Back when I first began investing, I would often attempt to play the trends of the market and buy stocks on a day-to-day basis. As I've grown older, and with more experience, I've become much more patient, and have no problem investing in an undervalued company and then waiting for it to appreciate over a course of several months. I've realized that this strategy is much more efficient: I don't have expensive fees from my online broker, I am not so preoccupied with the day-to-day performance of my portfolio, and most importantly, I avoid the common mental mishaps of believing that when I correctly called the trend that it was due to skill.
Some of you can relate, and for others you are still chasing those quick day-to-day gains. If you fall under the category of investors who are trying desperately to find the edge as a day trader, then perhaps you've noticed that anytime you correctly call the trend and return a gain from buying a stock that it's 100% pure skill and that you correctly read the stochastics, or bought when the Williams %R informed you that it was oversold. But when you are wrong and the stock goes down it is always because of some unfortunate event that is out of your control, something you could have never predicted, or measured on a chart.
The fact of the matter is that trying to determine the day-to-day trends of the market is a messy business; similar to roulette, you have a 50/50 chance. And without going into too much detail, we are psychologically programmed to respond better to the prospect of winning versus losing, therefore not realizing or identifying our incorrect calls as our fault and meanwhile believing our correct calls are skill. Makes sense, huh?
In this article I am breaking my own rule and am looking at three stocks that I believe are poised to rise, and two that look ready to fall or possibly maintain current valuations. In other words, I am going back to the casino and putting my money on "black". However, I am doing so with stocks I currently own, because one can't deny that when you own a stock or watch it on a day-to-day basis and for many years that you become more familiar with its trading tendencies, therefore making it easier to determine its short-term direction. As a result, I am not saying that the below calls will occur on Monday, but rather in the next week. My reason for believing my calls is experience and familiarity with each stock, and the way that each trades.
What better way to start than with the most highly controversial, most volatile stock in the market, Arena Pharmaceuticals (ARNA). Back in July I purchased 750 shares of ARNA at $10, a price that I believed to be a value, and recently purchased another 500 shares at $7.25. Needless to say, it has been a roller coaster ride, but nothing compared to those investors who have owned this stock for the last year. I have often said that because of the obesity problem in the U.S. and American's overwhelming desire for a quick fix that both ARNA and Vivus (VVUS) will post incredible sales during their first year (which is why I bought both). And then following the first year, that one will emerge as the leader in the space. Which is anyone's guess.
After reaching a 52-week high of $13.50, following its FDA approval, the weight loss drug company has fallen off a cliff with significant profit-taking. However, since August 14 the stock has returned a gain of 19%, including a 7% gain last week. Therefore, at this point the stock looks poised to trade higher as investors jump back aboard the train. They are preparing for the launch of Arena's weight loss drug, a product that could return billions in sales. As a result, this is a stock that changes direction abruptly. With shares trading in an uptrend, I believe investors will see further gains until ARNA reaches the psychological point of resistance at $10.
After discussing Arena Pharmaceuticals I feel it might be best to stay on track with biotechnology, and discuss Questcor Pharmaceuticals (QCOR). Last week I wrote an article talking about QCOR's ability to change directions and trade higher very quickly due to the number of people wanting to take advantage of its ability to rally with speculation and key developments. Much like ARNA, the stock had been beaten down following profit taking and a bearish sentiment from known short-sellers at Citron Research. However, the fact still remains that this is a company that is growing by an incredible margin and is showing no signs of slowing down. Therefore, with QCOR trading with its best metrics in several years, along with its first week of consistent gains since its period of profit taking I believe it is poised to trade significantly higher. If you look at its five-year chart, it is obvious that the stock is beginning to reverse, and with no resistance in sight, it is already crossing the ever-important $40 mark, I would be shocked if QCOR didn't continue to rally into next week.
XPO Logistics (XPO) is a smaller company that doesn't really match the others on this list. However it is a company I watch closely, and one that I believe has more upside than any other stock in the market. XPO CEO Bradley Jacobs is attempting to build his fifth billion dollar company, a feat which he always accomplished within five years. The only difference is that with XPO he is not starting from scratch, and he is attempting this feat in a much larger industry than any of his previous ventures. In fact, Jacobs is already getting close, his strategy involves building through cold starts and acquisitions, and then integrating both with a top-of-the-line network. Over the last six months Jacobs has already acquired half of his $250 million revenue run-rate goal in terms of acquisitions and has exceeded his guidance for cold starts.
Back in June and July, XPO traded lower from over $19 to near $12 as investors feared that he could not meet expectations in terms of acquisitions, and were getting frustrated by a lack of acquisitions. Therefore, investors sold XPO prior to earnings, but were surprised when Jacobs announced an acquisition which added $100 million in sales to the company. The stock has been rallying ever since, and closed Friday at $15.33. The reason I expect XPO to trade higher is because it is following a pattern that it has followed during every rally: It trades higher for three-four days and then pulls back. On Friday it pulled back, much like on August 9 when it traded from $14.75 to $14.35 (almost the same amount), and then began its trend higher. My belief is that XPO will continue the same pattern, it only fell back in June and July because of questions surrounding earnings. However, now that Jacobs has his team and system, fully integrated investors expect more $100 million acquisitions, and everyone who knows of the company is very excited. In my opinion, it's the best kept secret in the market, and after Friday's slight pullback it looks poised to continue its rally.
Throughout 2012 I have been one of the biggest supporters of Sprint (S), saying that it was undervalued at every possible opportunity (when it was under $3), as I had accumulated all of my shares around $2.35. The stock has posted one of the best rallies of the year, which started before it announced earnings, and then after earnings due to increased revenue and strong subscriber growth. However, once the stock hit $5.25 I felt that for the first time it may be wise to take some profits, and set a stop-loss for $5, which was executed, therefore selling my 10,000 shares.
On Friday I repurchased 3,000 shares at $4.80, but only because I believe I will be able to purchase at a cheaper price. The reason is because Sprint has followed a very noticeable trend, of posting higher highs and then lower lows throughout its rally. It would trade to new highs and then dip, but always trade higher (following the dip) to reach new highs. However, its dip before reaching $5.49 was at $4.99 on August 14, and the stock has obviously fallen below that dip. Therefore, I believe it is possible that other longs may be taking some gains off the table and that Sprint may actually sink lower in the next week. However, this trend is somewhat tricky because on August 14 the pullback was so quick and unlike the others. As a result, I will watch over the next week, and if it crosses $5.10 I'll be prepared to buy, but for the short-term I expect some loss. Although I still believe the stock could reach $12 in the next 16 months due to strong iPhone sales, unlimited data, and subscriber growth. In other words, despite the fact I sold my shares, I still believe there is significant long-term upside in shares of Sprint, I simply sold because it's never a bad idea to take profits, I just hope I don't regret my decision.
A couple weeks ago I wrote an article in which I looked for companies presenting the same upside potential with similar catalysts to Sprint back when it was trading at $2.30, and the company I felt was closest was Level 3 Communications (LVLT). The much anticipated acquisition of Global Crossing has been by all measures a success. However, the stock has retraced and is yet to reflect the progress as a result of the acquisition. Level 3 reminds me very much of Sprint, back when Sprint was trading under $2.50, Level 3 is trendy, and sometimes breaks out, but can never gain enough momentum to take it to higher levels. And once it reaches a price around $22.50 it begins to pullback. Therefore, I would watch LVLT over the next week, and look for it to pullback. But if it trades higher and possibly reaches $24, then perhaps it could continue until reaching $27. In my opinion, LVLT is a stock to watch, one that could become the next Sprint.