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Let's do an investing experiment...

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March 24, 2010 – Comments (12) | RELATED TICKERS: BGPIQ.DL , RAS , ZLC.DL

I really want to do this so I (we) can learn something new.

If you ever read any of my posts, you probably know I specialize in highly speculative stocks. I also like to study charts (developed a method I call chart-eyeballing, which is more art than science), and use no fundametal analysis whatsoever.

Now, as you know, majority of investors say that's just wrong, and they advise other people to stay away from speculative stocks.

However, I think that's wrong. I think every portfolio should have one or two (or three) of these speculative stocks. Of course, I would never tell you to put a lot of your money into them, but I think a certain small percentage (that you can afford to lose) is OK. I think these speculative stocks keep investing interesting as they usually make very wild moves, and they also give you that hope that you are possibly owning a potential 10+ bagger.

So what is my experiment?

I found 3 stocks that fit my chart-eyeballing screen perfectly: BPG, RAS, and ZLC. Their charts are just beautiful. Music to my eyes (or something like that).

However, all 3 of these are highly speculative, fundamental junk stocks.

Let's take a quick look at them:

BGP, Borders Group Inc., currently at $2.06, operates bookstores, 1 star stock

RAS, RAIT Financial Trust, $2.09, provides financing to real estate industry, 4 star stock

ZLC, Zale Corp., $3.64, operates jewelry stores, 1 star stock

Some technicals too:

BGP is down 45% from its 52W high ($4.34 on 6/5/09), but up more than 100% since 2/1/10

RAS is down 39% from its 52W high ($3.45 on 9/18/09), but up more than 100% since 2/1/10

ZLC is down 57% from its 52W high ($8.51 on 9/16/09), but up 100% since 2/1/10

Now, what I'm trying to learn is whether these stocks are good buys as a part of a speculative part of one's portfolio or not. Are they simply junk, stocks waiting to die (and that's why they are $2-3 stocks, 50% off their 52W highs), or are they just starting to come back (and will eventually be $6, $10, $20 stocks).

I really don't know what to think, and that's why I'm posting this "experiment".

Once again, I love their charts, but are fundamentals more important than charts? Is there a good reason people stay away from sub-$5 stocks? Is there a good reason 2 of these 3 stocks have the lowest CAPS rating possible? Is there a good reason people call these stocks garbage? I don't know, and I'm trying to find out.

But those are not the only questions I have. I'd also like to find out if there is a good reason these stocks were multibaggers up until the day they started going down. Is there a good reason they are now up more than 100% in a very short period of time? Is there a reason they are now jumping up on volume that's much higher than the volume on which they were going down (for BGP ad ZLC the most recent volume spikes are almost highest ever)? I don't know, but I hope to find out.  

Naturally, I'm pulling for my chart-eyeballing and hope these stocks will take off, but I'm also kind of in an uncharted territory for me (picking low priced stocks this late into the rally).

I have all 3 of these stocks in my CAPS portfolio (as I believe my chart-eyeballing makes no mistakes), and I'm not planning on closing them for at least 12-18 months (unless they die before then).

Let's see what I (we) will learn from this...

12 Comments – Post Your Own

#1) On March 24, 2010 at 3:02 AM, APJ4RealHoldings (37.52) wrote:

i believe you have a really good potential multibagger with BGP

dunno about the other 2

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#2) On March 24, 2010 at 3:53 AM, devinbrown (< 20) wrote:

Thanks for the interesting article you have posted for us, we come to know new experiments which will be so beneficial for our country..

Great Job

Thanks & Regards

Devin Brown

www.datarecoverysoftware.com

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#3) On March 24, 2010 at 8:31 AM, hrc777 (< 20) wrote:

OK- a couple of points:

1- Your picks are based on the charts.  Then you go on to wondering about the fundamental aspects.  Thats ok, but you have to decide what your approach is going to be.  Its a personal thing.  Do you want to go into detailed fundamental analysis?  Fine- make sure you have a very good understanding of balance sheets, macro economics, etc.

2- You have combined speculative, volatile, low priced stocks with a holding period of 12-18 months.  Not sure how that kind of recipe works.  Color me sceptical.  Might be ok at the beginning of an extended bull market, but then most all approaches are.  Regardless of your approach, you still need to have a sell discipline.  Is it going to be based on the charts, fundamentals, horoscope?  I really dont see 'buy and hold' as an investment alternative these days.

3- I noticed these 3 all crossed the 50 ema with volume and then came back to test the 50 ema.  Hmmm- a buy system?  Perhaps some kind of sell system combined with the 50 ema?

Well, you wanted some thoughts.  What it really comes down to, if you want to make money is:-  You have to develop your own system.  You have to know exactly how it works and be continually testing it to see how it works in different markets.  The SELL discipline is the most important.

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#4) On March 24, 2010 at 10:21 AM, TSIF (99.96) wrote:

hrc777,  Dragon has his own system, it is chart eyeballing.

His reference to whether fundamentals are bettter is in reply to other Fools here who have debated him over the last year.  He takes the debates very seriously, where else he pokes "the he** of fun" at everything else, including himself.  Most of us are like that, we all take some things more personal than others. Investing should be fun and I admire his viewpoint there.  Of course, it's more fun when you're winning.

I'm fully behind a few speculative stocks with the caviat that it's money you're willing to lose.  Few people,  giving opinions, stress that enough. Again, I admire DragonLZ for keeping that out front.

My method, that seems to work for me, and great point, everyone needs their own, is a mix of fundamentals and charts. I believe Mr. Market may overlook or over punish a particular stock at a particular time.  DragonLZ indicates his method always works. I think that was a slip of the fingers.

"(as I believe my chart-eyeballing makes no mistakes), " or another poke at himself that is lost in the serious parts.

If DragonLZ has his reasons that work for him, I'm all for it. At this point, it's not a trainable tool for others, short of everyone tuning in for his picks and suffering from the time lag.  I believe everyone should be self sufficient in investing and learn their model.

A blend of Fundamentals and Charts is my play. Others are pure fundamentals, and some are pure charts.

TSIF

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#5) On March 24, 2010 at 4:28 PM, dragonLZ (99.31) wrote:

Thank you all for your thoughts, and thank you TSIF for the kind words.

TSIF, you know I'm doing this as I believe my chart-eyeballing will prevail over fundamentals, but picking highly speculative stocks (jumping up on high volume) is something I've never done before.

I really am trying to find out if these stocks will survive and strive or die.

If this was Sept. of 2009, you know what my answer would be, right?

 

p.s. Believe it or not, when I first thought about posting this experiment, my list also included BEE, MPG, and WNC. I dropped them later as I thought they already went too high two weeks ago. You know what happened after that... Oh, well...  

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#6) On March 24, 2010 at 5:50 PM, TSIF (99.96) wrote:

I think you're going to need some help from Julia on this one, (her birthday was ONE day too early!)  :)  It missed mine by a day and her one year birthday missed the Market crash of '09 by one day!! 

Unfortunately, when the market is rising, much like the tide, it rises all most equities.  Some still have holes in them and are taking on water.

You will continue to do well with your volume play, however, if you stick to stocks with decent market caps and volumes. Unfortuantely, volume is used by market movers to manipulate share price for a variety of reasons. Those that are about to issue more shares get more manipulation than others. Friday at 3:45 last week was an example.  You should filter out some of the playing the MM's are doing by sticking to well known, even if beaten down companies. One lesson that would have been extremely valuable the last 12-18 months is that very, very few lenders want to own the business they loaned money to, for any reason.  Few stocks will "die".

Knowledge of that would have made many stocks that went sub-$1 attractive. 

Fundamentals can help one avoid the few that might go under or reconginze the ones being manipulated, but with the rising tide, these are in the minority and are unlikely to seriously wound you.  The winners you pick should more than compensate.  If the tide goes out for a long period of time then as you've noted in other blogs, the carnage will be temporily bloody!

Good luck. 

 

 

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#7) On March 24, 2010 at 6:16 PM, TSIF (99.96) wrote:

Blend of Fundamentals and Charts, (TSIF style)

ZALE:   ZLC,  short term, Market outperform.  Long term, Market outperform.    Approximately $4.90 or better by end of year.  (Current $3.61, approximately a 25% net gain).

=============================

BGP:  Short term, Outperform.  Long term, UNDERPERFORM.       Currently $2.02

Max one quarter  $2.35.   Target End of year.  $1.50  (Possibly as low as $1.20). 

============================

RAS as a financial is tough, especially as a blended REIT, property manager, advisor.  They have morphed over the years. Generally it's hard to read the books on these type. Carring charges, imparments, writedowns and lien holders make quite a mix of possibilities.  Overall I give RAS the thumbs up. Possibly $3 by end of year, barring nothing really critical to their operations. Possibly higher.  I wouldn't put them in the goner camp. 

I have an upthumb call pending on ZLC, I'd like to get it slightly lower, but I'll ensure it opens soon.

I'll have a downthumb waiting on Borders, at about $2.34 if it gets that high.

I'll have an upthumb on RAS if I can decide an entry point.

 

Good luck on your experiment, since I only disagree with you on one then the sample size is pretty small, but I do believe others would probably classify at least 2 if not 3 of these as doghouse stocks and might chime in for comparison.

Hard to say that you are picking stocks with poor fundamentals but good eye-charting unless there is some agreement on fundamentals, but most people know that I'm a bit less conservative than most fundamentalists.

Good luck.

TSIF

 

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#8) On March 25, 2010 at 1:16 PM, Griffin416 (99.97) wrote:

You are obviously very good at what you do. To make money in the market, you should do whatever works for you. Personally, it is not my style, I like winning a high percent of stocks by a small-ish margin (5-10 caps points) or 20% in real life, then I bail.

That being said, for the speculative momentum stocks I think a shorter time horizon is better, say a month or two and always have a trailing stop so you don't get caught with your pants down. Companies with bad fundies with momentum are only trades IMHO.

Happy trading, Griffin

 

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#9) On March 25, 2010 at 3:54 PM, dragonLZ (99.31) wrote:

Thank you on your input, guys.

TSIF, you are really scaring me now if you like 2 of my 3 picks... :) Let's see what happens.

Griffin, just lately I started thinking I should take the same approach (20% and out), but haven't tried it yet. Most likely, I'll end up mixed portfolio of my long-term-speculative-multibagger picks with some try-to-snatch-easy20% picks.

Thanks again and Good Luck.

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#10) On March 25, 2010 at 4:17 PM, TSIF (99.96) wrote:

I've liked many of your picks.  I have a few of them in my RL portfolio.  A few of your picks I picked before you and a few after. I enjoy using your pick list for ideas.  Big one day gainers, big one day losers.  I might play them opposite of the market that day. Unfortunately I missed PMI when it peaked. I had a $5 downthumb open and it only got to $4.98 today before retracing back to $4.18.  I could have had a quick TEMPORARY 15 points or so.  IT doesn't mean that I don't agree with the pick in general, it means that fundamentally things can overshoot or undershoot. There are plenty of other people playing the volume story, same as you, especially day traders.  Sellers trip limit orders and things cascade from there. Especially one that has risen quickly where the new buyers aren't loyal.

Overall, Yes, I got two of the three picks made that I indicated. I hesitated on Borders. I had it it set to downthumb at $2.35. IN hindsight I should have been happy with $2.20, but I'm not prone to downthumb an equity that is under $5 lately. They bite!

Thier earnings is Monday. I expect some action then. I think it may get the $2.35 from my original target.

Good luck.

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#11) On March 28, 2010 at 1:13 AM, dragonLZ (99.31) wrote:

TSIF, as you know, I also watch your picks closely (lately even more than before). With Jakila and Porte, you were one of my early favorites... 

Just recently, I also noticed you picked (quite some time ago) some of the stocks I thought I just "discovered". 

Back to the experiment: I'm afraid you misunderstood it (based on what you said in your post on ZLC and RAS), but I might be wrong.

Just to make sure we are on the same page: I'm doing this experiment mainly so I can learn something for the future (next bull market, I'd say). I'm interested to see what happens with stocks that fit my volume/chart-eyeballing criteria, but are low priced stocks even after one year into a bull market.

In the past, I always thought there is a very good reason why $2 stocks are at $2 this late into the rally, and would definitely say one should stay away from them. 

But, now, these 3 stocks have the same chart pattern that worked very well for me so far, and I don't know what to think. Thus the experiment (and my buy of ZLC in RL).

Good Luck and thanks for mentioning my name in a positive way. It sounded like you think I know what I'm doing.

p.s. Be careful with that. With my picks, I might soon look like a complete idiot again... :)  

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#12) On March 28, 2010 at 12:17 PM, TSIF (99.96) wrote:

We're all Fools here.  I understand your experiment. Many of the easy picks are gone and your questioning those that are lagging is a worthy experiment. . It's also the place that speculative investors are looking, so they might see artificial spikes.  There might be some opportunity in the Sub-$5 range still, but only for those willing to take on high risk.  For your sample size to be meaningful you might want to try to get up to 10 that you flag for the experiment.

Learning from this recession could definitely help next time.  Each recession, however has a different "flavor".  This one with the banking issues had a sharper drop and a faster climb than we might see in the future.  Some companies were materially affected and others not so much, but suffered by association.

There is always opportunity even outside a recession for some equities to be overly punished and some to deserve getting a drubbing.    There is also opportunity to learn from each other, which was the point of my going public with my thoughts on Zale and RAS.  I can't go deep enough by myself on too many equities. I only add a few a month to my RL portfolio.  I traded in/out too much early in the recession.

Good luck!

 

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