Trader Talk: The Anatomy Of A Winning Stock

February 8, 2002
Tim Truebenbach

The following was transcribed and edited from TraderTalk on Feb. 6, 2002. This free, live interactive workshop was conducted for TradingMarkets members by hedge fund manager and
intermediate-term trader Tim Truebenbach.

It seems like once again we find
ourselves in the midst of a decline in the
major averages. Following the rally in the fourth quarter, many stocks had large
bounces, but the time never really came for growth. Other than a few successful
moves, most growth names saw very little appreciation. I want to pull one of the
successful names from that period and explain why it stood out and was
successful. That stock is NVR Inc.
(
NVR |
Quote |
Chart |
News |
PowerRating).

First, I want to begin with the fundamental picture of the
company and what made me spot it out of all the stocks.

The company painted an impressive earnings picture with a growth rate of 78%
and double-digit quarterly earnings increases. Its ROE was an impressive 72%,
showing that it was able to produce significant results from its capital base,
and the group it kept company in was performing in the top 10% of the market,
showing strong leadership.

Moving on to technicals from fundamentals, NVR had managed to set up in a
seven-month double-bottom base. (If you haven’t familiarized yourself with basic
healthy base patterns, you need to. I cannot emphasize how important this is to
successful investing.)

The base began the week of May 11, 2001, and lasted through Nov. 30, 2001,
when it finally broke out through its buy point of 183.10. The stock moved
through the pivot point on above-average volume.
Since then, it has acted very well, as stocks advancing will do. They will make
a move higher, pause, then move even higher, working through overbought
conditions simply by consolidating at each level rather than selling off.

Q&A

Can you define above-average volume?

A: I
look at the average volume from the last 50 trading days and compare the day at
hand to that volume. At the time of breakout, NVR was trading just under
80K/day. On the breakout day, the stock posted volume of 156K.
That is above average.

Another point to mention in looking at a potential investment deals with how
many weeks of accumulation vs. distribution you see in the right side of the chart.
NVR posted four solid weeks of accumulation vs. one week of distribution…solid
evidence that institutions are there to support it.

Many stocks that broke out this past fall lacked institutional support. We would all buy the breakout, then the stock would sit and eventually fail to
continue higher. This was because institutions were not picking up shares, day in day out
— when this
again materializes, we will see many more NVRs.

NVR is a relatively thinly traded stock with a
large spread most of the time. I have been trying to buy it since it was at
234 a few days ago, but it doesn’t offer many pullbacks. What do you think of
it as of close today at about 250? Is it too extended? Should I wait for
pullback to five-day MA?

A: Over the past few days, NVR has increased its move higher,
making me think it is due for a type of climax here, or at least a pullback.

Q:
With the kind of
volume you are talking about, doesn’t liquidity and spread become a problem?

A: If liquidity and spread become a problem, I
will have to reduce my size, but you are also talking about NVR, a $180 stock.
If you divide it by four, its a $45 stock w/average volume of 320K.

Q:
What made you enter at 183? And please comment on what you see using the weekly chart
basing, etc.

A: Entered at 183 because it was the midpoint of the double-bottom base.

Q: How did you determine that NVR had a double base?

A: Double bottom bases resemble a “W”.
The base starts on May 11, 2001, the first bottom was June 15, 2001, the middle was
July 20, 2001, the second bottom was Sept. 21, 2001, and then the subsequent breakout.

Q:
On your NVR purchase, can you
comment on how you purchased it? All at once? Or how do you scale into a
position that’s this thin and has such a large spread?

A: I will usually move into a position all at once, but scale out.
I actually sold out of half before it ever got going in an effort to manage
my risk, but then it took off before I got completely knocked out and allowed me
decent gains.

Q:
What specific scans do you use?

A: I scan for fundamentals first, then look at charts of these stocks, finding
ones that fit a quality base pattern I like.

Q:

Please name all fundamentals you scan for.

A:
Fundamentals I look for include, EPS, growth rates, as well as cash flow. I look at both
quarterly and annual EPS numbers.

Q:
As you enter,
monitor and exit I-T trades, do you utilize other technical indicators: e.g., RS, RSI, MACD, Stochastics, etc?

A: I look at the stock’s RS, group’s RS, how a stock acts off the 50-day on
pullbacks on the right side of its base, and mainly price and volume.

Q:
Did you say that you only have five positions
in your portfolio when fully invested? If
not, how many do you have? Given that you
run a hedge fund, up to how many assets do you feel you can manage with this
diversification level?

A: I prefer to only have five positions when fully invested, but they would have
been purchased at different times and are up varying amounts. Oftentimes I
end up with more than five, but I try to concentrate on the five best stocks I can find to increase
profits.

Q:
In your
historical studies, would your discipline work in sideways markets, besides
keeping you in cash? Say, for instance, in the late ’60s to ’82, or 1994?

A: I’d have to say that this discipline would work during a sideways period, but
obviously not as well as a bull market. O’Neil’s book “How To Make
Money In Stocks” shows
his actual trades from that period from 1962-1980.

Q:
Would you share with us approximately what percentage of your portfolio is
presently invested in this market?

A: Zero
percent.

Q:
Are you long only?

A: I am long only for all practical purposes…shorting is just un-American at
this
time!

Q: Will
you wait for a follow-through day before you get back into market?

A: I would like to see a follow-through day or solid accumulation in
the market before
considering new purchases to hold onto.

Q:
Do you monitor any of the commodities markets or use any economic indicators in
your analysis?

A: I only follow economic reports to shape my own opinion, but I don’t really trade
by anything other than price and volume.

Q: Can you explain pre-tax numbers and how
you use them?

A: Pre-tax numbers on a balance sheet are just
that, the company’s financial
performance before the impact of taxes. I don’t use them, but I do focus on after
tax numbers.

Q: How much do you usually risk on a new
position?

A: Risk is a personal thing. Money I manage for others is limited to no more than 20%.
But in tough times, that can drop significantly. On the other hand, I won’t hesitate
putting all of my personal account into a position that I
find nothing wrong with.

Q: Can you explain how you use cash flow?

A: I look at the cash flow per share for a full year and compare that number to
the one-year EPS.

Q: Where do you find after-tax numbers, and how do you use
them?

A:
After-tax numbers can be found as the EPS per share on a balance sheet

Q:
You mentioned
(
NVR |
Quote |
Chart |
News |
PowerRating) might be setting up for a climax. Do you use any criteria for
exiting a profitable position?

A: I’ll scale out of a position if I have a large position, otherwise I’ll just
sell.

Q: What
is the time frame that you generally hold a stock?

A: Probably around
two to three months.

Q:
In this environment do you find it worthwhile to hold that long?

A: No…holding stocks right now has not worked,
that’s why I’m in cash, but when I
do become fully invested, or even while I’m in cash, I still come across
profitable opportunities I pass on.

Q:
Ever hold shorter swing-type trades?

A: I do hold shorter-term trades, or mostly every stock I get into is up at some
point, and usually very quickly. I just choose to stay in positions and realize longer-term moves.

Q:
Once you enter a trade, is there an “uncle point” that you will exit
prior to your projected time?

A: I don’t project a time in a position, but rather trade the stock based on how
it is acting. I thought June 2000 was the start of another bull, and I bought
(
KEI |
Quote |
Chart |
News |
PowerRating). In 28 days
the stock tripled, and I was out. I have learned to do away with time and just
trade. It saves money when I’m wrong and makes me more when I ‘m right.

Q:
What is a price target for
(
QCOM |
Quote |
Chart |
News |
PowerRating)?

A: I don’t know, and I wouldn’t be
involved in this stock at this point.

Q: Do you flip through chart books like
Gary Kaultbaum
does?
If so, do you start with the daily, or the weekly to find your patterns?

A: I do most of my scans for stocks
through weekly and daily charts. Weekly charts allow me to see a larger picture.

Q:
With all of the accounting issues today, do
you find earnings numbers to be a lower quality, â€œmanipulatedâ€ estimate of a
companyâ€™s profitability? Do you perform
any cash flow analysis or balance sheet work on your
names?

A: With all the accounting concerns
plaguing the market recently, cash flow analysis is more and more important. For
me, cash flow should be equal to or greater than the previous years’ earnings.
Companies cannot “mess” with the cash flow number nearly as easily as
EPS.

Q:
Other than Daily Graphs what software do you
use to hunt for weekly charts?

A: I just use Daily Graphs and the new beta version which has weekly charts.

Q:
Do any sectors meet your strict criteria
currently?

A: No sectors really meet my criteria my criteria right now, but I’m also more
focused on waiting for a better market in general.

Q:
How
do you occupy yourself during market hours considering that you have been in
cash for some time?

A:

While I’m in cash, I spend a lot of time developing my business and keeping
track of the market

Q:
In your video you say that you will have five
positions on when fully invested. Do you offset the large risk with anything
other than stop orders?

A: I don’t really use stop orders literally, but I will implement my sell rules
to monitor the positions. If you are referring to hedge with options, I do not
do that.

Q: Tim, all that you are saying is fantastic, but
that’s history and is good for teaching
what you have to see in stocks. Now tell us about the future so that we can follow together.
One stock, only one, of the hundreds that you have that is going
up at least 10 points in a month.

A: It’s
kind of choppy right now, but I’ll give it a shot. Not much has worked lately, but that’s the market we’re currently in whether we
like it or not. The point is to hone in on a successful example to: 1) put in
your portfolio or find out why you didn’t, and 2) use it as a model for the next
bull market.

Q: Do follow-through
days need above average volume or greater volume than the day before?

A: Follow-through days do need better volume
than the previous day.

Q: Do you have a minimum daily volume figure that a
stock must trade? Eighty-five thousand seemed like a rather low volume figure for a
stock.

A: I use 40k as a minimum volume figure.

Q:
When you say cash flow, do you
mean sales (as in Daily Graphs Online type)?

A: Cash flow is a specific number derived from the cash flow statement.
It is different than sales.

Q: What
are your normal requirements for ROE and ROA?

A: I like ROE >/=17%.
I don’t really consider ROA directly.

Q:
When is your new service coming out?

A: Feb. 8, 2002 is the launch
date.

Q: What will your new service cover?

A:
I will be managing a daily trading service that is focused on zeroing in on
quality names in good markets.
I will identify the market environment from good to bad to sideways.

Q:

If I read you correctly, and you don’t short, think the market environment is
bad, and have no long position, what will the service offer at this time?

A:
The service will allow investors access to how I manage money and view the
market…and we all know that things could change as early as four short days.

Thanks to everyone who submitted questions. Good
trading and feel free to use my e-mail address for any further questions.
I try and respond to all of your e-mails ASAP. Feel free to follow
the link at
the end of
my columns or use: Timt@tradingmarkets.com

Trader Talk: The Anatomy Of A Winning Stock

BUY THE FEAR, SELL THE GREED

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