Stockcoach's Corner

What JOB giveth, KTCC taketh away. Yesterday was going well until I bought KTCC right before the close. Within a couple of minutes, the stock tanked big time. Oh well. Despite KTCC, I'm still up 1.4 percent for the week so far.

For the month of January, the portfolio gained $41,578 (5.3 percent), my best month since last April.

Up 0.2 percent today mainly on account of a low volume move in TRNT. The Jobster (JOB) reported a strong quarter tonight. JOB is my biggest position (4.5 percent of my portfolio), so hopefully the stock will rock n'roll tomorrow.

Although OCCF did not do nearly as well as I had hoped today, I managed to stay well in the plus column for the day and for the week. For the week, the portfolio ended up gaining $11,429 (1.4 percent), the fifth consecutive week of positive gains.

I'd like to thank Jonathon at Valuewiki for his nice comment about my blog.

Have a nice weekend everyone!

Down 0.4 percent today. Optical Cable reported a very strong quarter this evening. OCCF is a medium sized position for me (a bit less than 2 percent of the portfolio). It's good to see that their business is starting to turn around. Hopefully they will be able to maintain the momentum. I have not been hestitant to express my displeasure with OCCF's management in the past, so hopefully they won't screw up again. If the stock can maintain its 30 percent afterhours gain (on just a handful of shares), that should be good for about a 0.5 percent gain in the portfolio tomorrow.

It was a nice day for the markets, especially the Naz. My portfolio managed to gain 0.6 percent thanks to decent moves in OCCF, AIH, and a few other stocks. On days like today I have no illusions that I can outperform the market. That's okay. My outperformance typically comes on down days, not up days.

RACK continues to taunt me. I thought after yesterday's nice recovery there would be more follow through. The stock did manage to surge this morning and then just rolled over. Oh well.

Down 0.1 percent yesterday but up 0.4 percent today. After today's close, Ablest (AIH), a stock that I own, received a going private proposal for $7.50 per share. Considering that the stock is currently trading at book value and the company is profitable and has a steady history of revenue growth, I think the offer is grossly inadequate. Given the amount of the liquidity that private equity firms now have, Ablest's board, in my opinion, could get over $9 per share by shopping the company around to potential buyers. Failure to consider third parties for a potential sale would suggest that management's interests and those of shareholders are not well aligned and that minority shareholders should vote against the offer that is currently on the table. Hopefully the board will come through and either insist on a higher price from managment or invite other external parties to bid for the company.

Stupid RACK prevented me from having a 5 digit gain this week, but considering that both the NASDAQ and the Russell 2000 were down for the week, a gain of $9,225 (1.2 percent) is still one I am very happy with. With this week's gain, my portfolio is back above $800K. Let's hope it stays there.

In retrospect, I think the only reason I bought RACK was because I am having so much difficulty in finding new stocks to invest in that meet my value criteria. Ironically, RACK doesn't even come close, but I am currently sitting on about $180K in cash, so it's tempting to grasp at straws in order to find reasons to buy something... anything. If you think there are some good value stocks out there that I have overlooked, please let me know.

Looks like I may have selected the wrong answer in my little reader poll off to the left as RACK continues to vex me greatly. Anyhow, I am not sure what to make of the recent market action. I am not too inclinded to read much into it. Most likely this is not the beginning of a major correction. However, I'm not inclined to take any chances. With that in mind, I pruned two of my less favorite stocks: FNLY and PEAK. The portfolio didn't get too badly hurt today, down 0.2 percent. MACE helped a bit. I wish they would just take the $3 buyout offer that they were given. I think MACE, along with OCCF, has two of the worst managements of all the companies I currently own. I'd be happy to part with both if the price were right.

Up 0.3 percent today. I don't know what I was thinking. I bought 500 shares of RACK this morning. I'm not even sure why. It's not the sort of company that I would normally purchase. The stock gaped down 35 percent and I just figured it would bounce. It didn't, and I am now $700 down on this position. I guess I will hold until the company releases earnings in a couple of weeks. I need to avoid being impulsive with my trades, it has gotten me into trouble before and I need to cut it out. In better news, I picked up 1200 shares of CPE this morning and the stock proceeded to rally higher, so at least on paper that offset the RACK blunder.

It was a good day for Stockcoach, with my portfolio gaining 1.0 percent thanks to lots of nice moves in many of my favorite positions (TAIT, BRNC, TRNT, etc.). I picked up some shares of CATS last week. The stock is trading close to book value and has lots of cash on hand and no debt. The lone analyst that follows the stock increased earnings estimates last month (always a good sign). The only drawback is that the company's CEO appears to be rather overpaid given the size of the company. At any rate, I still like the stock. The price has moved up a bit in the last few days so I'll be looking to add to my position on any dips (with INTC reporting not so great numbers after the close, that means I might get my chance tomorrow).

It was not a particularly memorable week for the portfolio. The portfolio gained $7,431 (0.9 percent), not bad in its own right, but vastly inferior compared to the Russell 2000 (up 2.4 percent), and the seemingly indefatigable NASDAQ (up 2.8 percent).

I sold 1000 of my BELM shares. I will hold on to the rest with the aim of selling them in the mid-8 range.

The market was on fire today but my portfolio still managed to lose groud, falling by about 0.1 percent. When I checked my Ameritrade account after the close, it showed that I was up over $2000, but when I entered the new portfolio value in my spreadsheet, I was actually down for the day. This seems to happen often with Ameritrade. I wish they would fix that software glitch. Not that Ameritrade is any better than Scottrade, which is the other broker that I use. I am now getting trade alerts for things that happened in ..... December. Very helpful.

Up 0.3 percent today. As I mentioned in an earlier post, I will try to do more short-term trading this year, which I hope will boost my portfolio's returns. With that in mind, I picked up 2000 shares of BELM. BELM has just broken out from a 30 percent orthogonal fibonacci channel, the stochastics look great, and the stock chart is showing the famous "dog with long tail holding a cup of coffee" pattern, which I know all you technical traders love to see. Oh yeah, (not that it's important) the company guided up revenue estimates yesterday and who knows, maybe that will also help.

Up 0.5 percent today. Kewaunee Scientific Corp (KEQU) makes the furniture you would find in most science labs. While domestic sales have been weak, sales to Asia have been growing nicely, and the company's profit more than doubled last quarter compared to the previous year. To quote the company's CEO: "Regarding our current fiscal year, we expect the last six months to be profitable and much improved over the same period last year." Despite this improved performance, the stock is still trading below tangible book value. I think there is about $1 of downside with this stock, and perhaps as much as $5 upside.

Disclosure: I am long 2000 shares of KEQU.

Up less than 0.1 percent today. Back in May I rolled the dice on TORM and lost big time as the stock proceeded to decline 50 percent over the next couple of months. I held on, and even added more shares below $2. It paid off, after bottoming at around $1.50, the stock has rallied to $3.40. I've been selling shares along the way and today I completely closed the position. In the end, it turned out to be a profitable trade (total profits of about $4,600). The stock has been moving up lately because the company announced a new contract. The details of the contract have not been disclosed, although I am sure it will help the company's bottom line. However, I still decided to sell because historically the company has had trouble generating big profits, and now that the stock is about 25 percent above book value, I think there are better and safer places to park my money. To my fellow tormites, I wish you well. I still think the stock could easily run above $4, but I'm just too risk averse to join you for the ride.

Richard from Move the Markets posted the following comment about my earlier post:

I guess, in short, I understand trading based on news, and I (sort-of) understand value investing, but I don't understand how one would go about doing short-term trading on fundamentals.

The markets are pricing in everyone's best guess about what the fundamentals will look like in the future, right? So, whether you trade fundamentals or technicals, you've still got that nagging problem of being unable to predict the future. Isn't there still a bit of black magic in figuring out what multiple you'd be willing to pay (especially if the company is actually losing money)? More of an art than a science, still, right?

I used the little search bar on your blog to search for "fundamental analysis" and got no hits other than this post. Do you have an entry that describes the way you trade fundamentals?

Let me respond to Richard by saying this:

I guess I am not saying that technical analysis is wrong by definition, but rather, those who practise technical analysis tend to rely on patterns they learned from books and blogs, the efficacy of which are based on folklore and not rigorous testing.

Short term trading based on fundamentals is largely news based. Long-term trading based on fundamentals requires screening for various criteria that tend to work well. This post mentions some.

I guess there is also the issue of what distinguishes a trader from an investor. I tend to distinguish trading and investing in the following way: The value of a stock in an efficient market should equal the present value of cash flows that shareholders will receive, typically in the form of dividends. If you are buying a stock for those cash flows, you are an investor. If you are buying the stock for capital gains, you are a trader. In practise, this means that anyone who holds a stock for less than 5 years is largely a trader. So obviously my definition of trading encompasses a much longer time frame than what others would regard as trading.

Is trading based on fundamentals more of an art than a science? Yes, in many ways it is, but I would argue that it is more of a science than technical analysis simply because there is a lot of good empirical work that demonstrates the efficacy of various trading rules based on fundamentals (buying value stocks, stocks with insider buying, stocks that recently beat earnings estimates, etc.). My own reading of the literature on technical analysis is that almost all patterns tested are unprofitable after realistic assumptions are made about slippage and commissions. It's not a hard and fast rule, however. Andrew Lo at MIT has done lots of good research on TA. Some of the patterns he tested are marginally profitable, but again, it would be difficult for a person to make a living by trading them.

The only possible big exception is momentum (buying past 12 month winners and holding them for 3 to 6 months). The momentum effect, from about the mid 1930's until 2000, was absolutely huge, much much bigger than the boost one got from buying value stocks or small caps. The numbers simply are staggering by how much past winners outperformed past losers. However, the momentum effect is long term in nature. You can't daytrade off it since it requires a holding period of about 6 months. Futhermore, more than half of momentum profits are from the short side, so in practise it may be difficult to fully realize them. Moreover, momentum profits tend to last longer for low volume stocks, contrary to what most traders believe. However, this illiquidity also makes it more difficult to trade them.

Let me also say that I don't think trading on fundamentals is the only way to go for short-term trading. Much of the trading done on Wall Street is basically liquidity provision. That's what market making is all about. Market makers tend not to take directional bets; they just sell when others are desperate to buy and buy when others are desperate to sell. But in general they are keen to balance their books as quickly as possible. There is a parallel here between what they do and the sort of value investing I do with illiquid stocks.

There is also a fair bit of money to be had from scalping off institutional money flows. People will argue about the benefits of TA if you're a scalper. My own sense is that it is of limited help, but I am sure others will disagree.

So I put up my reader poll on Friday and so far only 25 percent of you have gotten the correct answer, which of course is "fundamental analysis". I know that the rest of you chartists think you can actually develop profitable trading systems based on the rantings 12th century Italian mathematicians and other such nonsense, but let me assure you, time will prove you wrong. Technical analysis is pseudo science. Good science backs up everything with empirical data, not with anecdotes and assertions. Have you ever had the misfortune of opening up one of those technical trading books? Eek! Assertion after assertion. Where's the proof? Where's the evidence? There is none, because when one tries to take the assertions of technical analysis to the data, the data typically win. I've said it before, and I'll say it again, technical analysis is just like astrology, but a lot less interesting.

I always enjoy the feeling that one has when a new year begins. One can put past mistakes behind them and start fresh. As far as investing is concerned, regardless of how well or how poorly you did the previous year, the counter gets set back to zero and everyone goes back to the same starting line. Of course, that warm and fuzzy feeling of knowing you have a perfect decision making record for the new year usually lasts until about 9:31am of the first trading day, but hey, enjoy it while it lasts.

Anyway, the first week of 2007 was a slow one for my portfolio. After deducting the $50,000 dividend that I paid myself earlier this week, the portfolio was up $2,114 (0.3 percent). This return was better than the Russell 2000 or the S&P 500, but not as good as the NASDAQ.

Despite the dividend, I am still sitting on a large cash position of about $200,000. I've been trying to bring that down by buying some new stocks, but so far most of the limit orders that I have in place have not been filled. Unfortunately, that's one of the problems with microcaps. If you want to start or exit a position, you can only do it very slowly since most of the time the liquidity simply isn't there to move large amounts of stock. In the microcap world, patience is indeed a virtue.