In 2008, I became a Seeking Alpha contributor to introduce stocks with a low-risk/ high reward profile. In late-2010, I shifted that focus to present stocks that have the potential to triple. Both strategies have proven very successful.
While searching for winning picks, a lot goes on behind the scenes. This is the first installment in a regular series, chronicling selected events the Pipeline Data team encounters, while analyzing companies and seeking triples.
Today, we will discuss how to optimize profits on our highlighted names. We will also discuss some stocks that we have investigated over the past month.
We get several emails asking us how to maximize profits on our picks. We get many more that curse us for recommending a stock that we stopped highlighting long ago. Allow me to resolve both issues simultaneously.
First of all, our "Stocks to Triple" are neither day trades nor long-term holdings. Rather, they are opportunistic. This is based on one of two criteria:
1) The shares are so cheap that it will pay an investor to wait. This is also known as "bottom fishing". BroadVision (BVSN) was a perfect example of this. When we first highlighted BVSN, the shares were cheap. We felt the risk was low relative to the potential reward. That was two years ago…and it took that long for the shares to take off. When they did, it lived up to our moniker and tripled (at its peak it was actually a 7-bagger).
For the record, we didn't take the full ride. Tripling turned BVSN's risk/reward profile upside down. Besides, a 200% gain was more than sufficient for our tastes. We currently believe the shares are now destined to revisit the teens due to fundamental factors (See "Broadvision And Jive Are Set For Another Quarterly Clash" for more on this). This is a good segue to our second criteria.
2) There are fundamental catalysts on the horizon. The world of catalyst-based investing is all about timing. This is especially true of small caps. When a catalyst is on the horizon, you can make a bundle by being among the first ones in, but only if you're not among the last ones out.
iGo (IGOI) was an example of this. When first highlighted, IGOI had two things going for it - stocking orders going into Wal-Mart (WMT) / Best Buy (BBY) and a joint effort with Texas Instruments to develop a chip based on patented power-saving technology. The stock was $1.50 at the time. The next two quarters, buoyed by sales into WMT and BBY, drove the stock above $5. In less than six months, the shares had more than tripled.
At that point, WMT and BBY were fully stocked, so orders dried up. One of our catalysts became a headwind and the other catalyst was still several quarters off. On Wall Street, they call that "dead money". Since then, it's been all bad news. Consequently, the shares have fallen to half of what they were when we first highlighted them.
The moral of these stories is simple. The stocks we highlight are unlikely to achieve long-term success as independent entities. Instead, they are driven by near-term catalysts that will likely dissipate after a few quarters of strength. Before that happens, one of two things needs to happen: (1) the company can sell itself to a larger firm, or (2) we can sell our shares.
As we discussed / documented in "These Stocks Are Poised To Triple In 2012", five of our names have been acquired, while four more of our picks have tripled (giving us a triple-or-get-acquired hit rate of 50%). So, what if you can't watch and analyze these picks on a regular basis? The best alternative is probably to set up stop-loss orders.
To determine an appropriate stop strategy, you have to look at the profile of our typical picks. Indeed, they tend to explode. However, they also tend to fall back after a spectacular ride. In addition, a few never take flight. Accordingly, an investor will probably be best served by setting two stops on each pick - one at 20% below our initiation price (to protect against the duds), and one moving stop at 20% below the most recent high (to protect gains on the big winners). Based on our track record to date, an investor should make a sizable profit on most picks, while incurring small losses on the occasional loser. We discuss specific stocks in the next part of this article.
Disclosure: I am short BVSN.