Why I Love The Rich
The two highlights
of Wednesday’s session: first, the Comp’s recovery from a 5.8% drop to finish
off about 1.3%.
Second, and more important, the
volume, at long last coming in like that downpour you’d been praying for to end
a drought.
The volume tells you that the fear
level is finally picking up.
So does the elevated level of the
put/call ratio, above 1.00 for the entire session.
A negative: EMC
(
EMC |
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PowerRating), which I had
labeled "ominous" in Tuesday’s
comment…Wednesday, it was distributed, going a long way toward completing
the right side of the right shoulder of a head-and-shoulders.
Among the names, Check Point
(
CHKP |
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PowerRating)
stood out like a sore thumb early in the session and continued to stand out like
a sore thumb for the duration.
This is the exact type of behavior you
should be on the lookout for on days like Wednesday a.m.
Handspring
(
HAND |
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PowerRating) was another,
joining CHKP as the cream of the glamour complex Wednesday.
Common sense tells you that when
stocks like these hit or come close to a new high price in the middle of a bear
market, they are doing something terribly, terribly right…enough to make them
candidates for leadership if any sort of Nasdaq advance materializes in the near
future.
At The Venetian, a popular question
that was asked of me was "How can you just sit in cash?" and the
corollary "Do you ever buy energy or the financials?"
These are good questions.
They speak to the idea that a pattern
is a pattern is a pattern.
And so if tech isn’t working why not
buy the breakouts in the oils, banks, etc.
Yes, this is true. However my strategy
insists that expected earnings growth over the next two fiscal years be in the
30%+ range
That leads me to my next statement
which I can practically guarantee you’ve never heard anywhere else.
I much prefer to buy stocks with rich
P/Es.
Really.
Low P/E stocks such as the banks and
oils don’t have the juice, the hyped-up expectations embedded in the price, that
produce high relative strength versus the rest of the market. And that’s what
I’m after.
As an intermediate trader, you are
only in a winning stock for a few weeks to a few months.
And since you want the most bang for
your buck, you must be in stocks with the potential to double.
Financials, such as the banks and the
brokers and the insurers, don’t often double over the course of a 12-month
period.
In general, an oil driller simply
doesn’t trend as well as a growth stock. It may clear a base, but the
follow-through that ensues isn’t worthy of my attention.
As with anything else in life, there
are exceptions.
For example, a cyclical group can
often experience a sea change in its fundamentals, resulting in P/E multiple
expansion.
The drillers are the best recent
example of this.
New technology in the mid-’90s, such
as horizontal drilling and 3-D seismic imaging, allowed drilling firms to tap
into areas that had long been considered unfeasible from a profitability
standpoint.
The result was a huge ramp in earnings
growth as explorers booked every drilling rig that was standing, sending day
rates to the skies.
In late ’95 and into ’96, all the
proper basing patterns were there for drillers like Reading & Bates,
Transocean, etc…importantly, they now had the earnings growth necessary to
attract institutional investor demand, expanding multiples in the process. This
led to very nice follow-through to base breakouts en route to doubles and
triples in some names.
Rich is better.