I was watching CNBC's Fast Money Friday night and heard Pete Najarian recommend a trade in Manitowoc (MTW) because of it's connection to overseas construction. That clicked with two of my SLO stocks, ABB and Graham Corp., having had nice moves on earnings last week. To see if this looked like a solid trend, I scanned earnings reports from last week looking for companies that make big, heavy machinery and equipment and sell it around the world. My scan results are shown in the table below. The stock move column is the difference between the closing price before earnings and the opening price after for stocks that reported when the market's closed. For stocks that reported while the market was open, it's the difference between the day's opening and closing prices. Of the 13 that reported last week, ten beat estimates, one met them and two missed. Ten of the stocks moved up on the earnings and three moved down. I like those odds.

It's very possible I missed some companies that should have been included in last weeks list. Since I don't know of a screener for 'make big, heavy stuff and sell worldwide' (MBHS&SW) the scan was looking at companies I knew were in the business and a quick look at the profile for those I hadn't heard of and couldn't tell what they did from the name. Feel free to post a comment if you know of something that should have been included in last week's wrap-up.

This week I'm going to try trading the earnings releases for stocks that fit the MBHS&SW profile. I've identified five candidates so far, Manitowoc is among them - but there's another one I like even better. Most of the stocks for next week have decent looking fundamentals, so they shouldn't get slaughtered too badly if they miss. Because of time constraints research for this is limited to a quick scan of the profile and key statistics on Yahoo Finance and a check of the chart to try and avoid buying on a big run-up before earnings. The company I really like for the earnings trade is Bucyrus (BUCY). They make mining equipment, 'nuff said.

Lincoln Electric (welding supplies), Northwest Pipe (pipe) and Harsco (steel supplier) also reported last week. All three missed earnings estimates, which I found surprising since their customers should include MBHS&SW companies. Based on their results I narrowed the field for next week's trades to equipment manufacturers, not their suppliers.

I'll post a blog entry next weekend with the results.

I've already entered an order to sell my Graham Corp. (GHM). They redefined 'blowout quarter' with their earnings report Friday, estimate was 42 cents a share, they delivered $1.10. However, in the news release they said gross margins for the past quarter had increased due to the product mix and the margins were likely to be lower next quarter. The company's doing great, but it's had a nice run from the high 30's to the high 50's and seems pretty close to fully valued. If the stock pulls back to the 40's, I'll be tempted to buy it back.

Comments: View Comments |  Sunday October 28, 2007

With the SLO nearing the half-way point, it seemed like a good time to see how I'm doing against my objectives for this contest. My primary goals for the SLO were to practice portfolio management, learn a few things and help evaluate whether I want to manage my own stock portfolio or continue investing through mutual funds. The practice has been good and I have been learning a few things. Not much help so far in the stock portfolio vs. mutual fund decision. A few things that stand out so far:

1. The first few weeks showed us cheap stocks can get cheaper. Even when you're sure they can't go any lower, they can.

2. Patience. I was in too much of hurry to meet the compliance requirements. Worse, I saw the dips early in the contest and piled in too quickly getting nearly fully invested the first week - then watched point 1 play out.

3. Watch commissions. I wanted some gold exposure in the portfolio and picked Northgate Minerals because it offers exposure to gold and a potential kick if their new mine gets approved. However, it's a $3 stock, so a five-cent per share commission takes nearly two-percent off the top. Had I considered commissions, I would have selected a gold stock or ETF with a higher share price to reduce the commission percentage. And be careful playing with kickers, they kick both ways - the new mine approval ran into snags and NXG has been a big drag on my performance.

4. I've had pretty good success enhancing returns by trading around a core position. I've been far more aggressive with this in the SLO than real life, but still have only used small pieces of the core position. This wouldn't be very effective in a taxable account since you would end up with a lot of short term gains (losses) and a complicated cost basis for your shares. Obviously, works best with free or low-cost commissions. I plan on getting more familiar with technical analysis methods to help set the trading buy and sell points, but don't see myself getting very aggressive with this strategy in my real portfolio.

5. Know why you bought a stock. In rough markets, you can go back over your notes and see if your reasons for owning the company are still intact, research to see if you missed something, and make a rational decision on whether to bail out or ride it out. I think my best portfolio management decision so far has been selling out of ARII after a bad earnings report. I locked in a loss, but avoided an even bigger loss. Since one of the key reasons for putting ARII in the portfolio was an expectation of strong earnings growth, the decision to sell was easy when earnings didn't materialize.

6. Blogging has been more helpful than I thought it would be. Writing about what I'm doing helps me organize my thoughts and consider the risks and rewards of the moves I make. The blog really makes me think about what I'm doing since millions and millions of people (ok, I exaggerate -but it sounds better than no one) will be ready to laugh at my mistakes. It also serves as a journal to record the reasons for making the investment - useful for point 5.

7. One of my objectives in this contest is to determine whether or not I can beat the mutual funds in my account and the overall market. The results so far are mixed. Marketocracy shows me ahead of the S&P 500; my spreadsheet shows me a little behind. I'm also tracking my performance against three stock mutual funds I hold and am beating two of the three so far (beating Allianz NFJ Dividend Value and Hennessy Cornerstone Growth, losing to Toqueville). Backing out Marketocracy's management fees would improve my performance, but not enough to move me ahead of the S&P or Toqueville.

8. This is more time consuming than I had anticipated. A key factor in deciding whether to run my own stock portfolio or continue to invest through mutual funds will be whether or not I'm willing to invest the time. Based on my results so far, I would have to conclude I'm better off buying an index fund, broad market ETF or mutual fund and free up the time. But, I am enjoying this and the game isn't over yet. The smartest move might be to just copy Vad's portfolio.

9. Using Yahoo's historical price quotes, I calculate the S&P 500 is up 7.05% since the contest started. If it were a player, it would be in 290th place out of 558. Over half the field is smoking the market. Most of you are pretty good at this.

I'd be interested to hear what you think your best (or worst) portfolio management decision in the SLO has been so far?

Comments: View Comments |  Sunday October 14, 2007

This week's question comes from one of your fellow Strategy Lab Open members, Duffbeer, who asked, "What are you planning to do with your investments with the upcoming 2008 election ??? ... Will you change your investment plans at all due to the election year?

I found it very difficult to keep my political opinions out of my answer and stay focused on the investment scenario. Then it clicked, that's exactly the problem an investor will face in attempting to adjust a portfolio to political events - you need to keep your political opinions out of the process and focus objectively on what, if any, impact government policies and programs might have on your investments.

The short answer to this question is I don't plan any actions in anticipation of the 2008 elections. I have some strong opinions about those elections, but also know the stock market has seen good and bad returns with the White House and Congress under D, R or split control. At this point in the election cycle it isn't possible to predict a winner and, even if you could, predicting which stocks would benefit or be hurt by specific policies would be like playing darts blindfolded.

For example, Senator Clinton has proposed a tax on oil companies to fund alternative energy research. At first glance, that doesn't look good for Chevron, one of my real and SLO holdings. However, even if events lined up to implement this program, there is no way to know how it would account for Chevron's investments in alternative energy technology (cellulosic ethanol research, battery technology, bio-diesel, etc.). Would the R&D spending count towards this proposed program? Could CVX be eligible for research grants or government contracts? Would they be able to pass any increased costs on to consumers? In order to factor election politics into my Chevron holdings, I need to make far too many assumptions about election results and details of a program that have yet to be defined.

Once the details of a policy are known, adjustments can be made. A good example here is the 2006 Pension Reform. That act makes it more beneficial for companies to shift from defined benefit to defined contribution plans. As a major provider of 401K plans, T. Rowe Price is a company that should be able to expand its business as a result of this legislation. Those smart enough to see that and act on it (sadly, not me) have seen about a 25% gain over the past year.

The best bets regardless of who wins the elections will be companies that have consistently shown they can perform in good times and bad and can adapt to a changing economic environment. I want to own companies like that last year, this year, next year,...

Comments: View Comments |  Friday October 12, 2007