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I satisfy both sides of my brain by following two different systems, devoting about half my portfolio to each: 1) Fundamental investor using Free Cash Flow as defined by Buffett's 1987 shareholder letter. Invest only in predictable, undervalued stocks with good management. Buy with a Margin of... More
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  • Herbalife Valuation Using Buffet's '3 Pillars' Approach Yields 25% One-Day Return

    Herbalife (NYSE: HLF) stock today made a round trip into my "Buy zone", then took off and gave a 25% one-day return. Herbalife, a nutritional company that uses multi-level marketing tactics, has been pressured recently by Bill Ackman of the Pershing Square hedge fund. Ackman, who has been publicly battling HLF for a year, owns a large short position in HLF. News that Ackman would give a detailed presentation Tuesday presenting his short case had brought the stock price down as low as $54 per share on Monday. When Tuesday's presentation had little new information from Ackman, HLF stock skyrocketed more than 25%.

    Here's a look at the past 3 months of trading in HLF:

    (click to enlarge)

    The price action in HLF has been so swift this past week that I missed the opportunity, but HLF presents a case study in my stock investing methodology. I calculate the current Intrinsic Value of HLF at $77.20. With a 25% Margin of Safety, my 'Buy Price' is $57.90. HLF has been on my stock watch list for a few months, where I patiently wait for stocks to fall below the Buy Price. HLF fell to as low as $54 per share Tuesday morning, offering me a chance to pick it up well below $57.90. I certainly wish I had, because the stock bounced back mightily more than 25% in one day. It is still below my Intrinsic Value, but I buy with a minimum 25% safety net. So HLF is safely back on my 'watch' list.

    Warren Buffet has described a '3 Pillars Approach' to calculating the intrinsic value of Berkshire Hathaway in several of his annual shareholder letters. The following quotes are from his 2010 Berkshire Hathaway letter:

    "Though Berkshire's intrinsic value cannot be precisely calculated, two of its three key pillars can be measured. Charlie and I rely heavily on these measurements when we make our own estimates of Berkshire's value."

    Pillar #1:

    "The first component of value is our investments: stocks, bonds and cash equivalents. At year end these totaled $158 billion at market value."

    Pillar #2:

    "Berkshire's second component of value is earnings that come from sources other than investments and insurance underwriting. These earnings are delivered by our 68 non-insurance businesses."

    Pillar #3:

    "There is a third, more subjective, element to an intrinsic value calculation that can be either positive or negative: the efficacy with which retained earnings will be deployed in the future. We, as well as many other businesses, are likely to retain earnings over the next decade that will equal, or even exceed, the capital we presently employ. Some businesses will turn these retained dollars into fifty-cent pieces, others into two-dollar bills."

    The table below presents a summary of my valuation of Herbalife using the '3 Pillars' Approach of Buffet. This is a version of a Discounted Cash Flow (DCF) model.

    (click to enlarge)Herbalife DCF Valuation

    Hopefully most of the table is self-explanatory to value investors. Current year earnings are normalized, and projected into the future using conservative historic growth rates. The FCF multiple for terminal value is determined with the Stable Growth Rate equation.

    I maintain my complete Stock Watch list on the 'Wealthy' page of my website. Feel free to follow along or critique. Usually a falling stock will give me ample opportunity to buy at an attractive price. No such luck today.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jul 23 2:29 AM | Link | Comment!
  • Trend Exhaustion On 3 Timeframes: We Finally Reached 'Sell In May And Go Away'

    [May 23, 2013]

    A significant sell signal was completed today by the S&P 500. I follow a 'Trend Exhaustion' system that uses the Setup, Sequential and Combo technical indicators.

    Some amazing calls made by these indicators have been described in my article: Trend Exhaustion Market Timing Excel Spreadsheet. Detailed descriptions of the indicators and other information is also found on my Tom Demark page. In this article I will assume you have a basic understanding of these indicators. I also highly recommend the book, "Demark Indicators" by Jason Perl.

    The spreadsheet can analyze the Setup, Sequential and Combo indicators on 3 time frames - Monthly, Weekly, and Daily. Looking back at market history, major sell signals have occurred when the stock market has advanced to a point where all 3 timeframes are recording sell signals. This signifies the market is way overbought and has advanced too far too fast.

    There can be no question the S&P 500 is overbought and overbullish. By many simple technical analysis methods (Bollinger Bands, MACD) the market is extremely extended, even approaching parabolic. Parabolic moves don't end well. Bullishness is high, with the % of Bulls far outnumbering the % Bears in investor polls such as AAII. The latest crowd sentiment poll compiled by Ned Davis Research has reached 70.9, rivaling the most extreme readings in this indicator's history - see the Forbes article Sentiment Blow Out.

    The advantage of using Setup, Sequential and Combo indicators instead of conventional trend-following methods is that you can buy into weakness and sell into strength. Operating against the trend is often difficult because it contradicts human nature. However, there are distinct advantages to doing so, and these indicators are designed specifically to accomplish this goal.

    Let's evaluate the market using the Trend Exhaustion Spreadsheet:

    Here is an image of the S&P 500 on a Monthly timeframe, showing an 'Aggressive Sequential' sell signal at the end of April 2013. The Sequential sell Signal is shown in cell BJ286.

    (click to enlarge)Demark Sequential

    After a monthly signal is given, I like to wait on a Weekly, then Daily signal to confirm the major trend is at an end. On a Weekly timeframe, The S&P 500 reached a Combo sell Signal the week of May 6th, 2013. Both the 'Aggressive' and standard Combo signals fired, as shown in cells AZ1224 and BF1224.

    (click to enlarge)Demark Combo

    For higher confirmation the market has completed it's upward trajectory, we like to see a Daily signal follow the Monthly and Weekly. This occurred today, May 23, 2013, when the S&P 500 completed a 15-day Setup phase (Setups are a minimum of 9 days. The signal came today when today's close failed to exceed the close of 4 days ago). The Daily signal is shown in cell M1412 below.

    (click to enlarge)Demark Setup

    Today I 'hedged' the value of my stock portfolio by purchasing several etf's which move inverse to the S&P 500. I purchased SDS at $39.11 (2X inverse) and SPXU at $23.07 (3X inverse). I was at a low % of stocks in my portfolio so the hedges are relatively small.

    Risk Management: Tom Demark describes a method to establish a risk level of when to get out of this trade if it goes against you, by adding the True Range of the highest high during the Setup or Countdown phase of the signal. On the daily signal the highest high was 1687.2 yesterday, May 22nd. The True Range yesterday (High - Low) was 38.3. Adding 38.3 to 1687.2 gives a risk level of 1725.5. I would get out of the trade if the S&P 500 continues higher and closes above 1725.5.

    You can purchase the Trend Exhaustion Stock Market Spreadsheet thru my Research Offers page.

    Things I worry about:

    -I don't know what Tom Demark thinks of the market right now. He is very hard to track since he is under contract to some of the largest hedge funds in the world - ie. SAC Capital. He will often however give interviews on CNBC or Bloomberg TV and generally gives very direct buy/sell advice when interviewed. Demark has pinpointed practically every significant market junction in public since 2009, but did have a big miss by calling a Sell on the S&P 500 in January of this year - too early.

    -With Ben Bernanke flooding the market with money thru QE programs I worry that many systems won't work in this environment. However this Trend Exhaustion is still around after 30 years of development and has made unbelievably accurate calls (my spreadsheet can look at the S&P 500 back to the 1980's)

    -The Daily Sell signal described above could continue into a Combo or Sequential Signal, meaning I'm a little early on the exact market turn.


    -Tom Demark and Market Studies, Inc. is not associated with this website or any product offered herein.

    -This article is not intended as investment advice. Do your own due diligence.

    Disclosure: I am short SPY.

    May 25 8:20 PM | Link | Comment!
  • When The Trend Is At The End: Quick Profits On BGZ Using Demark Sequential

    [edited hyperlinks on 12/14/12]

    I recently made a quick and easy 15% profit using the Demark Sequential indicator. Below I'll graphically show how the trade happened.

    With the Demark trading system, it's important to look at multiple timeframes to be sure you know the direction of the primary trend.

    On a monthly timeframe, BGZ (Direxion Russell 1000 Bearish 3X ETF) completed the 9-count Setup phase in May 2011, confirming a bearish trend (cell O36)

    Demark Setup - BGZ Monthly timeframe

    Moving to a weekly timeframe, BGZ completed a Sequential indicator the week of October 31st (cell AE160).
    Demark Sequential - BGZ Weekly timeframe

    Now for the daily timeframe, BGZ completed a Sequential indication on November 29, 2011 (cell AE760).
    Demark Sequential - BGZ daily

    To summarize, BGZ completed a monthly Buy Setup in May 2011, then completed a weekly Buy 'Aggressive Sequential' week of Oct. 31st, and then completed a Daily Buy 'Aggressive Sequential' on Nov. 16th. Thus, all 3 timeframes were in agreement. It was the end of the downtrend for BGZ.

    The monthly in May completed at $34.56
    The Weekly completed at $31.71
    The Daily completed at $32.45

    Any of those dates may have been a good entry price but I felt more confident seeing that all timeframes had exhausted their downtrend. In anticipation of the daily signal, I bought BGZ on the 12th day of Sequential - November 15th - at $31.25

    Setting the Stop-Loss: To set the stop-loss on Sequential, we find the lowest low of the Sequential phase and subtract the true range of that bar from the low of the bar. The lowest low (daily timeframe) occurred on October 27th, and gave me a Stop-loss price of $25.18

    The Stop-loss was never in danger because BGZ catapulted higher immediately on completion of the daily Sequential indicator. Because BGZ is such a highly volatile fund - capable of large price swings on any day - I was looking for any of a number of short-term oversold indicators to tell me when to sell out of the trade. One of my favorites - Demark Camouflage - triggered on November 25th. I sold on the open of Monday the 28th at $35.95 for a very nice 15% gain in less than 2 weeks.

    Below is a graphic illustrating the trade:

    Demark Aggressive Sequential, BGZ, short

    If you'd like to monitor your own stocks, ETF's and mutual funds using trend exhaustion indicators try my Excel 'Trend Exhaustion' spreadsheet available on the Research Offers page of

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: SPXS
    Dec 14 11:10 PM | Link | Comment!
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