Saturday, May 9, 2009

Volume 3, Issue #35

Also in Today's Issue...

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 stops 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...

* 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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