linger on for years, causing you pain and suffering as you do your best to watch over and care for them like the diseased invalid they are.
Who is the Real Gambler?
The bottom line is, you cannot buy a stock and cheer it on. I talked about gamblers yesterday. The truth is, the long term investor that buys one of these stocks and holds it forever, is the gambler. They call themselves conservative investors because they are willing to buy and hold. I do not think it is very conservative to not actively monitor your investments and just hold them forever. In my opinion, they are much bigger gamblers or speculators than the short term trader who actively manages his portfolio. How about the investor that bought SUNW at $60 five years ago and still holds it waiting for it to comeback? Now that is a gambler. Anyone in these stocks at this point is a gambler and if they averaged down to lower their cost basis, they have just tied up more of their cash for years to come or until they admit that they were wrong and are willing to sell and move on and start over with a new growth story. You cannot gamble on a comeback in my opinion, instead find a stock with a great chart and a good growth story and you have some real potential for big time profits.
Reminder
There will be no bulletin on Thursday February 24th due to the fact that I will be out of town for that one day. I will not be available for trading that day either. No alerts or trades will be made that day. It will be business as usual on Friday the 25th.
Please Tell A Friend
Please tell a friend about our service. As always, thank you for your support past, present and future! We will see you Monday evening.
Earnings Calendar
Do not forget to check your short-term holdings and know when those companies are reporting earnings. Holding a stock through earnings is risky and I do not recommend it. You can always buy the stock back after the dust settles.
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