Doc's Diamonds

Stockpicking will be key in this volitile market

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I will soon be blogging on all of my stock positions and discussing each one in depth. My methods of choosing the stocks in my portfolio were varied and did not follow any one pattern. My funds include a combination of three highly different investment styles. I use what some might call a "core" and "edge" method in developing a fund such as this. For example, I have several stocks which have solid financial strength, good balance sheets, reasonable momentum, good growth prospects and are near the top of their 52 week ranges. Some of these include Johnson Controls, Research in Motion, Apple Inc., Lockheed Martin, Allegheny Technologies, and Cisco Systems. I also have some stocks that are solid financially with good growth prospects, but, primarily because of weakness in their sector of the market, are currently near 52 week lows and I believe represent values with quality. Some examples of these are Bank of America, Catapillar, JC Penney's, Best Buy Co., and Sears Holdings. Finally, I have a group of more highly speculative stocks which have potential great growth drivers, but who have not executed well or the timing isn't right for them to have appreciated their stock prices to where I think they will be. Examples of those types of stocks include, Maxwell Technologies, Photon Dynamics, and Level 3 Communications.

It has been very difficult to "trade" this market. For example, I recognized that Maxwell Technologies had "run" way too far and too fast without specific news to back up why. Therefore, when it ran up 30% I tried to sell out of more than half of my position. Since I cannot really trade during the day, I was forced to try and sell after it closed at 16.5. I set up sells for the next day at 16 and 15.5 limits. The stock dropped so fast that I was not even able to sell out at a price a full point below the previous day's close. Since then, it has trailed back to 13.85 and I haven't been able to get out at a reasonable gain. Therefore, I may just have to keep the whole position and hope that it drives up again so I have a chance to trim my position a bit.

Have a great day!

Doc

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The market is poised to rise, but ..............

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The Fed finally quit using their inflation fighting poker face and revealed their understanding of the pressure the economy and financial markets are under at this time. Even though I am not sure we know the whole impact at this time, it is good to know that the Fed will be willing to help the credit crunch by adding liquidity and lowering the discount rate. This did not affect the Fed Funds open market rate yet, but it signals a cut coming down the road (most feel September). In the meantime (possibly even starting tomorrow), expect the market bears to still hold the upper hand in the short-term. In the longterm, I am confident of the direction of the markets moving upward. In the short term, I may have started too aggressively despite my attempt to move in more slowly. I simply found too many of my "watch" stocks reaching what I considered good prices. Therefore, I jumped in over this past two weeks.

My major miscalculation was in the commodity stocks, particularly gold and copper. I felt that there was a good opportunity in Yamana gold and Freeport/McMoran gold and copper, along with Allegheny Technologies. The stocks had already droppped quite a bit and I feel that I used good price points. However, if the dollar continues strengthening and titanium does not bounce from prospects in the aerospace and medical markets, I could be looking at quite a loss in those stocks. I will use these as an example of why I do not believe in "guessing" and trading your good initial ideas away because of short-term fluctuations. I have several months to go in this competition. I still believe that commodities and gold have further room to move upward. This might simply be a cyclical correction. In that light, I am going to "hold my ground". I will not add to my positions unless they reach very favorable price points. I have put into place some buy orders for AUY and FCX at very aggressively low prices. If they reach those buy points, I will lower my breakeven point somewhat. However, if the buys do occur, I will immediately reassess these positions to be sure they have upside. If I am not comfortable with their upside potential for a 4 month time horizon, I might sell quickly and accept my losses. We will see.

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Let's Talk Stocks!

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I find it amusing that the "top" virtual accounts in this contest do not have any blogs. They must just be so busy beating the competition that they do not have time to blog. Or, their stockpicks are so brilliant that they do not want anyone to know why they have selected them. Or, they took big risks and got lucky, thus having no instructional material to share. Or, they have trouble typing. Or............ Well, you get the picture. My point is that the instructions for this competition were clear. This is an exercise in stockpicking, virtual fund building, and then being able to explain yourself and help to teach your approach. That is the very reason why I entered this competition. If this were simply an exercise in who will get lucky in 6 months, then I would not have even bothered. The challenge to try and explain your approach and stay focused is the tough part in my opinion. The "top" competitors need to "get in the game."

My first stock comment is that my account is suffering from acute "stocksplititis". That is an illness where the virtual site does not account for a 3 for 1 stock split and it looks like your account has an enourmous position loss when it is acutally a position gain. My stock in question is Research in Motion. It had a recent 3 for 1 split and my position is actually 3 times what is shown. I actually have an account NAV of 10.21.

I want to blog today on some of the losing picks for my account. Everyone loves to talk about their "winners", but I think the losing positions (especially early in the competition) are often just as important.

Photon Dynamics: This stock is a micocap stock with some real short-term potential but is probably the riskiest stock in my portfolio. This company has a history of poor management and performance despite excellent technology in an industry with excellent growth. They excel in "yield management" for flat panel displays as used in computer monitors and LCD TVs. Their primary product is a testing device for the flat panel glass which detects minute defects in that glass and whether it is satisfactory for an LCD display. They are a leader in this field and are used by many manufacturers. However, their primary revenue is from their testing product and many flat panel manufacturers were caught in an "inventory crunch" recently and cancelled orders and slowed down factory building for the higher tech and larger displays. After several lackluster quarters in a row, they were really hit by a surprisingly poor quarter because of a major customer cancellation and they had to "eat" the cost for manufacturing those machines. With these problems behind them and the prospects for LCD growth still good, they have recently announced this quarter's revenue will easily exceed guidance. At that time, the stock rallied for one day. Then the credit fears swept over the market and the stock dropped. This makes it a significant losing position in my portfolio. Despite the stocks inherent risks, I picked it because of it being at an all time low and the firm knowledge that their coming quarter will be good and exceed to the upside. That makes a risky stock much less risky. Now, if they see evidence of the LCD manufacturers adding capacity in the near term, the stock will be a great value for this game despite it's current loss.

ENT (Enterra Energy Trust): This is an out-of-favor Canadian Energy Trust. Almost all of these babys were hammered when the Canadian govt. said that they might change the tax laws and tax dividends to investors as regular income. This will not happen for nearly 4 years from now. However, this trust doesn't have quite the reserves of other trusts and it is fairly strongly leveraged to natural gas, which has performed very poorly. This stock is a play on the higher energy prices that have existed most of this year, the lowering of the dividend per share that further hammered the stock, and the potential for rebuilding the natural gas prices before the end of the competition. If the company can raise back its dividend because of better profits in 2007 or if natural gas rebounds, this stock will rebound rapidly from its 52 week low. Also, if I get credit for the monthly dividends, the yield is about 15% on this stock.

JC Pennys: A classic play with an extremely successful stock and company that is completely out-of-favor in the current market. Most retail stocks are totally messed up at this time because of the perception of that the economy is headed for a recession and the consumer is "tapped out". I have consistently made money in top quality retail stocks when their stock prices are depressed. I have the patience to wait this out and hope that the holiday retail sales are not as bad as currently expected. If not, both JCP and KSS (Kohls) will do well. They are excellently run companies and provide good products at reasonable prices. I'll take my chances despite the current loss in this position.

Well, that's enough for now. I'll be back soon.

Doc

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An early rebalancing

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Even though I do not yet have all of the active positions equal (and they never will be exactly equal), I do have many of my stocks between $30,000 and $40,000 total value. My diversification based on capitalization is good, but there is an overweight in microcaps and underweight in midcaps. I also have an overweight in "value" stocks, but that fits my normal investment style. My sector diversification is a bit lacking, and I am more heavily weighted in technology and consumer discretionary (mainly retail stocks). However, I am more knowledgeable in those areas such that the sector diversification makes reasonable sense. Also, we are going into good seasons for technology (3rd and 4th quarter) and retail stocks (4th quarter) so, again, the overweight is more defensible. I simply point this out to summarize my portfolio development at this time.

I will discuss my only "sell" of this competition (Cisco Systems) in a later post. This was an "opportunity" purchase of 3000 shares and I divested 2000 shares rapidly once the stock appreciated as I anticipated.

Now, I plan to sell some of another position (Research in Motion) if it reaches $82. I am doing this for two reasons: 1) The total position value is approaching $50,000 which is a bit high. 2) The stock is approaching my short-term target of $250/share, or translated to $83.33 per share after the stock split. Therefore, if I sell 200 shares at $82 (previously $246 before the split), I will bring the total position value in line with my target of $35,000. Further, I will have trimmed the position and "rebalanced" at a price nearing my short-term target. To maintain some sense of discipline for selling, I try to set early and final price targets. If a stock approaches my early price target rapidly and I have enough value to rebalance, I will sell part of my position while still maintaining a "full position". If a stock approaches my final price target, I will sell half my position at or near the target and then put a "stop-loss" under the rest of the position. In the case of Research in Motion, my early price target was $250 ($83.3) because that was the lower end of analyst's targets. My final price target is $265 ($88.33). Hopefully I will be able to demonstrate this approach with RIMM.

If this explanation was as clear as "mud", then I will revisit this "sell" approach in a later post.

Doc

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