David Ryan: Going For Growth
In TradingMarkets.com’s continuing series of interviews with traders, Kevin N. Marder spoke with David Ryan, a Los Angeles-based hedge fund manager. Before setting up his money management shop about 18 months ago, Ryan, a three-time U.S. Investing Championship winner, worked at William O’Neil + Co. for 16 years.
Kevin N. Marder: In terms of fundamentals and technicals, what do you look at when you search for a stock to buy?
David Ryan: I’m looking for two things: A company that has strong earnings in combination with a strong stock price. If the two aren’t confirming each other — if the earnings are there but the stock is not performing well — then I’ll just continue to track it until it does. Especially today, it’s amazing how there are a number of companies trading at very low multiples with great growth records that people are not even paying attention to.
There’s one stock that we’re watching called ^SAH^, which has great earnings. It has a 132% growth record in 1998/99; an 80% growth record from 1979/99. So it’s actually accelerating with great quarterly numbers, up over 50% every quarter and the stock’s trading at 7 times earnings. But the relative strength is 8 on the stock. Maybe people are looking at this as more of a cyclical play. Sonic is in the automotive dealership business and they’re acquiring a number of dealerships as they go. That’s one example.
Another example is ^URI^. Another unbelievable earnings story. It’s got a 68% growth record, quarterly earnings up over 60% every quarter, good estimates the next two years going up — 50% and 30% — and the stock’s trading at 13 times earnings. Relative strength is at 14. So there’s a case where you have great earnings but there’s no relative strength yet. It hasn’t really been trending up for longer than a few weeks. We’ll just continue to watch it and maybe have to pay higher prices. But we want to see the earnings and price and the relative strength going in the same direction.
The only time we’ll buy a company that doesn’t have earnings but has very, very strong price action — and that includes just about every Internet stock — is if you have an entire group move occurring. And this has happened at times in the past. It happened in the biotechs; it happened in cellular stocks in years past. So there are times where we’re just playing the price performance and the relative strength because the group is so strong.
Marder: Why don’t you want to buy a stock that’s been beaten down?
Ryan: First of all, you’ve got a lot of overhead supply. You’ve got a lot of people who bought at higher prices who are going to say, “Well, if I can only get back to where I bought the stock before,”…then they would sell out. It constitutes a lot of supply as the stock moves higher. If you’re buying a stock that’s already gone through that and is trading close to or into new high ground, then there are only happy shareholders and the only people who are selling the stock are people who are taking a profit. The stock has a free range above it to continue to run.
Marder: Getting back to the Internet stocks you mentioned, do you have any screens at all — maybe not formal ones but just informal screens — that you sift through if they don’t have earnings? Obviously a company like ^EBAY^ or ^AOL^ does, but what about something else in the Internet world that’s losing money now? Is there another fundamental characteristic that would help you in screening out the stock?
Ryan: If it doesn’t have earnings, we pretty much rely on the market and try to do some research into what specific area of the Internet it’s in and what kind of revenue estimates they might have. And we also look at the market cap vs. the other stocks in that similar space because sometimes there is a catch-up in terms of market cap. But with some of those Internet stocks, you’re almost winging it in terms of which one’s really going to make it and which one isn’t. And which one is going to sign a deal with another company and the stock’s going to jump 20% or 30% in a day.
Marder: When you look for earnings growth, is there a minimum figure you’re looking for, like 20%?
Ryan: Yes, at least 20% to 25%. But the bigger the growth, the better off.
Marder: Do you find yourself buying many stocks where the earnings are growing in excess of 100%?
Ryan: Yes.
Marder: What sort of size constraints do you put on something you’re looking to buy? Is there a minimum number of shares that trade per day, on average, or market-cap or float or anything else that you look at?
Ryan: Our size constraint is usually based on average daily volume of the stock and I think we really don’t go any lower than something that trades 20,000 shares a day. We’ll go that low if we really like the company but in most cases it will be trading hundreds of thousands of shares a day.
Marder: When you look at entry points on charts, technically, do you have a few favorite chart patterns that you like to favor?
Ryan: The cup-and-handle is one of the better ones but it does not show up nearly as often as people might think. A cup-and-handle really has to occur in a general market correction. That’s when a lot of them show up. So if you get a market that corrects 10%, you’ll have a lot of the good growth stocks that will pull back twice that, maybe 20%, maybe even 25%. And also it would take maybe about six weeks down and six weeks up and then drift off a little bit. The other one I look for a lot is just a flat base, the stock breaking into new highs off of a fairly long consolidation.
| “If an Internet stock is based out for one week, that’s the equivalent of seven weeks on any normal stock.” |
What‘s interesting about Internet stocks is that they trade in dog time. It’s said that one year for a dog is the equivalent of seven years for a human. It’s the same with an Internet stock. If an Internet stock is based out for one week, that’s the equivalent of seven weeks on any normal stock. Everything is compressed on those Internet stocks. So the time they take to base out, the time they take to correct, the time they take to move — it’s all in much, much shorter time-frames. With these, it’s hard to get used to buying off short bases. If you’ve been disciplined for so long to be buying a certain way and then things make a 50% move, sit there for three weeks and then break out and go another 50%, it’s just very hard to change your methods when that is occurring.
Marder: I take it you have changed things.
Ryan: It’s still very, very tough. We do it but we do it smaller, we take smaller-size positions for those types of stocks. We also vary the size of the position based on the volatility because I just will not have one of my top positions in a 10-point trading range every day. It’s very easy to get shaken out of some of those things. So we tend to buy sort of a basket of them and spread the risk out among a number of stocks rather than concentrating all in one stock. Especially as you get bigger and bigger size money. You can do that when you’re very small and get in and out very quickly but the execution and the price movement on these things are so big in such a short period of time, it’s hard to even get out sometimes when you’ve got 5,000 shares. This is because by the time you place the order, especially if it’s moving, your execution can be 4 or 5 points lower than where you picked up the phone on. So it just makes it a little bit harder especially when you get up in terms of size to go through the volatility of these stocks.
Marder: As far as getting out of a position, what sort of general parameters do you look for when you’re ready to sell a stock?
Ryan: A lot of it — I would say a majority — will be technical in terms of how the stock is acting. We look at price-and-volume correlations on the stock. We also look at relative strength. Has its relative strength gone into new high ground on maybe its last move into new high ground? We look at moving averages, trendlines, to help us stay in a stock or come out of a stock when it’s time to sell. And we’re also constantly moving up and down the size of the position based on how the stock is acting. If we feel a stock has had a good run and has gotten very extended, we might just cut the position size. We can cut it in half, maybe to a quarter of what we had before, and then just mark time with the stock as it goes through a correction and then look for another entry point as the stock starts moving back up again.
Marder: Do you use the 50-day average for anything at all? A lot of people seem to think that’s a spot where institutions like to come in and provide some support?
Ryan: Yes, it’s something we look at very closely. We also look at the 10-day and also the 150-day moving average. I really no longer use the 200-day because the 200-day is a full year of trading and the way stocks are moving these days, they don’t really even pay too much attention to the 200-day moving average.
Marder: What do you use the 10-day for?
Ryan: The 10-day is used for shorter-term moves and also for Internet stocks a lot more than stocks outside the technology area. I look at things like what side of the stock is the 10-day moving average on or is the stock passing through the average, or has it been above it for a long period of time and is now coming through or is it breaking a downtrend and going through it? So we use that fairly often on the Internets.
Marder: Would you buy a stock if it comes down and touches the 10-day moving average?
Ryan: It would have to depend on what kind of volume it’s come down on. Is there another support point close by? It depends on exactly where that 10-day moving average is.
Marder: As far as sell parameters, when you’re looking at technicals, is there any basic rule or two that you use on that? For instance, if a stock comes down 20% off its high, does that kind of concern you and maybe you’d get out of that position?
Ryan: Before. If it’s come down 20%, we’re probably out of a majority of that position because we’re watching it fairly closely and again, we’re looking at other trendlines and moving averages that it’s probably broken before it’s gotten down to that 20% decline. It all depends, on a stock-by-stock basis, how much we have sold by that point. In most cases, we will have at least trimmed a quarter to a half of the position by the time it’s already been off 20%.
Marder: As far as general market direction goes, what do you look at to determine that?
Ryan: I try not to get too complicated. I look at the daily Dow and that works but it’s not foolproof. You can get whipsawed and you have to be careful in using it. It’s like anything else — nothing is foolproof. I look at some of the McClellan Oscillators and summation indexes for general trends but a lot of it is based on “Can we find enough stocks to buy?” and “Are the patterns showing up that we like to be buying off of?”
Marder: Let’s say the averages looked a little shaky, maybe after a big run-up or something. For example right now there are still some stocks out there to buy, maybe not as many as three or four weeks ago. Would you would you still be buying some of these on the breakout?
Ryan: As time goes on, you just have to be a little bit more careful and if they do not work out, then quickly cut the loss. Especially as you get later into a move. I think we’ve got a little farther to go on this move, but it seems like the last stocks you buy right before the market starts correcting are the ones you sometimes get hurt the most on because you’re buying the breakout and they can come off very quickly for the sale.
Marder: When it comes to money management, how do you add to a position? Do you purchase, say, one-half of your normal-size position on the breakout and then add another half as it goes up a few percent?
Ryan: We try to take at least a 1% position in a stock as it’s starting out and if it starts making a nice move on the first breakout then we can quickly move it up to 2% or so, or even more if we like the company. It all depends on how liquid it is, too. Sometimes it’s hard to buy that much of a stock that quickly if it’s a smaller-cap stock. Then we’ll add to the position as the move continues. Because we’ve got a larger-size portfolio now and it’s a lot of other people’s money, we’re not taking huge positions in stocks, especially with the volatility. We probably have a little over 30 positions and now there’s really only one position that is over 5%. And that’s also because it’s up between 75% and 100% for us, and that has moved that position to a weighting farther out. But we try to start out with 1% and then we move it up from there, based on the stock and again where it is.
Marder: Can you give a couple of examples of stocks with interesting charts, maybe one that you bought on a breakout that worked, or something else that you might have just recently bought? Or maybe you got out of something that just started to break down recently?
Ryan: You could probably use ^HD^ as a good example coming out of that base at about 45-46 at the end of September. What’s good is that it pulled back down on top of the base on lighter volume. Then it started moving out and as it went through 50 we added more to it there. It got up to the mid-50s and spent a few weeks there. We probably added a little bit more there and then got a nice 56-to-almost-70 run out of it. Then, when it broke down on big volume on the first day of the year, I think we cut the position almost in half. Because it had a nice long run and then they get hit with that type of volume. That’s where we feel, “Hey, it’s time to lighten up and take some of the profits.” Because when you see that much volume on a stock getting hit that hard going through the 10-day, then you can say it’s probably time it takes a rest, so you can cut back on the position. We still have a position in the stock and will be ready to add to it if we start seeing the volume increase and the stock starting to come back up through probably 64 or so.
Marder: If things break down in this stock and, say, the whole market, will you retain any core positions or are you going to be all in cash at some point?
Ryan: Well, if the whole market starts breaking down, then I’ll just keep on selling stocks down. And if I get to a 100% cash position, that will just tell me there’s nothing out there to buy. But I’ll also be looking for stocks on the short side to add to and I’ll also hedge some of my positions as the market starts coming off.
Marder: Any other charts of interest?
Ryan: People may laugh at this but something like ^C^ just broke out. Good volume. And I like to have some big-caps in my portfolio for stability because if you’ve got all high relative-strength stocks in your portfolio, I’ve seen it happen where all of a sudden you’ve got all these hots in high-relative-strength stocks and all of a sudden then the market doesn’t want those any more and it’s like a light going out. You can really suffer quickly and also you get a few of these stocks in there and it helps the volatility so you don’t have huge swings. It all depends how risk-averse you are and how you structure your portfolio.
Marder: A lot of people are under the assumption that shorting is as easy as the long side of the market. Would you agree with that?
Ryan: No. Especially when the majority of the time the market’s going up and especially in the last couple of years you’ve had corrections that have been swift. These corrections don’t last long. Also, some of the rules have changed since Internet stocks have come along — a stock corrects 50% and then comes back and doubles back to its old highs and then it goes again. Some of those things I had just never seen in all the years I’ve been watching the market. The explosiveness and the moves. I would say the No. 1 advice I’d give on shorting is “Do Not Short Too Soon.” You have to wait until its hop has been completed and that usually takes two to three months. Too many people are trying to short on that and I try to do it because we all want to get that top tick. We all want to say, “I shorted it right up here.” It’s an ego thing. The best shorts are the ones where the top has been put in for a number of months and then you’ve got some overhead resistance. To try to pick off the top in a stock is very, very hard and sometimes you can get extremely lucky and get within those top few days, but it is tough. I would say your odds are much, much better if you’ve let the stock based out. Come down, try a few different rallies over a few months’ period of time and then see it start rolling down. That’s the best time to short.
Marder: Thanks. It’s been real.