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Published: May 9, 2009
For the last few
weeks, I have been warning you about an impending correction.
This week was no different. My data have been forecasting a
correction since early April and the overbought condition is
still in play. However, if you are very cautious, you can still
be in this market and continue to make money in all the near
panic buying.
Many of the talking heads and pundits are telling us that the
next stop on the Dow is 10,000. This is not likely. When markets
are overbought, virtually anything can cause the big
institutional investors to take profits and move to cash. When
this happens, the short players will jump back in and push the
sell-off even lower. This may not be a 'Sell-in-May-and-go-away'
scenario, but it should be a time to move
stop-loss
orders up every day
that the market moves up.
Here is what I'm doing in this
market...
* For the last couple of months, I have been about 30% invested
and 70% in cash. I sold some positions last week and am now
about 25% invested and 75% cash. What is interesting is that
even with only 25% invested, my portfolios are nearly matching
the huge run-up in the market over the past few weeks. I mention
this not to brag on my stock picking skills, but to underscore
the importance of staying in the market even if you believe a
correction is soon to occur. You just don't have to be all in or
all out. With only 25% of my money at risk, I have been able to
nearly matching 100% of the gains in the market.. At the bottom
of this week's report, I will take you through an example of how
I go about picking the right stock at the right time and getting
out at the right time.
* Every day that the market moves higher, I have been moving my
stops higher. If the market continues to move higher this coming
week, I will continue that strategy. Currently, 90% of my
holdings have stops nicely above each equity's cost basis. This
means that when the correction occurs, the vast majority of my
holdings will stop out with net cash profits. I strongly
recommend that you consider this strategy in light of the
overbought condition of this market.
Tool Time...
A few weeks ago, CEDC bubbled up in my Watch List as a good
candidate to buy (see chart, below). Central European
Distribution Corporation (CEDC) and its subsidiaries produce,
distribute, import, and export alcoholic beverages primarily in
Poland, Hungary, and the Russian Federation. It produces and
sells vodka. The company distributes approximately 700 brands of
alcoholic beverages consisting of various alcoholic products,
including spirits, wine, and beer, as well as non-alcoholic
beverages. It distributes its products directly to off-trade
establishments, such as small and medium-size retail outlets,
petrol stations, duty free stores, supermarkets, and
hypermarkets- and on-trade locations, including bars,
nightclubs, hotels, and restaurants.
As of December 31, 2008, CEDC
operated 19 distribution centers and 124 satellite branches
located throughout Poland. It imports spirits, wine, and beer of
various brands, including Corona, Budvar, Guinness, Carlo Rossi
Wines, Concha y Toro wines, Metaxa Brandy, Remy Martin Cognac,
Guinness, Sutter Home wines, GrantA's Whisky, Jagermeister, E&J
Gallo wines, Jim Beam Bourbon, Sierra Tequila, TeacherA's
Whisky, Campari, Cinzano, Skyy Vodka, and Old Smuggler. The
company was founded in 1990 and is based Bala Cynwyd,
Pennsylvania.
There was (and still is) a lot to like about this stock. I
bought it at $14.72 on April 6, 2009. It closed this Friday at
$23.94, giving me a +62% net unrealized gain. Let's review why I
picked this stock...
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* The stock is one of my 2009
Doublers. This means I have already tagged it as a stock that
should encounter little resistance to doubling if the market
begins to move higher. Note that less than a year ago, the stock
was trading near $78.00 and as recently as a couple of months
ago, it was trading near $5.00 per share.
* In spite of the huge decline in market share price, the
fundamentals of the company remained strong. Its Fundamental
Score put it in the top 10% of all the stocks in my database.
* Technically, it gave a Buy Signal about month ago when it
moved above my trendline (10 week moving average, time shifted
forward 3 weeks) at Circle A.
* When the stock dropped to a 3-year low, Insiders started
buying (Circle B). This is a great sign that the Insiders
believe the stock is cheap. From that point, the stock's share
price dropped another 80%!
* During the time this stock was being crushed in the market,
major Institutions continued to hold the stock, with only a
slight move toward the distribution side (Circle C). I like to
see strong (but not too strong) commitment from major
institutions in holding outstanding shares of a company. My
"sweet-spot" for this ownership is between 30% and 60%. CEDC is
at the top end of my sweet-spot. This means that the big
institutions believe there is a lot of upside for this stock.
This level of Institutional Ownership is an excellent indicator
for owning the stock.
* Although volume has fallen off
a bit (Circle D), the general trend of investor activity of this
stock has been excellent, with more green bars (increasing
volume and increasing price) than red bars over the past several
months. This gives momentum to the stock in the direction that I
want the share price to move. This is another positive for
owning the stock.
* Finally, the Industry (Beverages - Wineries and Distillers)
and the Sector (Consumer Goods) were bouncing off multi-year
lows. This is where the 'rising tide' analogy comes in to play.
If more money is pouring into an Industry and Sector than moving
out, the tendency is to see all the stocks in the Industry and
Sector moving higher.
If the stock's price
is moving higher, the insiders are buying, the major
institutions are holding a significant number of shares, volume
is increasing, the average price of all stocks in the Industry
are moving higher and the average price of all the stocks in the
Sector is moving higher... and if the stock has strong
Fundamentals... and if owning the stock does not violate my
diversification rules, this stock becomes a great candidate to
own.
That was my conclusion a few weeks ago and were it not for the
impending market correction, this would still be a great stock
to buy.
And... one more thing... The normal stop loss setting for this
stock is $12.65. This is calculated by subtracting the Expected
Move ($5.76) from last week's lowest low. In a normal Bull
market, this is the price to use to stay just below 'normal'
weekly volatility for this stock. This is a 24% stop loss. In
normal markets, I am not too worried about this low of a stop
loss. But, in this market; with this much unrealized gain and
the fact that I expect a correction to occur at any time, I do
not want to lose that much profit on a pull-back. So, I have a
much more aggressive stop loss. My stop on this stock for the
upcoming week is $20.94... well above the 'normal' stop loss.
Plus, if the stock continues to move higher, I will be moving my
stop higher on a day-to-day basis.
Have a great week in
the market!
--Mike Turner
Editor
Mike Turner's Market Report
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