Why I Sold National Oilwell Varco and Bought WMS Industries 10 comments
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I continue to work my strategy even in the face of this volatile market that was screaming higher at the close. On Tuesday, the Dow closed at 9,065.12, up 889.35, and the Nasdaq moved up 143.57 to close at 1,649.47. The S&P also participated, moving up 91.59 to close at 940.51. I cannot guess when the market will be moving higher or correcting sharply.
All of the stocks I own I consider "great companies." But they do not always perform as I would like (move higher). I have changed my strategy when down to the minimum of five positions, as I have written about previously. I continue to try to have a minimum of five holdings, but I can tolerate a 16% loss, and after they hit that loss and are sold, I replace them with a smaller position. I actually now determine the average size of my remaining holdings and buy a new position at 1/2 that size as measured by the cost of the purchase - not the number of shares.
On Tuesday, before the last hour climb in the Dow, I sold my 210 shares of National Oilwell Varco (NOV) at $23.55/share. This stock has been traveling lower in synch with the price of oil. And no matter how pretty the numbers on this company, the price has been relentlessly declining since my purchase. These shares were purchased literally just days ago on 10/17/08, at a cost of $28.83/share. Thus I had a loss of $5.28 or 18.3% since purchase.
No way around this, it had passed my 16% limit for a loss and was sold. Ironically, this stock rebounded later on Tuesday to close at $25.49, up $1.99 or 8.47% today - but I hate that analysis. It is far more important to make decisions in the market than to kick yourself about decisions that might have worked out some other way.
Back to four positions in my trading portfolio, I had a new 'permission slip' to be buying a stock. However, this purchase would necessarily be smaller, representing 1/2 of the average size of my remaining four holdings.
I went to the list of top % gainers and identified WMS Industries (WMS) which seemed to fit my own requirements and purchased 96 shares at $20.04. Even though I missed the rise in NOV, I now participated in WMS which closed today at $22.44, up $4.34 or 23.98% on the day. My own gain on WMS (a paper profit that can disappear as fast as it appeared), amounted to $2.40/share, or 12% since purchase. (Most of this gain could disappear as WMS was trading at $20.56, down $1.88 or 8.38% in after-hours trading!)
Let's take a little closer look at WMS.
First of all, what does this company do?
According to the Yahoo "Profile" on WMS:
[The company] engages in the design, manufacture, and distribution of gaming machines and video lottery terminals [VLTs] for customers in gaming jurisdictions worldwide. The company's products consist of video gaming machines, mechanical reel gaming machines, and video poker gaming machines. It also sells spare parts, conversion kits, amusement-with-prize gaming machines, and used gaming machines, as well as equipment manufactured under original equipment manufacturing agreements to casinos and other licensed gaming machine operators.
And the latest quarter?
On Tuesday, after the close of trading, WMS reported 1st quarter 2009 results. Earnings came in at $15.7 million or $0.27/share, up from $11.1 million or $0.19/share the prior year. This result exceeded expectations from analysts polled by Thomson Reuters who were looking for earnings of $0.25/share. Revenue came in at $151.4 million, up 14% from last year's $132.5 million result. Again, this revenue figure exceeded expectations by analysts. The company reaffirmed fiscal 2009 guidance.
Longer-term results?
Reviewing the Morningstar.com "5-Yr Restated" financials, we can see the steady revenue growth, the steady earnings growth, and the relatively stable outstanding shares. Free cash is solidly positive and the balance sheet is strong.
And what about the chart?
Looking at the "point & figure" chart on WMS from StockCharts.com, we can see what looks like a rather dismal chart to me! The stock failed to move higher in September, 2008, at the $36 level and has been trading under the 'resistance line' since. I would like to see this stock break through the $27 level to reaffirm the change in price momentum.
click to enlarge
Summary:
The market has been tossing me wildly like a ship in the midst of a storm. I am learning to adapt - giving my last five holdings a larger leash before selling, and I am reducing the size of my replacement positions without changing my underlying strategy. I hope this works.
I sold my National Oilwell Varco stock and replaced that fifth position with WMS Industries, a gambling machine stock. I did so because of a strong quarter which exceeded expectations on revenue and earnings, a solid Morningstar.com report, and reasonable valuation. The chart however looks awful - I hope this approach works out!
Disclosure: The author owns WMS.
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This article has 10 comments:
I like National Oilwell Varco (NOV). If you are willing to ride it down as well as up along with the price of oil, it may be a winner. I sold because it exceeded my own loss tolerance. What are your thoughts?
you seem too much focused on the short-term gains and you sell at a loss at the same time. If you compare the gambling industry with the energy business and look in the long run, you will be much better off with NOV.
When people run out of money they stop gambling, but they still drive their car to work...
Thank you for your thoughts. Gambling is also cyclical but a stock like NOV travels with the price of oil. I do like NOV's numbers though, and with the great results from XOM today, the stock has popped higher.
My strategy involves minimizing losses, taking small short-term gains, and trying to shift into and out of equities depending on the performance of my underlying holdings. The entries on Seeking Alpha are informative but you might want to visit my blog over at Stock Picks Bob's Advice for more information.
Again, thank you for taking the time to write and think about what I have written.
Varco. Only sold small parts but will always hold some. For me that's about 200 shares. I always have held some energy since early 1970's.
After all, oil was $140 two months ago. Even if it drops to $50, that is not sustainable, and it is more reasonable to see oil settle, even in a recession/depression, at the 70-85 range.
I agree, it is hard to take the hits in NOV from the prices which held steady for a long time at $70 (and even then had a great PEG ratio).
However when you get into the low twenties, is it likely to go down to $10 and stay? Unlikely,but possible.
My choice is to hold my shares.The value is there.
Unfortunately, my decision to sell NOV was based on my own idiosyncratic strategy of limiting losses and moving to other investments when such losses develop. It was not an assessment that there was no value in Varco, nor was it a judgment on the relative worthiness of WMS vis a vis Varco. It was simply my own approach, that I am continually working on refining, of trying to avoid large losses in any investment, maintain a minimum of positions at all times, and replace companies that incur losses when at or below that minimum.
I also do not become emotionally involved with any holding, I do not try to think real hard about the story behind any stock beyond the fundamentals and my own limited ability to predict future trends, and sell stocks based on price movements rather than anything else.
I work hard at this entire process. I am trying to build an investment 'machine' of some type, that will assist me in knowing when to buy, how much to buy, when to sell, and when to 'sit on my hands'. In the same fashion, I am trying to develop a portfolio strategy that will automatically be shifting me into and out of equities depending on the market action as reflected in the action of my own holdings.
This is a tall order for an amateur like me. So the microscopic viewing of this trade may seem irrational or even difficult to comprehend. Like a part of a watch seen outside of the movement, the entire process may be hard to assess without understanding the rest of the story, like Paul Harvey would say.
I hope you all take the time to visit my blog, read some of my entries, and see if it makes sense. I am not sure that this process will work, but I have an ambitious goal to develop something of significance in my work that I do.
I have been in oil for some time, love the dividends as I am retired and focused on income; growth is secondary.
I suspect the VIX demonstrates the severe volatility in the market with multi-hundred point swings on a daily basis.
So far I haven't done that badly with WMS and NOV was hit pretty hard today closing at $29.92, down 9.11%. (still way above my own sale point.)
WMS closed at $24.81, down $1.70 or 6.41% so nothing to write about there either. But this is also well above my own purchase of $20.04.
So overall it was a wash. Lucky enough so far I guess.
But your comments are noted and I appreciate your insight on the VIX and avoiding getting whipsawed in this volatile trading environment.
Bob