Doc's Diamonds

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