March 2008 Archives (The Stock Surfer)

March 2008 Archives

Video Game Stocks: More Becomes Less

Rating: 2.00 (2 votes) Vote:

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As an investor in video game stocks, I'm beginning to worry that consolidation will remove pure-play opportunities for trading in my favorite sector. Activision (ATVI) got bought (sort of) by Vivendi, and now Take-Two (TTWO) is probably going the way of Electronic Arts (ERTS). The TTWO buyout is not all that surprising--I first speculated ERTS would take them over back in December on my personal blog. Lucky guess, even an amateur surfer catches a wave now and then. But the question now is what to do with an industry that's changing rapidly.

Let's start with the good. Nintendo (NTDOY) and Activision are the clear winners this time around. Nintendo looks attractive again after a pullback, and I wouldn't underestimate the realease of Wii Fit. The biggest headwind I see is that NTDOY has been trading with the Yen (Yen goes up, NTDOY goes down). As for Activision, they were gaining market share even before the addition of Blizzard. Everyone knows about World of Warcraft, but I don't think the Street is pricing in another Blizzard game: Starcraft II. The first Starcraft popular in South Korea, to the tune of professional tournaments being played in front of huge audiences and broadcast on TV. Starcraft II could be equally huge, and not subject to Korean writers' strikes! I own ATVI and NTDOY, proudly.

Moving on to the mediocre, there's ERTS. The Take-Two offer isn't as bad as some think, but I still question EA's overall strategy. Sure, they have sports, and they might soon have TTWO's Grand Theft Auto and Bioshock. But ERTS seems desperate. Last month, they upped their revenue estimates for fiscal year 2011. It is now 2008. Raising estimates that far ahead strikes me as bizarre. Speaking of bizarre, I'd suggest you check out a demo of EA's highly anticipated Spore. A cartoony character grows from a tadpole to a goofy Jar Jar Binks lookalike...meesa not so excited. If it were a minor game for EA I wouldn't care, but the hype has me worried. I'm being Minnesota Nice when I say Spore has bust written all over it. That said, I own some ERTS. I like it around $45 per share for a trade because I think the Street likes it around $45. I will probably sell before Spore makes it out of the evolutionary goo.

And now, the junk heap. THQ (THQI): I hate to say this (Minnesota Nice), but THQ is in trouble. Their new games have disappointed, and they are in danger of losing their licenses with WWE and Disney. The Wall Street Journal recently reported that Disney is going to make the Toy Story 3 game in-house. If Disney pulls it off, not only will THQ lose that valuable Pixar tie-in, but it would also decrease the chance that Disney would buy THQ. What exactly does THQ have that someone else will pay for? Just to make THQ feel better, I want to mention Midway (MWY). The chart looks like an experiment in gravity.

So, there are still some opportunities in this video game cycle, but be careful--they're not all worth playing.

Disclosures: Long ATVI, NTDOY, ERTS

Risk Management: Why I Will Lose Strategy Lab

Rating: 1.67 (6 votes) Vote:

I have little doubt that I will lose the strategy lab contest. I will probably lose because I'm not the best stock picker, and of course there's only one winner. But another, smaller factor that will ensure my doom is a focus on risk management. The funny thing about this is that it's not real money, but try not to think about that for now. Instead, close your eyes with me and think about risk. Actually, you'll need open your eyes again to read this. Sorry about that.

The fine print of every investment commercial is "Past returns do not guarantee future performance." But when the market waves are rough, there's always a chorus of people saying, basically, "Don't worry, the market always comes back because it always has in the past." So which is true? I say both.

The key is, which past? And which market? It is true that there are always good stocks out there, and over long periods of time stocks in general usually do well. However, I take friendly issue with the current leader of the SLO contest when she says we should not worry so much about our financial system, but rather "take a look at the financial history of this country, beginning in the 1800s with the tulip bulb bubble." I mean this in a tone of happy banter (and she will probably beat me like a drum in this contest, proving my ignorance) but doesn't the tulip bulb craze show that bubbles can be more extreme and irrational than most people realize at the time? Think about it--tulips! How much is an average tulip worth these days? (By the way, wasn't this in Holland in the 1600s? Maybe she lives in Holland; if so, apologies.)

Just having fun here, but the point (that she does make later on) is that you need to be very selective as you navigate the market. I know people who bought tech stocks on the way down in 2000, and they are still angry about it. This does not mean we should go to the other extreme and be completely bearish (now I'm picking on you, Mr. Bearly Solvent!). It just means that whatever your time horizons and investing preferences are, you should consider the art of risk management. As Keynes said, "The market can stay irrational longer than you can stay solvent." Good stuff, Maynard.

Recently, I read the book When Genius Failed: The Rise and Fall of Long-Term Capital Management. The story really opened my eyes to how leveraged up bets on seemingly safe investments can be disastrous to financial institutions and, as a result, individual investors. This type of risk (and risk unwind) is playing out again right now, and it can deal a blow to any portfolio. If an institution gets a margin call, they will sell what they can to meet it. If they can't sell what they want, they'll sell what they can--tech stocks, energy stocks, whatever--fundamentals be damned. Risk management simply means being ready for the market's ups and downs.

There is no question the current market is in a precarious position, and no one knows how far up or down we go from here. There are pundits on both sides. It certainly doesn't seem like a bull market to me, so I'm being extra careful even with my fake money. Therefore, I've had a third to a half of my portfolio in cash the entire time (much to the chagrin of marketocracy's compliance rules). I have some short positions related to financials (SKF) and real estate (SRS) and some long positions related to video games (ATVI) and energy (SJT). Nothing too fancy. When I got lucky and Take-Two (TTWO) got a buyout offer, I took the gains. When I got nervous that the ag commodities (DBA) were getting too much hype, I sold. Whether the market has been up or down, I've done okay. That is risk management.

Why will I lose the contest? Well, as I've been watching the leaderboard, I've noticed that when the market is down big, the bearish portfolios do better than me. When the market is up, the bullish portfolios do better. Such is life. But I have a decent chance of beating the market averages, and maybe even some of the Strategy Lab professionals (I find it astounding that only "The Amateur" has any short exposure). More importantly, by applying some risk management to my real and imaginary portfolios, I find myself sleeping very well at night. With my eyes closed.

[This article simultaneously published on my personal blog, www.thestocksurfer.blogspot.com.]

Google: More Questions Than Answers

Rating: 2.50 (2 votes) Vote:

When I Google "GOOG" in my stockpicking brain, the result is a list of questions.
1) Why buy a "slowing growth" stock in a market that is punishing slowing growth stocks?
2) How can I trust the analysts (and their estimates) on GOOG? Price targets, according to Yahoo! Finance, range from $590 to $900. Why not $400? Why not $1000?
3) Is GOOG too big? Can GOOG monetize YouTube? The space program?
4) Why buy a stock that, as Dennis Gartman would say, is moving from the upper right to the lower left on the chart?

I can't answer any of those question in a positive way, so I can't bring myself to buy it. Under $400 I might change my mind, not because I think it's a good "value" at that price (I have no idea what price GOOG warrants), but because I think other investors would see it as value and I could go along for the ride. It would be a short term trade only, and I'd only consider it if the Nasdaq were bouncing. In fact, the Nasdaq probably needs GOOG, and vice versa.

So, I'm a bear on Google for now, mostly because I'm a bear on the market in general, outside a few select areas that are not in clear downtrends. I concede that some value investors might be able to catch a bottom in GOOG, but I'm not nearly smart enough to be one of them.

[Disclosure: No position in GOOG. For info on my past GOOG trades, click here.]

Trading the Rally

Rating: 2.20 (5 votes) Vote:

This market is very, very difficult. Many people, rightfully so, are wary of this rally. I am one of those people. And as I've said before, the trend is still down. The best strategy is probably to stay heavy in cash and wait for the rally to prove itself.

However, if the market holds up reasonably well, we could have a sharp rally. Although there was a lot of short covering yesterday, there's still a lot of cash on the sidelines. Investors will want to get in on another move up, and I want to be on that wave as it picks up steam. I kicked myself for not participating more during the last rally that started in late January. What am I trying this time? Gamestop (GME), Goldman Sachs (GS), and Genentech (DNA).

Each of the 3 stocks has upcoming news: DNA with an analyst meeting Friday, and GS / GME with earnings reports next week. It's risky to anticipate these events, but in this environment a little good news could go a long way. Also, these are fundamentally sound companies (at least they appear to be sound, as far as I can tell). If the trades go against me, I will cut them quicker than you can say "Hey, Stock Surfer, you're an id--". Yes, that fast.

If you chose to trade this rally (in real life), I suggest you also shoot first and ask questions later if your trades go against you. Set stops and protect yourself. There's nothing wrong with risk if it's managed. Let me also put some S&P levels on your radar: 1350ish-1370ish is the next area of resistance, which also corresponds roughly to the 50 day moving average. The exact numbers aren't important to me, I just want to use it as context. When we get close to that ballpark, I want be prepared to keep a disciplined swing, hit the other way, and possibly go shortstop. Trying to stay ahead of the curveball...

Note: This post also appears on my personal blog, with charts.
[Disclosure: Positions in GS, GME, DNA].

Today's Special: Humble Pie

Rating: 2.33 (3 votes) Vote:

Having a plan is important, but being able to scrap a plan is more important. In my previous post, I said we could have a sharp rally if the market held up reasonably well. It didn't. That doesn't mean a rally is impossible, but it does mean that caution is again the name of the game. Whatever technical or fundamental analysis told you on Thursday changed around 9 a.m. on Friday with the Bear Stearns (BSC) news. I'm not one to overreact to news, but you can't help but wonder if there are other Bears out there, whether they be hedge funds or, worse, big names like Citigroup (C) or Lehman Brothers (LEH).

When the market began to tank on the BSC announcement, I had to quickly reevaluate my game plan. The 3 stocks I bought in anticipation of a rally were Genentech (DNA), Goldman Sachs (GS), and Gamestop (GME). DNA's catalyst was an analyst meeting; there was no bounce so I bounced DNA out of my portfolio. GS might still be a great buy at these levels, but why give a financial stock the benefit of the doubt, with brokerage earnings and a Fed meeting next week? No thanks. The bright spot is GME, which was up over 10% on the week--quite a feat for a retailer. Video game sales continue to beat analyst expectations, and that's a good sign for GME's upcoming earnings report.

So, only 1 of my 3 picks has worked out, and my theory of a market rally was way off. That's ok. I'd rather adjust quickly and make money than stick to a theory and lose money. The only thing on the menu in this market is humble pie--I'd rather eat it than go hungry.

Capitulation Trading: Dog Eating Your Dog Shares

Rating: 2.25 (4 votes) Vote:

On January 22nd, I was humiliated by Carter Worth. Carter, for those unaware, is Chief Market Technician at Oppenheimer and a frequent guest on CNBC's Fast Money. He has been spot on since I can remember, and I always pay close attention to his analysis. So I guess it's not humiliating to be beaten by Carter, and I actually want to thank him for teaching me a lesson: Not every stock has rabies.

On Martin Luther King Day, markets around the world were tanking while the U.S. market was closed. The anxiety was palpable, and I (like many others) couldn't wait for the Tuesday open to dump some shares and save myself from certain financial doom. The market had been going down for weeks, testing my patience and pain tolerance, and this was it--I could take it no longer. I had to get out before the crash!

On January 22nd, of course, the market opened down huge (get out now!), only to rally and put in a low that lasted until early March (huh)? Eager for understanding, I was watching either Closing Bell or Fast Money, and on came Carter. He said (my paraphrase), "This was capitulation. An open like that, you don't want to be selling, you are capitulating. I want to buy those shares." Very matter of factly, Mr. Worth was telling me that I gave him my money out of panic. Carter, you're welcome.

It was then that I recognized the true zero sum game of the market, the dog-eat-dog nature that rewards the smart and cool and punishes the scared and unprepared. I was behind the curve. Way behind. From a long term perspective, it was no big deal. We are lower today than we were in January. But as a trader, I missed the boat.

The beauty of trading is that we can learn new tricks, and start over if necessary. Since January, there have been several days where the premarket has looked terrible. My drubbing at the hands of a professional taught me not only to avoid panic, but to see those days as opportunities--not necessarily for long term investments, but for short term trades. It happened again today. Don't get me wrong, I still think the market will work its way lower. But along the way, I'd like to take those shares that you think are dogs going the way of Old Yeller for a little walk...with my finger firmly on the trigger, of course.

[Posted simultaneously on my personal blog, with pictures.]

Bears Can Climb Trees

Rating: 2.00 (5 votes) Vote:

Every corner of this market is getting raided by the bear. The latest was commodities and gold, which have been crowded plays on the weak dollar. In my thoughts on a bear market rally on March 11, I wrote:

Very simply put, the Fed today hinted that they will try to help solve this credit problem in ways other than lowering interest rates. At least, that's what they're hoping. Since the dollar was falling at the promise of more rate cuts (and big ones at that), I wonder if this action isn't paving the way for a rebound in the buck. Why do I care? It means the inflation plays might not be such a sure thing. There's a lot of money chasing commodities, ag names, and gold names right now, and I just wonder what would happen if deflation (as a function of a slowing economy) replaces inflation as the "flation" of concern. Hmmmm.

I can't take credit for considering the danger of commodities; it came from a lot of sources, especially Minyanville. (If you're serious about investing, I can't stress enough how good that site is.) I also can't take credit for making a lot of money off the commodity crash, but I did save some money by not chasing gold or oil.

So, safe areas of the market are no longer safe. Interestingly, even the shorts were hammered this week. Between government intervention, Fed action, recession, and perceived value, there are so many sides to the market story that it can be difficult to find a focused play. I've seen this play out on the Strategy Lab Open contest. Many of the people on the leaderboard on Monday were betting against the market with short ETFs. After the huge spike, many leaders were commodity players. On Tuesday the short sellers got rocked, and on Wednesday the commodity players got smashed. As for me, I've been trading too much, but it has probably worked in my favor to keep a quick trigger finger. It's rough out there.

In short, I don't see any sector that is safe. This market should teach anyone that money doesn't just grow on trees in a simple buy-and-hold way. Even if it did grow on trees, bears can climb them. That doesn't mean the market can't rally from here, or that we should head for the mattress. It just means that risk management is still the name of the game. Consider the following options.

* Commodities / Materials / Energy: Do we really know the supply/demand equation, especially if economic growth slows sharply? How much speculation is in commodities? What if the dollar heads up for a while?
* Financials: The Fed is helping, but was Bear Stearns the only firm on the brink? So now investment banks are going to the discount window--it's good to avoid a downward spiral, but what does it say that they need it?
* Technology: Is it recession proof? Can Google and Apple lead again?
* Health Care: This is not an area I know well, but I noticed the carnage in the managed care sector. Biotech and Pharma have been equally treacherous.
* Consumer: What consumer? Remember, safe consumer plays (like PG, KO) might outperform on a relative basis, but negative relative returns still lose money.
* Industrials: Might rally first to end a recession, but have we all acknowledged that this is a recession? One up day on Wall Street and many think the bear is dead. I've seen him, and he's quite alive.

Pick your poison. For my money, I still like my core video game holdings. Other than that, I think the big money is rotating around, trying to find a home. It's good to be in cash, and wait until some clear trends emerge.

[Simultaneously posted on my personal stock blog.]

Goldman Yes, Gold No

Rating: 0.67 (3 votes) Vote:

About that bear market rally...

I suspected it, then rejected it, and now accepted it. Confusing? You bet. To catch you up, on March 12 I was anticipating a rally with Gamestop (GME), Goldman Sachs (GS), and Genentech (DNA). On March 13, I had to rethink the rally as Bear Stearns (BSC) hit the market fan. There were more fits and starts this past week, but the market still wants to rally (apparently) and who am I to argue?

DNA's analyst meeting was a non-event, so I dumped that one. GME's earnings were good, so I stuck with that one. Which leaves GS. [I should note for disclosure that I got stopped out of GS in my personal account, but in the Strategy Lab contest I was able to get back in. I wish I personally owned GS now, but such flexibility is not always possible with real money. Alas.]

I liked GS a lot better at 150, but I still like it here at 180 because it's one of the best financials out there and financials are intent on rallying. And I do think the Fed's action allowing investment banks to access the discount window takes away a lot of the short term risk that another of them would bite the dust and drag GS down in sympathy. So while I probably won't buy more GS at these levels, I think it's a solid hold for what I see as a bear market rally.

This rally, you should know, bothers me. The weak sectors are jumping while the strong sectors are sinking. With Gold (GLD) and the commodities getting whacked, many folks were caught on the wrong end, and only the quick and flexible could adjust in time. I suspect that will happen again when the next wave of bad news comes out in the financial sector, and that's why I'm holding Goldman on a tight leash. The Fed's actions were helpful in avoiding disaster, but I don't think the market will bottom until everyone realizes we're in a recession and a bear market. No sector is really safe right now. And yet, it's not safe to be short either.

Here's the bottom line: You can play this rally however you like as long as you manage your risk and have an exit strategy. Go for it. I like tech (generally) and financials (for a trade). But this is not a market that rewards stubbornness. If active management isn't your style, then make smaller moves, remain heavy in cash, and watch some basketball.

[Posted simultaneously on my personal blog.]

Blah Blah Blah BOTTOM Blah Blah Blah BOTTOM

Rating: 2.67 (3 votes) Vote:

Watching CNBC today, I feel like the dog on that famous Far Side cartoon. All I'm hearing is "Blah Blah Blah BOTTOM Blah Blah Blah BOTTOM." Hey, I love CNBC. I also love Barron's, which had BOTTOM on its cover this week as well. But this widespread recognition that the market has bottomed after the perfect Fed rescue strikes me as a little too easy.

The Gamestop (GME) trade worked well, so I'm paring it back a little to take profits. It's up 20% in 5 days, no reason to get greedy. I also liked the financials for a trade, but I am now looking ahead to the other side. The Ultrashort Financial ETF (SKF) dipped below 100 today, and I like the risk/reward there.

Despite this big move, the financials and the S&P 500 are still trending down. I don't want to fight the rally, but I also don't want to chase it here. If that was a bottom, there will be plenty of chances to get in. If that wasn't a bottom, I want to be ready for the next wave of volatility. That means cash, stops, and hedges. Blah, blah, blah risk management blah blah blah.

[Posted also on my personal blog, with pictures.]

Solar Stocks: Making World Peace, One Multicrystalline Wafer At A Time

Rating: 3.00 (1 votes) Vote:

I love the sun. I chose the name "The Stock Surfer" because I like all things beach. So you might think solar stocks would be right up my alley. If by "alley" you mean "stocks I wouldn't touch with a 10 foot pole," you'd be correct. But as it stands, I enjoy the beach more than the alley, and I enjoy laying in the sun more than betting on it.

Solar stocks have been hot (so many puns, so little time) at times over the past year, but I'm not sure which one to trust. First Solar (FSLR) has held up well on a technical basis, but a P/E of 112 is a yellow flag, if not a red one. A more exotic solar play, and by that I mean a Chinese one, is LDK Solar (LDK). LDK was taken out to that alley I was talking about and was beaten senseless. From December to March, LDK went from 70 to 20. Does that mean it is now a bargain? Or was it mere hype in the first place? I'm not sure.

What I am sure of is this: A stock that swings from 70 to 20 and back again (yes, it did this twice) is wild by nature. Moves like that tell me the market isn't sure where to value this thing. Sure, 20 could be a steal. 20 could also be a pit stop to 10. The only certainty is a crazy ride.

As for the "story" behind solar, I admit that the idea of using the sun to power my HDTV is quite appealing. But is it really going to happen? Whenever oil dominates the headlines, I hear a lot about how (insert alternative energy play here) is going to power my car and bring world peace. Yet, I don't know anyone who has a solar panel on their house or car, other than perhaps Al Gore. And although every beauty pageant candidate from Miss New Jersey to Miss Jiangxi Province (home of LDK Solar!) is clearly working on world peace, I haven't seen that come to pass either. Color me skeptical.

As with any stock, I say go for it as long as you have an exit strategy. My exit strategy for now is to avoid the sector altogether.

[This article posted simultaneously on my personal blog, with pictures.]

The Stock Surfer

Randal LaBine

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