"An Essential Monthly Newsletter for the CAN SLIM^® Oriented Investor"

Sunday, February 1st, 2004 | 8:39 PM
February 2004
Volume 7, Issue 2
 

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When the Up Market Stops Going Up
Right out of the box let me say I believe the market has some upside to it. The internal market indicators remain positive. However, we are now starting to realize a rotation out of certain sectors and a move into more undervalued areas. I have observed that on many occasions the companies with the poorest fundamentals have been among those making the biggest price jumps. Many stocks that have been big movers will be questioned concerning their forward looking guidance and the outlook of their fundamentals.  At some point in the future these anomalies will have to reverse.

In hot, up-trending markets investors who believe to have employed good investing disciplines are tempted to cheat against the rules of their systems because it appears the market won’t stop going up. This has worked for the past year, but the reality is that the market will occasionally stop going up for at least a while. When the market does stop going up, investors may remember what it was like when stocks went down fast and furiously.

While the current upward move in the market has continued, overall market risk has increased quite a bit. A pullback is expected and would be welcomed by most “experts” at this time, but they have hardly proven reliable predictors in the past.  Many believe that a five to ten percent retracing would be healthy for the major averages. The rub is, not all stocks are going to pull back exactly in line with market. In fact, in the event of a more significant decline for the indices, some individual stocks are going to be sold off more violently.  Downside exposure in some issues could easily be as much as 25% to 50%.

Which leads me to my point. We can't say which stocks are going to go down and how far they might drop.  The more important question is, "Which high-ranked stocks will hold their ground, suffer only modest declines, then come back and continue to increase in price?"

As a preemptive move against the next slide in the market, review your sell discipline and know the points at which you'll exit your existing positions. Equally important is to reevaluate your portfolio’s CAN SLIM^® characteristics to insure against degradation in any issues' fundamentals (earnings) that could prove even more costly should the market retreat. This may be a good time to sell the weakest links among your holdings, and to be looking to add better stocks after the market adjusts and digests the last ten months of gains.  Assuming all of your stock holdings are still in a position of strength, that still doesn’t make them immune from a hit. 

Increasing revenues, earnings, and accelerated growth will almost always equal upward stock price movement, and that is what the game is all about.  But paying attention to the broad market direction is crucial to your success.  One more important point to remember is this - just because it is a good CAN SLIM^® stock doesn’t mean you should ride it down into a losing position.  Considering the recent volatility, you may even want to tighten up your stop-losses so you can realize those unrealized profits (paper profits) in your portfolio.

As an investor of other people's money, I am constantly evaluating the levels of investment and market risks. They say the market "climbs a wall of worry" as stocks and the major indices continue to rise, bringing on higher and higher levels of risk. William O’Neil makes two good points when he says, ”you don’t always have to be invested” and “you can time the market”.  Mitigating downside risk is a very important component of successful investing.

- Dee Hendon

CANSLIM.net's most timely buy candidates are analyzed by our experts in great detail in the "Stocks to Watch in This New Market "section.

Notes:

• This is a list of the strongest groups based on the total number of new highs achieved in the group. For example, 1 stock making 10 new highs is the same as 10 stocks making 1 new high.
• If there were less than four stocks in the list of stocks making new highs then the top five stocks in that group were added to the list.
• Any stock that was more than 20% off its 52-week high was eliminated from the list regardless of any other characteristics.

- CANSLIM.net News Staff

Making the Choice Between Holding and Swapping?  Group Action is Your Guide 
by  Kenneth J. Gruneisen, Registered Investment Advisor, Source Capital Group, Inc. Members NASD/SIPC

More people than ever are reading this monthly publication, and thus I have been receiving a greater amount of correspondence and an increasing number of questions concerning detailed investing tactics. The ins and outs of the actual successful implementation of the CAN SLIM^® investment approach can present many stumbling blocks for investors.  The first advice I have for anyone who is still struggling with the details of this approach would be to read William J. O’Neil’s latest edition of “How to Make Money in Stocks”.  I know many people who read the book repeatedly, and they insist that doing so is a big help to them in reinforcing the proper buying and selling guidelines.

Those who have asked me about portfolio concentration have noted that O' Neil recommends an investors’ portfolio should not have more than 7-8 stocks, and that 3-4 stocks are probably enough for the average portfolio.  Of course, this is provided that the investor makes disciplined entries and exits always under the guidelines explained in the book.  Concentrating your funds in just a few well-selected stocks is an important and smart part of successful CAN SLIM^® investing.  

You will be better off shopping for candidates in a top performing industry group on the rise, not a group that is weakening.

The past few years have taught investors to expect volatility, sometimes rather extreme volatility such as 30% or 50% swings in a stock's price over as short of a period as perhaps only a day or two.  Being on the wrong end of a substantial move such as that can be devastating!  I’ve said it before and will say again that many people are simply not prepared emotionally, or financially, to handle the volatility that individual stocks can sometimes dish out.  We can almost consider the 10% and 15% moves we see as more friendly hints, yet a lightning fast loss of 10-15% often causes excessive emotion for investors.  Likewise, a quick 10-15% profit, for the average investor who is desperately thirsty for a victorious trade, can often lead to undue celebrating.  Moves like that are actually rather commonplace in the stock market.  The more important point we must always work at understanding and determining is whether or not a change is taking place with respect to a stock’s much more significant upward or downward trend.

In a bullish market environment with many breakouts occurring, it may seem as though every other day there is another list of excellent looking new breakouts showing up.  It can become quite a challenge to make the decisions between holding a portfolio’s current winners and selling to take on new positions.  You are probably wise to hold and give your winning positions the benefit of the doubt and a lot of room to fluctuate.  This especially true if you understand what the company does and have a good feel for its outlook, and you can see that its upcoming financial comparison looks like easy to beat earnings numbers from the year earlier. Be patient with any winners, since 3 out of 4 stocks will see their prices rise or fall in response to the overall market’s direction.

I recently explained in a “Ken’s Mail Bag” question how come tightly trailing a winner with a “stop-loss order” is not always recommended.  I find it extremely difficult to suggest a set percentage that one should be willing to let any winner correct.  I say this because in the mid-1990’s I recall seeing America Online (AOL) rise six-fold in price, but during that phenomenal rise it at one point corrected by 50%.  Years later, when I was up substantially for numerous clients and myself in a company called Network Solutions (later acquired by VeriSign), I endured a similar such correction.  I knew what I had my hands on, and seeing that the company had exceptional sales revenues and earnings growth and it played a very key leadership role in the Internet sector, I actually took advantage of the correction and acquired a more meaningful stake.  When the broad market failed in March of 2000, the Internet group went down swiftly, and the sell signals were very blunt.  Thankfully, we preserved some outstanding gains an new better than to try to force profits from an uncooperative market.

I suggest that one can manage a portfolio best by first removing positions in groups that appear to be on the decline or moving down substantially in IBD’s 197 Industry Groups list.  Then put your focus on making your new buys only in leading industry groups.  You will be better off shopping for candidates in a top performing industry group on the rise, not a group that is weakening.

Example – Lennar Corp. (NYSE- LEN) is in the homebuilding group, a group featuring numerous issues that are getting into technical trouble as their charts are weakening.  After a lengthy period during which a substantial advance was made, this company’s recent series of lower price highs and high-volume price deterioration under its 50 DMA are signs of exhaustion.  If you own a former leader like this one and you are seeing profits erode (or if you are in a losing position), you are probably wise to take the hint the stock’s chart has already been giving you.  “Don’t fight the tape”, or so they say. 

Kenneth J. Gruneisen - A Registered Investment Advisor & Registered Principal, Ken manages a Source Capital Group (Member NASD,SIPC) branch office and offers personalized assistance. Investors with a significant financial interest in equities may inquire about opening an account by calling the office locally at (954) 785-1990 or 1-888-237-8399 or emailing to kgruneisen@sourcegrp.com  Further information is always available upon request. Contact us if you know anyone that may have an interest in receiving this or any of our other reports. Comments contained in the body of this report are technical opinions only and are not necessarily those of Source Capital Group, Inc. The material herein has been obtained from sources believed to be reliable and accurate, however, its accuracy and completeness cannot be guaranteed. Our firm, employees, and customers may effect transactions, including transactions contrary to any recommendation herein, or have positions in the securities mentioned herein or options with respect thereto. Any recommendation contained in this report may not be suitable for all investors and it is not to be deemed an offer or solicitation on our part with respect to the purchase or sale of any securities. Source Capital Group, Inc. is a NASD/SIPC member firm.

Financials, StockTalk, News, Chart, SEC, Zacks Reports

Profile: Corillian Corporation is a provider of solutions that enable banks, brokers, financial portals and other financial service providers to rapidly deploy Internet-based financial services. The Company's solutions allow consumers to conduct financial transactions, view personal and market financial information, pay bills and access other financial services on the Internet.  Customers including Chase Manhattan Bank, Bank One, Wachovia Bank and SunTrust Bank use the Corillian Voyager software platform.  The company has recently turned the corner to profitability after years of shrinking losses. The most recent quarter ended Sept 30, 2003 sales revenues were reported up +15% from $10 million to $11.6 million and earnings per share were +$0.04 versus -$0.08 over the year earlier period .  In the just prior June comparison its sales revenues rose 28% from $9 million to $11.5 million while earnings per share were +$0.05, up from -$0.13 a year earlier.  The number of quality mutual funds with an ownership interest rose from 14 to 23 from Jun ’03 to Dec '03.

What to Look For and Look Out For:  A violation of the upward trend line would be an early indication that the stock might be heading for trouble.  Doing so at any time soon would also negate its recent breakout gains which occurred on above average volume as it recently rose above its pivot point and its November highs.  The upward trend line (rising green line) should be the first important support to watch and see that it stays above, while any deterioration under it or its 50-day moving average (now at $6.15) would of course be a much more serious concern, especially so if either might occur on heavy volume.  For now the stock appears to be an excellent buy candidate, but the fact that it is low priced and has already risen almost eightfold since May 2003 adds a lot of risk that there could be a sharp wave of profit taking upon any hint of disappointment.  Needless to say, strict selling discipline could be very important here.  Very little resistance would be expected in the stock now, however the fact that it traded substantially higher in 2000-2001 should be noted.

Financials, StockTalk, News, Chart, SEC, Zacks Reports

Profile:   Hansen markets and distributes alternative beverage category natural sodas, fruit juices, fruit juice and soy smoothies, energy drinks, teas, children's multi-vitamin juice products and still water sold under the Hansen's brand name.  Nutrition bars and cereals are also sold under the Hansen's brand, with business primarily in the United States   The company's management owns 43% interest, so they remain quite motivated to preserve and enhance shareholder value. Recent insider buying has been reported even after the stock has traded up to new all-time highs.  I find that to be at least one more strong vote of confidence. Only a small number of funds have an ownership interest (a source reported only 2 funds) totaling nearly 18% of its shares.  The beverage group isn't exactly bubbling right now, so I recall seeing a frowning face on the character at IBD's checkup service, yet the timeliness of Hansen's "functional drinks" is something worth noting in light of strength among several nutritional supplement companies.  Its earnings for the past three quarters reported March, June, and September '03 comparisons were +50%, +58%, +58% respectively, yet its annual earnings history has demonstrated ups and downs. 

What to Look For and Look Out For: Price is a concern, as low priced stocks which are in short supply and so thinly traded can obviously be extremely volatile issues.  Also, consider that this company is a relatively unknown entity among the institutional investing crowd.  The recent breakout was a technical buy signal, so near term the price could quickly increase and close too far beyond its pivot point to be a smart buy under the guidelines. Be careful and disciplined about any purchase order's timing and pricing, and also be equally diligent about limiting losses and keeping them small.  Expect that volatility could lead to some tricky action, and know that the broad market action may be a minor influence or substantial factor. Use the prior support levels including its 50-day moving average line (thin blue) and upward trend line (slanted green) as obvious points where you might be wise to place your mental price alerts or actual sell stop orders.  A violation or close under any of them would be cause for greater concern and a possible technical signal to exit, especially if the price weakness occurs accompanied by higher than average trading volume. 

Technical Analysis: When it lost ground on heavy volume on 01/07/04 HANS looked like it was getting into trouble.  But for the next two weeks the stock hovered near its 50-day moving average line, building on a 10-week base.  On 01/21/04 it rose sharply from that important short term average. The high volume gains on that session and the following day allowed it to clear its pivot point, signaling that it may reasonably be expected to continue trending higher.   

Note - The CANSLIM.net News editor, Andrew Hansen, is in no way connected with Hansen Natural Corp.

Financials, StockTalk, News, Chart , SEC, Zacks Reports

Profile:  Valueclick provides Internet advertising services to online advertisers and publishers of independent Web sites.  On December 18, 2003, ValueClick announced completion of the acquisition of Hi-Speed Media, a provider of e-mail marketing services.  ValueClick raised guidance as the acquisition is expected to be immediately accretive to earnings.  It turned the corner to profitability while the company reported earnings versus year earlier losses in each of the past four quarterly financial reports.  For the periods ended Dec ’02, Mar ’03, Jun ’03, and Sep ’03 the company’s sales revenues improved 54%, 57%, 42% and 31% respectively over the year earlier.

What to Look For and Look Out For:  Higher volume without meaningful price progress suggests that for the past week it has been encountering resistance near its October highs, while last Friday marked VCLK’s first day of quiet trading since the stock market was closed to observe the MLK holiday.  Continued flat-to-downward price action coupled with quiet volume might form a handle pattern (the best cup-with-handles have downward sloping handles), however, rolling back to a close under $10 would negate its 01/20/04 technical breakout.  If it possibly encroaches upon its 50 DMA (now at $9.18), consider any violation a more serious sell signal.  The long-term supporting upward trend line shows another point to watch for support, however an 8% stop loss would be triggered way before it dropped to that level.   Earnings are scheduled for release before the market opens on February 12^th, always a time when increased volatility can be expected.

Technical Analysis:  Volume has been extremely active since VCLK’s 1/20/04 breakout above its pivot point, previous to which VCLK had formed a cup shaped base with the left side at 10/15/03.  Through the many weeks since it bottomed on 11/17/03 it had shown only one down day with above average volume.  The near term price/volume action will determine if a handle becomes more sharply defined, perhaps adding more certainty to the bullish chart pattern.

Financials, StockTalk, News, Chart , SEC, Zacks Reports

Profile: AU Optronics Corp., formerly Acer Display Technology, Inc., manufactures and assembles TFT-LCD (thin-film transistor liquid crystal display) panels. The products are used in computers, consumer electronics products such as DVD players and LCD televisions, with large-size display panels ranging from 8.4 inches to larger than 20 inches.  Small to medium-sized display panels from 1.5 inches to 7 inches are also made by the company for use in products such as digital cameras, digital camcorders, mobile phones, car television monitors, car navigation systems and personal digital assistants (PDAs).   As a supplier to Hewlett Packard and Dell, this Taiwanese company is fast becoming one of the dominant players in the LCD field.  Earnings and sales revenue growth have been accelera