To be a quality investor, a quality strategy must be put into place. This is a follow up to my prior article: Portfolio Strategy Including the Two Best Stocks in the World, which is mainly pertaining to keeping a balanced portfolio and what stocks and ideas can help to have a positive balance between having dividends, short term trades, cash, diversification, and future expectations.
This article is more concerned with how to create a strategy to assist in the investment process; to create a valuable portfolio while being less focused on balance, but taking advantage of opportunities and trying to minimize risk. Here are some of the strategies that I find useful when trying to create a high return portfolio.
- The most important thing is to do research which includes reading the reports, reading the press releases to stay up to date, asking management questions, speaking with other investors, and researching competitors' fundamentals as well: How much cash do they have, what is their current valuation and why, what is their growth, what are their margins, do they exceed expectations, is the balance sheet strong, and other considerations in determining a company's value and upside.
- Invest in increments - on some stocks I will plan to buy in two phases and others I will plan to buy in five phases, depending on how much I think it could drop and the risk of the investment.
- Sell in increments - same strategy applies to selling as it does to buying.
- Set a price target in which buying and selling will occur and if it does not hit that target, then forget about it and move onto the next investment unless some information changes.
- Continually be ready to adjust, not just for the sake of getting in or out of a stock, but based on the overall market, any major changes in the sector, or with the company itself - it is easy to become too emotional, but that is an easy way to lose money.
- Learn from mistakes - If money was lost on an investment, figure out why and let it be a learning experience instead of a continued investment detriment.
- Always have cash available - No one can time the market perfectly and opportunities are going to present themselves and it is a way to alleviate risk.
- Diversification - Regardless of how much it seems as if a stock is the best in the world, other stocks need to accompany those because sometimes an investor can just be wrong, even with extensive research. It helps with risk, but can be an advantage on the gain side if one stock does better than the others.
- Stick to original investment thesis - When I deviate from my plans and strategy, 90% of the time, I hurt myself and lose money that I would have made by sticking to the plan. Which also means discipline. If a stock is bought, especially for the short term, a more specific plan needs to be in place. For example, if a stock has dropped to a desired level, but it is bought for a pop based on an expected catalyst, sell when that catalyst occurs. Adjustments are needed at times as stocks do not always behave as expected and positive and negative news can occur.
Every investor is going to have different variations of how they invest and what they invest in, but a solid strategy is necessary for the best possible returns. Everything does not work out perfectly so minor adjustments may need to be made, but having an initial plan, backup plan, and expectations of what can and cannot occur, will help put an investor in the right direction for having success.
Below, what I intend to do is go into the stocks I mentioned in my previous article and my current strategy on those, however, I am going to discuss my thoughts and strategy on other stocks I intend on investing in as well. I am going to include an analysis of why I believe these particular stocks are quality investments based on growth, earnings, estimates, risk, current valuation, and future catalysts. Both Apple and China MediaExpress are my personal two must-own stocks based on exceeding metrics.
- Apple (AAPL) - Apple continues to blow out numbers and easily beat estimates (see latest earnings call transcript here). They have now beat estimates for 32 straight quarters. This recent quarter beat estimates by about 20%, but it was unfortunately overshadowed by the health of the CEO. In my recent article on AAPL, I highlighted many of the positives of AAPL. Some being:
- Revenue has grown an average of 40% year-over-year since 2003
- Over the last four quarters, Apple has beat estimates by an average of 20.3%
- 2011 EPS of $22.72 based on average estimate
- Forward P/E of 14.79 based on estimates
- Over $50 million in cash and cash equivalents
- Major expansion in China
- Verizon (VZ) carrying the iPhone 12.29
There is a lot more in regards to Apple and can be viewed in the article in the introduction, and this article as well. Also, using the average estimate beat (stated above) over the last year of 20.3%, and full year EPS based on the estimate of $22.72, it would equate to an EPS of $27.33 for the 2011 full year. That would equate to a forward P/E of 12.29, which is about where Microsoft (MSFT) is, though MSFT has been growing much less than 10% over the last couple of years. Even using the estimate of an EPS of $22.72, that would equate to a year-over-year EPS growth of about 50%, again. Does this look like a company that is going to all of a sudden stop growing? While their revenue may slow down at some point over the next five years, it is easy to see why it will continue to be very significant.
Apple is a stock that can be bought right at this level and my plan would be to sell a small amount at $500, a larger increment at $750, and hold the rest for a much higher gain.
2. China MediaExpress (OTC:CCME) - China MediaExpress has continued to show why they are above the rest when it comes to the U.S. listed China small caps and why they should be trading with the likes of Baidu (BIDU) and Focus Media (FMCN). I first outlined many of the qualities and reasons to own CCME in my article, Portfolio Strategy Including the Two Best Stocks in the World. In a second article, Is China MediaExpress a Top Tier Company? You Decide, I went over some other reasons other than their fundamentals to show why there is no reason to question China MediaExpress as a high quality company and what puts them ahead of the rest.
- Forward P/E of 5
- Top four auditor
- Months of due diligence by Starr International and Global Hunters Securities
- Largest position for one of the top investors in the world, Mike Koza
- #1 in Forbes Up and Comers
- At the top in the Investor Business Daily's Top World Stocks
- Northland Securities top pick with a $32 price target
- Insider buying
- Strong management
- China advertising growth
- Contracts with major companies such as Apple, Nike (NKE), and Pepsi (PEP)
- New advertising platforms
- Income growth of about 150% expected for full year 2010
- $170 million in cash with little debt
That is a brief description of some of the positives and both articles go far more in-depth into the quality of the company and where the stock should be trading at. With the China space, there can always be unexpected volatile moves, but with CCME, anything at this level is a great opportunity, and as I have a good amount allocated to my portfolio, I will continue to buy if it drops. There is no reason that CCME should not be trading at least at $30 by year end, which represents about a 50% gain, but the upside is even much more than that. I will not think about selling any until $30.
3. American Capital Agency Corp. (AGNC) - The most obvious thing in regards to AGNC is that they currently yield about 20%. Recently, they have had several share offerings and while many investors see it as a negative, I believe it shows the strength of management. By doing the share offering, it is allowing for AGNC to invest their capital wisely while rates continue to be low, which shows their commitment to the long term success of the company. While they may not hit my initial goal of $45, I would not be surprised for them to come close to $40 within the next two years, which would equate to an average yearly gain of about 40% as long as the dividend stays unaffected.
Due to the recent offerings and possible expectations of more, it has helped keep the price below $30. If it gets to $25, I will add more and sell some of my position until it reaches at least $34.
4. World Wrestling Entertainment (WWE) - This company just recently had a very poor outlook, and it would be hard to get behind WWE as their growth has been stagnant and it looks as if they will miss estimates by about 40%. That does not bode well for the short term nor does their recent history bode well for the long term. They have shown over the last couple of decades that they can produce, but at this point it looks as if it may be a risk to get behind the company. Major changes need to occur.
This is a great example in which an initial strategy needed to be changed. I was initially planning on buying once it got to $12, but due to actual negativity within the company, I adjusted my target. A current investor of WWE, with the current news, has the opportunity to adjust as well instead of being too attached, which can represent higher losses while a better opportunity is out there.
I still think the dividend is safe for the next couple of years, but I will only invest in WWE if it falls to $9 because I still like the dividend and that would give it a yield of almost 16% with limited downside, even if growth stays even . My initial estimate of $20 can only occur with some major changes, but I now would expect $15 - $16 in the next two years at best without changes.
5. Proshares Ultra Silver (AGQ) - Both silver and gold have had tremendous runs, but they have recently had a nice healthy pullback. With the continued slow growth of the economy and the dollar, after some more of a downturn they should still be on track for more gains.
I like silver over gold due to the upside, but it definitely carries higher volatility and risk as it has jumped significantly over the last year. I like the (2X) play because I like the upside of silver and I am willing to take the risk. It still looks as if it is going to continue on a downward trend more than I initially expected. My plan is to place a buy at $115, then at $110, then $100, and if it gets below $90 that will be my final buy - all with light positions, making my max at 12% of my overall portfolio. It will depend on how low it goes, but if it stays above $100, my first planned sell will be at $120, then $150, then $170, and hold a small amount for a small run up to $200. If that does not work out and it does not go above $120, I will sell if it reaches $100.
6. Biostar Pharmaceuticals (BSPM) - This is definitely an interesting company as they sell an SFDA approved OTC Hepatitis B drug in China. It is very significant because 10% of the Chinese population has Hepatitis B. They are continuing to grow and show why they are a leader. Just recently, the CEO of Biostar Pharmaceuticals accompanied the Chinese President, Hu Jintao, as a representative of medicine on Mr. Jintao's visit to the United States.
- Expected Revenue of $80 million for full year 2010, which represents growth of 50% year-over-year
- Expected net income of $18 million for full year 2010, which represents growth of 71.42% year-over-year
- They plan on upgrading to a top four auditor in 2011, as it was stated in their most recent conference call
- Based on 2010 earnings, forward P/E is 3.78 based on price of $2.43
- Based on 2011 earnings, forward P/E of 2.80 based on price of $2.43
- $16 million in cash and no debt
- Treatment is about $2.50 per day and it is much less expensive than prescription medication
- This presentation gives a good representation of the company, including the stated effectiveness of their drug with an efficacy rate of 93.1%
They are very undervalued and have actually had a lot of positive press releases over the last few months, but the stock continues to trade downwards as there is continued fear in the China small cap space. They are making a big impression in rural areas as well and have a network of close to 10,000 in the rural areas. They continue to expand. While they do have competition, the market for Hepatitis B in China is large and Biostar has proven that they are going to continue to grow and take positive steps forward. Q4 2010 is expected to earn about $28 million in revenue, which is about 65% growth compared to 2009 Q4 and net income is expected to be about $8 million. As long as they hit guidance, it should be a great year for BSPM as the downside is now limited.
I have been invested in BSPM since around April 2010, and I have expected great things, but uncertainty about competition has held me from adding to my position. Recently, going over the numbers, seeing positive actions by management, and speaking with other investors, the price is just coming down too low. One investor I know who really dislikes Chinese pharmaceuticals has even bought at recent levels.
I am going to invest in two increments - below $2.40, which it is currently at, and below $2.30 - or if it does not go below $2.30, I will buy at $2.45. My first planned sell will be 1/3rd of my position at $3, as that would provide upside of nearly 25% and I think that can happen quickly as it has bounced back and forth around $3. Then I will hold until $3.50 and hold a longer position to sell above $4. I think as long as BSPM hits guidance and sets itself up to surpass expectations in 2011 (and with a new auditor coming), I see $4 as a real possibility by the end of 2011, which would provide upside of about 70%. My other thought is to sell a portion of my position just after 2010 year end results, regardless of the stock price, which is what I am leaning towards. Also, if they do not meet 2010 full year expectations as they have re-iterated they will several times, I will sell out of the majority of my position.
7. Direxion Financial Bull 3X (FAS) - This is my favorite ETF as it can provide great upside and I have had a lot of success trading it as well. Here is a recent article that I wrote in regards to these high-risk ETFs and others. These (3X) and (2X) ETFs are not for everyone as volatility is high, but in sectors that I like and I can get in on a good price, I have no problem in investing in this high risk category.
Many of the banks are still trying to recover and make large profits like they did in the past. It is still going to take time for them to fully recover while companies continue to focus on the core of the business. Long term, I like the banks. Short term, it is much tougher to say. The ETF provides diversity with in the sector, so if a couple banks falter or do not do well, it does not mean others will not.
I definitely will not jump at this stock right away and will most definitely wait for a pullback if one comes. My first planned buy is to get in at $25 and then again at $22 if it goes lower. If given the chance to get in, my plan would be to sell at $30 and then $35, and then try to get back in on another pullback if one occurs.
8. Visa (V) - This is my favorite short term play as I believe it is a very strong company, which also should limit my short term downside as well. Visa should do well long-term, but I have enjoyed playing this stock short-term as it has been highly predictable as mentioned in my article. Since writing the article, it seemed to hover above $75, not giving me the opportunity to get in at my desired price. So I waited, and then there was an over-reaction based on the mention of fees getting reduced. It then fell to about $65 and went up to about $72, which represented a nice 11% gain in two weeks. Then, just the other day, it dropped to about $68 and popped back up to above $71, which represented a nice gain of 4..4% in one day. The trading price has seemed to drop a little bit from where I stated in the article, but it continues to follow a nice pattern to follow and make quick gains.
I will continue to trade Visa as it has been the easiest for me. I will buy if it gets below $70 and continue to buy as it goes lower. If it drops to $65, I will sell at $70. If it stays above $69, I will sell above $73. With Visa, it is easy to take 4%-7% profits on the way up and just buy as it goes lower. It is a quality company and is just stuck in a trading pattern over the last 9 months or so.
9. Ford (F) - Ford has seen a tremendous run from its lows and has gone up about 900% since March 2009, when it was pretty much left for dead, but it has rose from the dead to continually beat estimates. In this recent article by Mark Riddix, he lays an outline of how the stock can double in the next couple of years. Does Ford really deserve a P/E of less than 9? They seem to be doing quite well and should only improve as the economy does as well.
While their revenue growth is nothing to write home about as their revenue is expected to grow about 5%, their income continues to rise. Also, what is great for upward momentum is that they have crushed estimates by an average of 52.53% over the last four quarters. If that can continue or even half of that can continue, it should help propel the stock towards a multiple of 15. Also, their earnings per share is rising in a big way as EPS for full year 2009 was $0.86 fully diluted, and already through the first 9 months of 2010 EPS is $1.61 fully diluted, and full year is expected to be about $2.07, but should surpass that based on previous nine months. It is extremely undervalued as they continue to easily surpass expectations. So their EPS growth year over year will be about 150%.
|Earnings History||Dec 09||Mar 10||Jun 10||Sep 10|
Investing in Ford now would not necessarily be a bad investment, but I would rather wait for a small pullback. I will wait until $16 to first buy in and then $15. If I see that the pull back does not occur, I will buy up to $18.50. Ford is a stock I can see going to $30 in a year with continued momentum, and would sell a portion at $25 and the remainder above $30.
10. Mad Catz Interactive Inc (MCZ) - I like MCZ as more of a momentum play. They have seemed to be very inconsistent over the years, with some years up and some years down. But in their most recent quarter, which represented Q2 2011 for them, they had record results.
- Net sales increased about 72% over the prior year's quarter
- Net income was $1.1 million compared to a loss of $1 million in Q2 2010
- EPS of $.02 compared to net loss of $.02
So, they had a very good quarter and it propelled the stock from about $.45 to $1.25 within a matter of a couple of months. It then fell from $1.25 to around $.85, which it is now trading at. So this is very volatile as well as there was no news to bring the price down. Q3 2011 is expected to be very good as the company has high expectations and if they meet or exceed those expectations, there is no reason that the stock will not trade back above $1.00; but if they do not, it could easily fall back below $.50.
For the short term, I like the upside. My plan would to buy below $.90 over the next two weeks and sell within a couple of days after their next earnings release. I am expecting it to be good based on the previous quarter and this upcoming quarter is based on holiday sales as well. Initially, I thought about buying it, but saw that it went above $1.15 and put it off instead of following the stock upwards. My initial plan was to get in at $1.00, but due to my patience, it has now given me a better opportunity.
Those are some of the stocks that I have a game plan for. There are others that I am considering, or that are out of my range currently. It is always a good idea to follow a large group of stocks which may look like a quality investment and figure out a strategy that makes sense. Constant thought is always needed - finding trends, comparing companies, the overall market, the different sectors, why one investment is better than the other, etc.
A lot of it is common sense after all of the research, decision making, and strategies. Basically, does it make sense? I usually try to make the investment not seem like it is rocket science. There are so many quality stocks out there and strategies in which an investor can do very well, but when an investor complicates it or does not have a set strategy, investing can become a little chaotic. As I mentioned before, when I follow my knowledge and strategy, I do very well and when I do not, it gets me completely out of rhythm. Obviously, many investors are going to have some different approaches, but setting up a proper strategy and plan, it will give an investor a better opportunity to succeed.