Doc's Diamonds

A brief post on "sells" made so far

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As mentioned in a previous post, I try to use a disciplined method for selling stocks. It is not always easy to maintain the discipline and it is not a method recommended by Ken Kam (marketocracy leader), who tends to stay with his stock picks and looks for "doubles" and better. In a similar way, I do try to invest in stocks I think will move up a minimum of 30% up to 60%. However, in a contest timed over only 6 months, there may not be enough time to realize the higher percentage gains looked for by Ken Kam and even the more modest ones I try to capture.

This is one of the main reasons that, in this competition, I have carefully looked at my stocks that have rapidly gained and considered "rebalancing" them back to full positions. I have done that with RIMM, AAPL, and FCX. This method allows me to "lock in gains" and still have a full position for appreciation to my price targets.

When I purchase a stock, I try to set two price targets for each stock based on my valuation measures, 52 week stock ranges, and analyst targets. As the stock reaches the initial price target, I sell 1/2 of my position and let the rest "ride". If the stock reaches the second or "final" price target, I will usually sell the entire position unless there has been a fundamental change in the company or it's stock such that my initial targets should be revised.

Thus far, only one position (LVS) has reached my initial price target and then my final price target. The interesting thing about Las Vegas Sands is that it reached my initial price target on Sept. 11 ($105) and my final price target ($120) on Sept. 14th. Thus, in four days I sold half of my position and then all of it. In my experience, without substantial news, upgrades or earnings "beats", this is rather unusual. The percentage difference between the initial target and final target was 14.29%. With an appreciation that fast, it might have been a stock to stick with for longer than my final target. However, I realize that LVS is not universally felt to be a strong stock (rated low by Charles Schwab and others) and is driven by speculation that Macau will be a fantastic gaming area (and I think it will be). That "news driven" appreciation can leave as rapidly as it occurs. Thus, I felt that I should certainly stick with my price targets and sell the stock. Whenever this disciplined sell method is used, you run the risk of missing a further run up of the stock. One way to deal with this possibility is to sell only 1/2 of your remaining position when it reaches the final target. That is a reasonable approach, but I felt my risk of holding a stock that drops soon after reaching my target was greater than the risk of lost opportunity for further upside. Thus, LVS is no longer an active position in my account.

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Kohl's

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KSS (Kohl's Corp.) is a well known retailer whose stock has not done well lately. I have mentioned in earlier posts about the weakness in retail stocks and how many strong retailers have seen their stocks drop to below or near 52 week lows. This price drop has been primarily driven by weakening retail numbers and an expectation of a slowing economy. Retailers do not do well when spending drops as the economy slows. The subprime mortgage crisis and dropping home prices further weakens the consumers ability to keep spending at previous levels.

This environment places strong downward stock price pressures on even the best retailers. Further, the fourth quarter is often the strongest for retail stocks and we have not reached that time of the year quite yet.

Knowing all of this, I had been tracking Kohl's to look for good entry points. I started building my position at a price of $56.23 and then purchased a small block higher and additional blocks at lower price points near Kohl's 52 week low (most recently at 53.91). My reason for choosing Kohl's as one of my retail choices is it's dominant position and reasonable prices. Their frequent "sales" reduce margin but drive growth. Kohl's 52 week price range is $52.50 to $79.55. At it's current price of $56.87, this represents a 39.88% upside potential to it's 52 week high.

The current risk for retail stocks is the FED funds rate. If the FED reduces interest rates, most retail stocks rally in response. In this case, Kohl's is almost certainly poised to rise as rapidly as other retailers and, in my opinion, more rapidly than most. However, if the FED stays put, retail stocks (and other sectors) will likely take a hit and fall in response. That is why I wanted to feature Kohl's in this post prior to the FED meeting.

We will soon see.

Doc

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