Since 1996, I have tripled my money every three years or so, on average. In 2009, I started sharing my Wall Street expertise with Main Street investors via my popular "Poised To Triple" series on Seeking Alpha. In 2013, I founded PTT Research to deliver investment wisdom and my very best picks to a large and growing subscriber base.
In this article, I will provide insight into this week's market correction, along with updates on my favorite picks to triple.
For starters, investors should understand that market corrections don't have to have a negative impact on their investment returns. In fact, some of my best years included 2000 (54.2%) and 2001 (49.8%). In those years, the NASDAQ fell 39.3% and 21.1%, respectively. I also eked out a 5.6% profit in 2008. That year, the NASDAQ fell 40.5%. The key is knowing when the market is getting too frothy and acting accordingly.
At present, with the sharp decline in stocks this week, it's best to review the lessons provided in my Stock Market Yellow Alert from November 27. My thoughts and opinions remain intact. Specifically:
"…a pullback appears due sometime in the next three months. It could be now or it could be later. FYI, in addition to the information I have already provided, many of my risk/reward charts are topping out. Accordingly, I am selling most of my secondary (non-favorite) investments. I am also making sure that my remaining positions are properly sized, according to my publicly-available Methodology."
I went on to say:
"Barring a market correction, I expect all of my stock to be up (after all, I believe they are all 'poised to triple'). In fact, even if the market falls, these positions could rise based on business momentum. Thus, at times like these, I hold my favorite stocks and simultaneously place heavy bets against the S&P 500 and the Russell 2000."
Since that time, the S&P has fallen 1% and the Russell 2000 has gone nowhere. Meanwhile, my two favorite Core picks - Glu Mobile (GLUU) and Attunity (ATTU) - have gained 4.6% and 31.9% respectively, despite this week's market rout. With one exception, all of my other active picks have also risen. Based on my Methodology, which provides guidance on how much to invest in each type of stock, our model portfolio is up 15% since the "Yellow Alert".
Investors can also read more about our model portfolio via my Seeking Alpha article, entitled Easy Moves To Double Your Money In 12 Months. The opinions I expressed in that article also remain intact. Specifically, the stock market remains at an elevated level, representing high risk. With many of our picks having tripled, investors should ensure that our Speculative plays only represent 10% of our portfolios (consistent with the preachings of Jim Cramer).
The Yellow Alert also recommended selling all of our holdings in SPY (and, by proxy, any other market-basket holdings). That move would leave our model portfolio with 50% in stocks and 50% in cash.
Of course, at times like this, it is critical to pay extra attention to our stock holdings. As promised, here's an update on some of our active picks:
Attunity: A few weeks ago, Craig-Hallum's Chad Bennett initiated coverage on ATTU, with a BUY rating and a $15 target. They said,
"Underfollowed and largely undiscovered, ATTU provides a key technology that addresses a major bottleneck for companies using Big Data solutions: facilitating the transfer and movement of data to support real-time information availability. Big Data is a booming $10B+ market growing at ~30% (per IDC estimates), but most organizations buy the hardware and then rely on expensive and inefficient data analysts to manually input the data. ATTU provides an automated software solution."
The company will report Q4 earnings on Thursday. I expect positive results.
Glu Mobile: Craig-Hallum upgraded GLUU to a Buy with a $5.00 target. A few days later, Roth Capital resumed coverage of GLUU with a $5 target. I personally believe $5 is too low by a wide margin. Nonetheless, our theses are aligned. With a huge short position outstanding, I believe that strong earnings will spark a short squeeze, getting us closer to $5 in short order (about 60% above our initial price in just a couple months).
The Roth initiation piece said,
"After recently traveling with management, we see a lot to like in 2014 and believe investors will be rewarded…Deer Hunter 2014 continues to perform. We are raising our Q4 estimates slightly, but see further upside from the game."
They also noted that Eternity Warriors 3 is off to a good start, especially in several Asian countries. Frontline Commando 2 and Motocross Meltdown are seen as other hits to come in 2014.
Don't underestimate the value of being popular in Asia. South Korea has the world's highest penetration of smartphones and China has the largest installed base, having recently passed the U.S. Growth there is still off the charts because China has four times as many people as the U.S., which means that its smartphone penetration is only 25% of what we have here. Lots of high growth still to come.
In other news, Pandora's active listeners grew so sharply in December that the news sparked a big rally in the shares. Wall Street analysts are saying that new listeners likely joined Pandora in the days following Christmas, as gift-receivers activated new devices. This dynamic (new phone activations) should also benefit GLUU.
Simultaneously, Dave Roberts, the Chief Executive of Electronic Arts' PopCap Games division, is retiring amid rumors that EA's $700 million acquisition is not adjusting well to the Freemium game model (in which GLUU is thriving). EA wants to be a leader in this segment, and it looks like they'll need a new plan to get there. I think GLUU and its monetization platform would make a perfect solution to their problem.
Pixelworks (PXLW): In my Yellow Alert, I stated that PXLW hadn't appreciated enough to justify trimming the position, despite my stock market concerns. That proved to be the right move. PXLW rose an incredible 70% in 14 trading days leading up to January 6th's 52-week high of $6.20. With the recent good news and excitement, the stock has gained a lot of visibility of late. That being said, this week's move near $6.50 caused PXLW to hit the upper end of my risk/reward chart. Clearly, this stock is not completely unknown anymore (a requirement for being a Great Find), and I am changing PXLW's classification to "Wait Time".
Of course, I still like the company's positioning and future! Indeed, my "triple" price target remains $9.72. However, it has run very far very fast. Thus, I am wary that the shares could correct or move sideways for a bit. Of course, I'll keep monitoring it for fundamental progress. When we see a sustainable-looking acceleration in the business, I'll look to call it a "Gold Mine". Stay tuned.
QAD Inc. (QADA): Earlier this month, QAD participated at the Sidoti Semi-Annual Microcap Conference and conducted one-on-one meetings with investors. The company also attracted a positive report from one of its Wall Street analysts. With a week to go before the end of its quarter, I consider these to be bullish signs.
Conclusions: In closing, I am holding tight to my top picks with the proper sizing, according to my Methodology. To protect myself against market declines, I have been short SPY (the S&P 500 ETF) and long TWM (which rises sharply when small cap stocks fall). Both positions generated great profits last week and will continue to do so if the market continues to swoon.
The lesson here is simple - If I like a stock, I own the stock. If I don't like the market, I bet against the market, not my stocks. The down draft we're seeing in the market is specific to the market, not our picks. I warned about this in my Yellow Alert. Thus, when an investor gets worried about a market correction, it is often best to hold one's favorite stocks and make bets against the market.