Updated Stop Loss Orders

• APOL: $64.94
• BUCY: $30.33
• CSKI: $12.81
• ENDP: $21.88
• EROC: $3.47
• LHCG: $26.37
• WDC: $33.60

Updated stop loss orders

APOL: $64.44

BUCY: $29.88

CSKI: $12.81

ENDP: $21.87

EROC: $3.35

LHCG: $25.57

WDC: $33.37

Portfolio and Stop Loss Orders

Current Portfolio and Perfornance



Updated Stop Loss Orders

Tuesday Sept. 22nd stop losses

Let's wait with DBA + quick update

In the last days DBA did not trigger our 1% trailing stop buy order.
I would suggest to cancel our order and wait.

Quick update
Good news for two of our stocks. APOL gained 8% yesterday on no particular news (unless I missed something). It is a good thing, since APOL had been moving sideway since we bought it.
EROC also gained 8% yestarday. This is a quite volatile stock and we will raise our stop loss soon in order to prevent bad surprises.

On the other hand, we own a loser (MIR) that I actually expected to perform better. Let's keep our current stop for MIR and let's hope it starts moving up.

Our latest buy, CSKI, is not moving much at the moment, but I would expect a big move soon (hopefully upward).

New Stop Loss Orders

We still have a pending buy for DBA (trailing stop at 1%). Remember to set a stop at $23.03 as soon as you buy.

A question worthing an answer

A reader asked the following question in a comment:

How do you recommend allocating the money for each stock?

That's avery good question and books have been written about portfolio allocation. My approach is to allocate my portfolio in a way that statistically (or usually) works.
Let's take our current portfolio and look at our stocks' industries:

• APOL: Services: Schools
• BUCY: Capital Goods: Constr. & Agric. Machinery
• CSKI: Healthcare: Biotechnology & Drugs
• ENDP: Healthcare: Biotechnology & Drugs
• EROC: Energy: Oil & Gas Operations
• LHCG: Healthcare: Healthcare Facilities
• MIR: Utilities: Electric Utilities
• WDC: Technology: Computer Storage Devices

We currently own only two stocks in the same industry: CSKI and ENDP that are in the Biotechnology & Drugs industry.

As a very generic rule, differentiating industries reduces the risk. Think of the Energy sector, Oil Well Services & Equipment industry from May to December 2008.

This industry lost 60% when the S&P500 lost only 36%. A mixed portfolio would have lost 35-40% while an Energy-Oil based portfolio would have lost 60% of its value.

Thesame for Basic Materials: Metal Mining from May to October 2008. The industry lost 66% against a 30% loss of S&P500. More than double.

It is true that in some circumstances an unbalanced portfolio may be a good thing. Suppose a particular industry gets severily hit by news, recession or whatever you want at the point that its average PE ratio goes down to 5. That is a good time to buy all the best companies in that industry, even if we end up with half of our portfolio in that specific industry. Our stop losses will keep us safe anyway...

What I like to use on my portfolio is a correlation test. I like to have stocks that behaved differently in the last 12 months. That reduces the risk of seeing my portfolio taking a unique (downward) direction. Let me take a couple of examples:

If we calculate the correlation between END and EROC over the last 12 months we get a 0.4%. That means these two stocks moved independently over 99% of the times.

LHCG and MIR show a correlation of 42%, meaning that almost every second day their prices moved the same way.

An experimental web page calculating correlation can be found here (beware: it is very slow).

Another point to cover is "how many stocks should our portfolio have"? I usually buy stocks for 5% of my portfolio value, so to equally balance my investments amongst 20-30 stocks. OK, I know you are thinking "5% times 30 makes 150%". Usually I own 15 to 20 stocks (thus keeping 25% of cash). In very good time I use margin and invest over 100% of my money. This adds risk but sometimes it can be done (always using stop losses).

A final note: I am not a professional trader. I like to invest abd I like to share my ideas. You do not neccessarily need to agree with my opinions and you do not have to follow my hints.

Happy trading

CMTL sold

CMTL broke its stop loss price at $33.27 yesterday. We sold it at $34.10. Its buy price was $28.99 on May 27th 2009 for a 17% gain.

A quick summary on our performance since blog start in April 2009:

Have a nice week-end and see you soon for the new stop loss prices.

Two "risky" buys

Today I would suggest to buy CSKI and DBA.


CSKI

It shows a technical buy signal and it has good fundamentals. But it is a Chinese stock, so I would recomment to pay particular attention to it, since Chinese stocks are usually very volatile.


DBA

It lost quite a lot and looks like having found a good support. Technical indicators show a probable big change in price.



As always I would suggest to set a 1% trailing stop buy orders at 10 o'clock, after the first 30 minuts of trading.

Please note: I consider these two trades riskier than usual so I recomment to use stop losses, beginning with:
CSKI: initial stop at $12.81
DBA: initial stop at $23.03

New stop loss prices, a question and the strange case of MAXY

The strange case of MAXY

I sold MAXY, but I did not want to. Let me explain: I use eTrade for my trading and there is a technical detail that made me sell MAXY yesterday. eTrade uses Ask Prices for buy orders and Bid Prices for sell orders. So, since MAXY's Bid Price went under $6.63 my order was executed at $6.83. The day low was $6.75, thus higher than our stop loss level. I do not know if other trading platform manage stop loss orders in a different way, but I consider this as an accident that can happen.

The bottom line is that I take home a 9.5% loss on MAXY. If you still have it, keep the stop at $6.63.


Current portfolio and updated stop loss prices



The new stop prices I would suggest are:

• APOL: Stop at $61.14
• BUCY: Stop at $29.13
• CMTL: Stop at $33.27
• ENDP: Stop at $21.66
• EROC: Stop at $3.23
• LHCG: Stop at $24.02
• MIR: Stop at $15.75
• WDC: Stop at $32.30

The question

I received the following question in a comment:

Quick question, how effective are stop losses? I assume you're putting a stop limit on these prices, but on some of the riskier stocks, if the stock opens up really low, the stock will automatically sell. Is that a good strategy?

I try to answer, but my opinion is not necessary matching your idea.

Stop Losses are statistically effective. I mean they usually work. I read books and made simulations and I found the method I use to calculate stop losses works well (on average). It happens stop losses are violated and stocks are sold, and after that they continue to go up. For me it is just part of the game.

There are basically two ways to manage stop losses:

1. Set stop loss orders (this is what I do). If the price goes down during the day the order is executed automatically. Then the price can go up again in a dragonfly doji.
2. Simulate stop losses. Set alerts on stocks at the stop loss level you want. If the price goes down you get an email. At the end of the day you check. If the close price is below your stop loss then you sell the following day on open. What I don't like in this approach is that a stock it may happen to lose 30% in a day. If you use this method you sell the day after losing 30%, while with method 1 you sell during the day when you lose, let's say, 15%.

Your choice. I hope this can be of any use for you.

New buys

Today I would suggest to buy three stocks.

WHAT?
I would sugegst to buy the following stocks: BUCY, EROC and MIR.

WHY?
These three stocks showed a technical buy signal in the last couple of days. In addition to that, their fundamentals are good compared to industry average.

BUCY
Financials
- Average quick and current ratios
- Low debt
Value
- Low PE and Price/Cash Flow
Profitability
- Top Operating and EBIDTA margins
Effectiveness
- Top ROI, ROE and ROA
Growth
- Good EPS and Sales growth



EROC
Financials
- Good quick and current ratios
- Debt is higher than average (some risk here - never forget stop loss)
Value
- Low PE, Price/Sales and Price/Book
Profitability
- Top Operating Margin and good EBIDTA
Effectiveness
- Top ROI, ROE and ROA
Growth
- Top EPS and Sales growth



MIR
Financials
- Good quick and current ratios
- Very low debt
Value
- Low PE, Price/Sales, Price/Book and Price/Cash Flow
Profitability
- Top Operating and EBIDTA margins
Effectiveness
- Top ROI, ROE and ROA
Growth
- Top EPS and Sales growth


HOW?
I would suggest to place a 1% trailing stop buy order.

WHEN?
I would suggest to create the orders at 10 o'clock. In these way we will wait for the first 30 crazy minutes of the day.

THEN?
As soon as we buy I would suggets the following initial stop loss prices:

• BUCY: stop loss at $27.93
• EROC: stop loss at $3.11
• MIR: stop loss at $15.75

Current Portfolio and Update Stop Loss Orders

September 14th 2009

Current Portfolio

Stop Loss Orders

• APOL: stop at $61.14
• CMTL: stop at $32.98
• ENDP: stop at $21.07
• LHCG: stop at $23.35
• MAXY: stop at $6.63
• WDC: stop at $31.55

A new buy and some new stop loss

Today I would suggest to buy MAXY.

Actually we should have bought it last Friday (September 4th) but I was not in front of my computer that day.
We can buy it now, or better, tomorrow, since today is Labor Day.

MAXY show a very goos PE ratio, averagePrice/Sales and good Price/Book.
It has no debt and very goos quick and current ratio (cash in pocket).
Operating margin and EBITDA are in Industry's best 20%, as ROI/ROE are.

This stock should offer us a good margin of safety.

I would suggest to set a buy order as a trailing stop at 1% (as an alternative, just buy it on market open) and set an initial stop loss at $6.63.


Updated Stop Loss Orders

• APOL Stop at $61.14
• CMTL Stop at $32.61
• ENDP Stop at $20.92
• LHCG Stop at $23.32
• WDC Stop at $31.04
• MAXY Stop at $6.63

Disappointing TSYS

TSYS violated its stop loss and was sold yesterday.
We bought TSYS on 05/19/09 at $7.54 and sold it on 09/01/09 at $7.21 for a 4.36% loss.

A comment on markets

S&P500 looks like forming a head and shoulder pattern. It may go down to 980 points. Then what happens? If it goes below 980 a new down trend may last for weeks/months. If it goes back up, rebounding, it may close the head and shoulder at around 1010 before going down again. The situation is very uncertain.
I would wait to see if S&P500 goes over 1015 before buying anything else...

New stop loss orders

September 1st 2009

• CMTL: $32.33
• ENDP: $20.73
• WDC: $30.64
• TSYS: $7.24
• APOL: $61.14
• LHCG: $22.15