When is enough, enough?

GoPro (GPRO) is a beautiful thing. Locking in a 65% gain in less than a month is the way to go, I should do that more often.


A great strategy to work on is trading around a core position to maximize your gains. Some people use small percentages to do this, I like to use nice even numbers.

Take GPRO as an example. In my previous posts, one of the rules is to not buy in on a stock that trades more than twice the earnings growth, basically we are using the PEG Ratio as a guide. This is my key to cash out of the position with whatever I have left unless you commit to using the house’s money.

Here is how it works:

I did my research and I want to buy 500 shares of GPRO at $45 a share. One of the rules is to divide up the purchase and never commit everything you have to the first purchase. Ideally, on a large position, I would want to break this up in 25% chunks of my 500 goal. However, we will use two purchases for this exercise.

Lets say that we purchased 250 shares at $45 and the next day we hit the bid on 250 shares at $40 per share. This make an equivalent purchase of 500 shares at $42.50. We have established a position.

Over X amount of time (in this case X = 1 Month, whoo hoo!), GPRO goes up 25%. Using this “trade around a core position” method, we should now sell 25% (125) of our shares, keeping the 375 (75%) as our core position and let it run. Effectively, we are still running even since we are out 25% and we are at this point up 25%.

Now we wait for GPRO to take a 3 or better percent decline (adjust this down for a less volatile stock). If GPRO goes up, we make money in our core position. If it goes down the 3-5% or more (and the reason that we bought in the first place doesn’t change) we commit the money from the 25% (125 shares) cash out to buy back in. When GPRO goes back up 10, 15 or even 25%, we sell the 125 shares (25%) and do it all over again and again. This is a great strategy if you pay attention to your stock and want to make a few extra percentage points.

When enough is enough, either by a multi-day ramp up in your stock (like with GPRO today!), you will need to look at adding more shares to the cash out and reassess whether or not to keep trading around the core position. If you hit the one bagger (100%) mark. I would highly recommend cashing out 50% and play with the houses money letting the remaining 50% ride as a freebie. You can always jump back later.

Alibaba…man those Commies know how to be Capitalists

Well, she went IPO today.

+1.00 (0.95%)

I tried to get in with a limit of $82, but BABA opened at $92.70. An awesome 36% premium for those lucky bastards that booked a few shares before the open.

Rumor has it that the top 20 Mutual Funds were screaming to get a cool billion dollars worth of BABA each. They obviously couldn’t get everything they wanted before the stock hit the floor, but they made up for it in the open market driving the price even higher.

I’m not bitter, just disappointed. It looks like BABA is going to close at about $93.00 with a forward P/E of 39, it is worth every penny, albeit on the slightly expensive side.  It is important to note that FB, as a comparison has a P/E of 40 and doesn’t have nearly the growth prospects of BABA. With a market cap of over $231B, this is the new power house on the Internet. Jack Ma, in one day, became the richest man in China. Nice run.

BABA has better margins than EBAY, AMZN, GOOG and even FB. It even has a better growth rate. With 50% of the Chinese people not even on the Internet and very low “brick and mortar” competition in China, this is going to be a Juggernaut with great prospects.

Yahoo has roughly a $35B stake in BABA. YHOO’s  market cap is $40B as of today, meaning that if you buy shares, you are only paying $5B for YHOO and you will probably score a sweet dividend at some point. The YHOO brand is easily worth $15 a share, there may even be some upside if the street thinks that YHOO will spend the money wisely.

According to the Mutual Fund Flows, there has been very little new money coming into the market. The good news is that with no new money coming in, BABA had a great open and didn’t take too much away from other stocks. Heck, it might even bring new money into the market due to the publicity of such a great run.

For me, the trade is over for the next few months. No chasing of BABA, just wait until the hype and froth is over. I might even wait for the lock up period expiration and maybe I can catch a deal. Everyone loves a fire sale!






Get the kids interested early!

My interest and obsession with stocks started in 1987 in marketing class. Mr. Adams was a shrewd business man but also a great teacher. He encouraged us to do the homework, do the research and he started me on my life long interest in the stock market.

I remember Black Monday (Oct 19th, 1987) when the Dow Jones Industrial Average cratered 22% . Even though I was only a teen, I remember the cover of every paper showing traders pulling their hair out, screaming and talking on multiple telephones.

In those days, you needed traders on the floor, a good knowledge of hand signals and a runner that could go the distance. Books like “Liar’s Poker” and movies like “Wall Street” and “Boiler Room” really bring back that excitement and the “irrational exuberance.”.

I won the Stock Market Challenge, sponsored by the Securities and Exchange Commission, in 1988.

I had researched an interesting guy: Henry Kravis. Mr. Kravis was was all over magazines and there were articles about him even in the local paper. Mr. Kravis was head of the Private Equity Firm of KKR (Kohlberg, Kravis and Roberts). Without the internet, other than that IBM XT Mr. Adams had in his office, there was no place to see the ticker or find out the real news, but I had read an article in the three day old IBD that told of a rumor that KKR was interested in RJR Nabisco, the tobacco and food conglomerate.

The next day, Shearson, Lehman, Bros (at this time Shearson, Lehman, Hutton…(of the fame: “when E.F. Hutton Speaks, people listen.”)) had issued a tender offer to take RJR Nabisco private for $75 a share.

I had 10 Large on paper to trade with, but since the margin rules were a bit lax back then, even for the game players, I leveraged it into the 100K that I needed. I was IN!

After I placed the trade, you had to buy even lots back then, KKR jumped in with a bid for $90 a share, allowing it to go forward without the approval of RJR management. The frenzy, as only Wall Street can muster, was on. I thought I knew what I was doing, a dangerous place to be.

Shearson Lehman Hutton and Salomon Brothers hit back with a bid of $112 and it ended up with the RJR Board of Directors actually settling in at $109 with KKR as the victor. The largest leveraged buyout in history at the time.

I had made a cool 30% after the ten weeks was over. Not a bad haul, even today.

The next year, I used that motivation and won the Commodity Challenge, sponsored by the Chicago Board of Trade. Using a drought, a couple of thousand bushels of soybeans, and a strike price that was easily hurdled…it sent me to the windy city and I traded in the pits at the CBOT…not even the president can do that!

The moral of the story is that these early games started me on a life-long interest in the market. Use whatever means to get your kids involved, the laws of compounded interest are on their side.


Growth Rate Applied to the Mutiple: Whutup?


Never pay more than twice the growth rate (converted to P/E) for a stock.

Most institutional investors, (the big guys behind the oak desks that move the markets) have a rule not to pay twice the growth rate for a stock…it is too expensive.

To determine the growth rate, we use FUTURE Earnings Per Share (EPS) estimates. Stocks trade six, nine, even sometimes twelve to eighteen months in the future and if you use the current or the past EPS numbers, most stocks will look overvalued when they could be actually quite cheap and you may miss the opportunity.

For example:

The company: Vandalay Industries (NYSE: GLC) trades at a P/E of 100 has the following EPS over the last few years:

2012: 1.00
2013: 1.20
2014: 1.40

These numbers show that from 2012 to 2013, GLC had 20% EPS Growth. A pretty respectable rate for the Latex Sales biz. With this rule, we would then expect to pay no more than a P/E of 40. [20% * 2 = Max P/E (Multiple)]. However, from 2013 to 2014, the growth rate slowed to 14.3%, which should cause a contraction to the multiple if we compared it to the year prior. We would now expect to pay no more than a P/E of 28.

Obviously we should sell it if we have it, or not even buy it (maybe even short it?) because it’s over valued. Right?

Wrong. We looked at the future predictions for EPS based on the management numbers and we noted the incredible demand for latex in several industry journals. The predicted EPS from 2014 to 2015 is 2.10, a 50% growth rate from 2014 to 2015 and the if the outlying years are even better, a P/E of 100 is not out of the question and maybe a reasonable valuation.

Additional comments:

1) Expect to pay a higher multiple (than the peers) for the best-of-breed stock. The top dog in the business deserves a bit more…you pay for quality.

2) Expect to pay a higher multiple if the company consistently  beats and raises earnings estimates at the quarterly conference call. We like managers that under promise but over deliver.







Timing is Everything

Timing is everything: Here are a few timing stats.

1) If you wait until 11am-12pm on the first Friday of the month (nonfarm payroll numbers are issued) to buy a stock, you will often score a better deal than you would at the open.

2) When institutions dump a stock or liquidate positions, they typically do it from 1:30pm-2:30pm EST on the trading day. If they can’t liquidate what they need to dump, the “Firm Reload” resumes the next trading day.

3) THE DATE to buy a stock with a dividend is, at the latest, the day before the X-Date.

4) You don’t typically want to buy an IPO before the lockup period expires. Wait to see the waist after the insiders sell.

5) Don’t take a position during earnings season, unless you absolutely have to. The unofficial kickoff to earnings season is the release of earnings by Alcoa (NYSE: AA).

6) If you see your stock in the New York Times, Businessweek or Forbes…the smart money has been already made. Don’t be a piker.

Trades vs Investments


Never change a trade into an investment and never change an investment into a trade.

A trade is short term where you are looking for a specific catalyst. A trade should be where you are betting on a buyout, a new product that you think the market will like but you also think it is just a flash in the pan idea (Crocs), or maybe you are betting on an activist investor, like Carl Icahn, to unlock some needed value and lay waist to sloppy management.  A trade is short term, usually less than six months, and when the trade is done, it is time to sell. Don’t make excuses to keep it. Remember, when the money is made, it is time to go.

Example of a trade: YELP: We are waiting for GOOG, MSFT, FB or YHOO to snap them up, YELP owns the yellow pages, they can’t stay independent for too long.

An investment is usually greater than six months. Sure, you may still be still waiting for a catalyst, but this stock has some mojo; maybe a good CEO, a first to the market product or no competition (we like a monopoly). When you make some money, you must let your winner run, just like in horse racing. Obviously, if there is a change to the fundamentals, it is time to sell, but you are in it for the long haul and if you keep reading the quarterlies and the news, you won’t be surprised to the downside.

Example of an investment: SBUX: They are run by a top CEO, no competition (no, Dunkin is NOT competition, they are being dragged by the ice cream biz.) and they are the masters of mobile payment that is going to double SBUX over time when they license the tech.