Here is a question from Bill;
Dear John,
Thanks again for your blogging efforts and help. They are appreciated.
QUESTION: In your posting dated July 26 "My Wish List is Getting Larger" you note several stocks you "want to buy down the road: Would you be able to share what information you look at and how you will use it to determine the most appropriate time to buy these stocks?
Thanks again for your help...
Best Regards,
Bill
ANSWER: Sure, Ill be happy to.
Choosing the right investments, in particular the right stocks continues to be a major source of frustration for millions of investors. The urge to buy the latest "hot tip" from a friend, financial news report, a broker, and yes even a financial newsletter can be a very frustrating experience.
What I hope to show you here, is careful thought and analysis should go into each and every one of your stock picks to avoid a disappointing experience.
Stocks like to run in herds. It has been often said that you can make a lot of money buying the right stock in the right sector. Actually, you can even make money in a bad stock in the right sector since buying pressure in a sector has a tendency to benefit most of the stocks within a hot sector.
Unfortunately, you can invest in the greatest companies on the planet, but if the sector happens to fall deeply out of favor, the stocks (even the great ones) within a sector thats out of favor sector have the tendency to under perform.
In my July 26th post, "My Wish List is Getting Larger", I made a list of companies that I would be interested in buying with the understanding that the sectors in which these stocks are in are currently out of favor.
If you dissect this list (CAKE, PFCB, ERTS, LOW, VAR, SYK, OSI, PHM, DIS, INTC, MSFT, PNRA, NVR, MMM, UPS, DELL, QCOM), youll find that most of the stocks are consumer cyclicals, and hence they are driven buy events taking place in the economy.
If you look at the second chart down on the StockCharts.com website, you will see the Sector Rotation Model. Please note that heading into a recession, the technology sector (I.E. - INTC, MSFT, DELL, and QCOM) and consumer cyclicals (CAKE, PFCB, LOW, ERTS, PHM, DIS, PNRA, NVR, UPS) fair poorly and eventually bottom out.
Next sector to get hit on the Sector Rotation Model should be Industrials, and then Basic Materials. This is why I said I would be cautious with commodity stocks a few days ago.
Since I believe we are in the beginning stages of a recession, buying into these stocks our sectors would be an early call. On the flip side, I believe that beginning an accumulation of these and other cyclicals is a prudent move as long as an investor understands that the downward cycle has just begun, and prices could go lower.
As was the case in this mornings post, I found that a 40% sell-off in three restaurant stocks (OSI, CAKE, and PFCB) provided a decent opportunity to begin nibbling. By doing this, I fully understand that the prices of these stocks could go lower, but I still believe a 40% retracement is attractive.
So, the first step in identifying a bargain is to know where the market is on the Sector Rotation Model, identify what sectors are in or out of favor, identify quality stocks in out of favor sectors, then identify what you would feel would be an appropriate price range.
So, the second step in attempting to determine entry prices is see how a particular stock acted in prior recessions or market downturns.
In todays earlier post, I gave examples of the price ranges on a few Dow stocks when the index was at 9450 and 8775. Since the 2001-2003 downturn came with extenuating circumstances (9-11), so we need to understand that the chances of another 9-11 are remote but not impossible.
For this reason, we set our price targets for entry within a companys last recessionary trading range, but not necessarily at the bottom of that range.
This strategy is basically for value investors. Value investors are those who are willing to wait 1-3 years for a turnaround to occur.
On the flip side, being in the right sector all of the time is the basis for my new newsletter, Dynamic Growth. The nice thing about Dynamic Growth is whenever one of our sectors goes out of favor, we adjust very quickly to make sure we stay in the sectors that are in favor, and keep ahead of where the market is going.
Based on our backtested results, the performance of Dynamic Growth speaks for itself;
# Top 5 no-load sector funds in our database soared 114.47%.
# Top 5 ETF's gained 94.26%
# Top 10 no-load sector funds gained 100.50%
# Top 10 ETF's gained 89.42%
# Top 15 ETF's gained 77.85%
# Even the more diversified portfolio of 15 funds handily beat the Russell 3000 which gained 18.71%.
