I've been slaving over a blog which I've been hoping to finish each day, but just when I think I'm done I find something else to add. The process has been much slower going than I had hoped so my apologies for the lack of blogs this week. (I also have to admit to taking some much-needed time off, too.) However, in the course of my investigations, I discovered an incorrect entry in the MANDA portfolio table: I purchased Bluegreen Corp. (BXG) on July 22, not July 2. The only difference this makes to the numbers is in the calculation of the annualized return.
MANDA tables from here on will be corrected.
Thursday, January 15, 2009
Monday, January 12, 2009
MANDA Portfolio Table: Updated as of 1-12-09
The table below shows today's addition of Aladdin Knowledge Systems (ALDN).
Click on table to enlarge.
Update 1/15/09: Please note that the entry date for BXG is incorrect: it should be 7/22/08 instead of 7/02/08. Future tables will be correct.
Click on table to enlarge.
Update 1/15/09: Please note that the entry date for BXG is incorrect: it should be 7/22/08 instead of 7/02/08. Future tables will be correct.
Another Manda Addition: Aladdin Knowledge Systems (ALDN)
MANDA addition: Aladdin Knowledge Systems (ALDN)
The New Year is ringing in with a bit of a surge in M & A activity, much to my delight. My MANDA fund holdings have been drying up and today I'm pleased to make a new addition to it: Aladdin Knowledge Systems (ALDN).
Here's a summary of the proposed transaction from Barron's Online: "Aladdin Knowledge Systems (ALDN) an Israeli-based security software company, this morning announced that it has agreed to be acquired by an investor group led by private equity firm Vector Capital in a deal valued at about $160 million.
Aladdin holders will receive $11.50 a share in cash, about a 20% premium to Friday’s closing price, and a 64% premium to the closing price on January 5, when Aladdin announced that it was in talks with Vector on a possible deal.
Vector Capital said it will place Aladdin’s DRM and authentication assets under common management with another one of its companies, SafeNet.
The deal is not subject to any financing condition. The deal is expected to close in 2-3 months."
The boards of both companies have approved the deal and Wells Fargo will be providing debt financing to support the acquisition. The merger is subject to the approval of Aladdin's shareholders as well as the usual antitrust regulatory approval.
I picked up the stock today at $10.92. This represents a 5.3% return on the transaction for a 20-30% annualized return, depending on when the deal actually closes.
Other M&A activity
Earlier today Abbott Labs (ABT) announced that it will be buying Advanced Medical Optics (EYE) for $22 per share in cash in an effort to expand Abbott's medical footprint into the laser vision correction and eye care arenas. The merger is expected to be completed before the end of the first quarter. This deal is yet another example of cash-rich big pharma buying up those quality smaller firms that have been badly beaten down. Expect more acquisitions of this type to continue.
I did not purchase EYE today because it traded above $21.48 which represents only a 2.4% return at best. Call me a pig but I'd like more. If the price drops to the low $21.20s I could be tempted into buying it.
By the way, Abbott stock has been channeling between $50 and $60. (See chart below.) Currently, it's sitting at $50 and if you're into playing channeling stocks, as soon as the stock moves up a bit, I'd jump in. (For you options players, a bull-call 50/55 or even 50/60 debit spread would be a good move. The reason I chose a spread over a straight call is that the spread mitigates the effect of volatility.) However, if the stock breaks $50 watch out below! The $50 level represents major support and if it violates that, then a short position is quite justified.
The New Year is ringing in with a bit of a surge in M & A activity, much to my delight. My MANDA fund holdings have been drying up and today I'm pleased to make a new addition to it: Aladdin Knowledge Systems (ALDN).
Here's a summary of the proposed transaction from Barron's Online: "Aladdin Knowledge Systems (ALDN) an Israeli-based security software company, this morning announced that it has agreed to be acquired by an investor group led by private equity firm Vector Capital in a deal valued at about $160 million.
Aladdin holders will receive $11.50 a share in cash, about a 20% premium to Friday’s closing price, and a 64% premium to the closing price on January 5, when Aladdin announced that it was in talks with Vector on a possible deal.
Vector Capital said it will place Aladdin’s DRM and authentication assets under common management with another one of its companies, SafeNet.
The deal is not subject to any financing condition. The deal is expected to close in 2-3 months."
The boards of both companies have approved the deal and Wells Fargo will be providing debt financing to support the acquisition. The merger is subject to the approval of Aladdin's shareholders as well as the usual antitrust regulatory approval.
I picked up the stock today at $10.92. This represents a 5.3% return on the transaction for a 20-30% annualized return, depending on when the deal actually closes.
Other M&A activity
Earlier today Abbott Labs (ABT) announced that it will be buying Advanced Medical Optics (EYE) for $22 per share in cash in an effort to expand Abbott's medical footprint into the laser vision correction and eye care arenas. The merger is expected to be completed before the end of the first quarter. This deal is yet another example of cash-rich big pharma buying up those quality smaller firms that have been badly beaten down. Expect more acquisitions of this type to continue.
I did not purchase EYE today because it traded above $21.48 which represents only a 2.4% return at best. Call me a pig but I'd like more. If the price drops to the low $21.20s I could be tempted into buying it.
By the way, Abbott stock has been channeling between $50 and $60. (See chart below.) Currently, it's sitting at $50 and if you're into playing channeling stocks, as soon as the stock moves up a bit, I'd jump in. (For you options players, a bull-call 50/55 or even 50/60 debit spread would be a good move. The reason I chose a spread over a straight call is that the spread mitigates the effect of volatility.) However, if the stock breaks $50 watch out below! The $50 level represents major support and if it violates that, then a short position is quite justified.
Tuesday, January 6, 2009
MANDA Portfolio Update: SM&A, Lincoln Bancorp, Rohm-Haas
Just a quick update to my M&A portfolio. All figures will be updated in the MANDA portfolio table either later today or tomorrow.
SM&A acquisition completed
Private equity firm Odyssey Investment Partners completed its acquisition of SM&A (WINS) on December 29th in a $6.25 per share all-cash deal. This represents an 11.4% return on the investment.
Lincoln Bancorp announces dividend.
On December 18th, Lincoln Bancorp (LNCB) announced a 7 cent per share dividend payable on January 15th to shareholders on record as of December 31st. The dividend was cut in half because of declining economic conditions and the desire to preserve capital, according to the company's CEO.
Lincoln Bancorp merger completed with First Merchant's
First Merchant's (FRME) takeover of Lincoln Bancorp (LNCB) was completed on January 2nd. One share of LNCB was swapped for 0.7004 shares of FRME. The shares of FRME were sold today at a price of $22.91. This represents a 14.7% return without the dividends and 16.3% including dividends.
Bullish play on Rohm-Haas
I took advantage of the high options volatility as well as today's slump in Rohm-Haas stock (ROH) and sold 2 January 50 put contracts (ROHMJ) for $3. Takeover company Dow Chemical (DOW) announced that it's threatening to sue the Kuwaiti government for backing out of a joint venture deal whose monies were slated to be used in part to finance the Rohm-Haas acquisition. Dow has until this Saturday to complete the current $78/share all-cash merger with Rohm-Haas, and if Dow starts dragging its feet, substantial penalties will kick in. I'm sure the company will try not to make that happen.
The put contracts are $10 out of the money. The $50 price level is about where the company was trading at in July before the acquisition announcement so I feel that all-in-all the risk here is limited. If not, then I'll either buy back the puts or else be happy to have the stock put to me at $50. Most likely I'll know where I stand come next Monday.
NOTE: The ROH put was executed in my own portfolio and not in the Manda portfolio. However, buying a protective put when the stock fell below $70 would have been prudent and I can only say that considering this economic environment, it was my bad. I also should have done the same with Bluegreen as that was an overpriced deal from the get-go. I will try very hard not to make this error in judgment again.
SM&A acquisition completed
Private equity firm Odyssey Investment Partners completed its acquisition of SM&A (WINS) on December 29th in a $6.25 per share all-cash deal. This represents an 11.4% return on the investment.
Lincoln Bancorp announces dividend.
On December 18th, Lincoln Bancorp (LNCB) announced a 7 cent per share dividend payable on January 15th to shareholders on record as of December 31st. The dividend was cut in half because of declining economic conditions and the desire to preserve capital, according to the company's CEO.
Lincoln Bancorp merger completed with First Merchant's
First Merchant's (FRME) takeover of Lincoln Bancorp (LNCB) was completed on January 2nd. One share of LNCB was swapped for 0.7004 shares of FRME. The shares of FRME were sold today at a price of $22.91. This represents a 14.7% return without the dividends and 16.3% including dividends.
Bullish play on Rohm-Haas
I took advantage of the high options volatility as well as today's slump in Rohm-Haas stock (ROH) and sold 2 January 50 put contracts (ROHMJ) for $3. Takeover company Dow Chemical (DOW) announced that it's threatening to sue the Kuwaiti government for backing out of a joint venture deal whose monies were slated to be used in part to finance the Rohm-Haas acquisition. Dow has until this Saturday to complete the current $78/share all-cash merger with Rohm-Haas, and if Dow starts dragging its feet, substantial penalties will kick in. I'm sure the company will try not to make that happen.
The put contracts are $10 out of the money. The $50 price level is about where the company was trading at in July before the acquisition announcement so I feel that all-in-all the risk here is limited. If not, then I'll either buy back the puts or else be happy to have the stock put to me at $50. Most likely I'll know where I stand come next Monday.
NOTE: The ROH put was executed in my own portfolio and not in the Manda portfolio. However, buying a protective put when the stock fell below $70 would have been prudent and I can only say that considering this economic environment, it was my bad. I also should have done the same with Bluegreen as that was an overpriced deal from the get-go. I will try very hard not to make this error in judgment again.
Monday, January 5, 2009
Is the consumer really dead?
2008 was certainly no joy ride for investors but 2009 could well turn out to be a walk in the park if the turnaround in the Consumer Discretionary sector is any indication. One ETF dedicated to this sector is the Powershares PEJ, a medium sized blended fund (it contains a mixture of growth and value stocks) designed to track the Dynamic Leisure & Entertainment Intellidex, an index composed of thirty stocks culled from the restaurant, gaming, leisure, and media industries. The three and a half year old fund hit an all-time low of $6.15 on November 21st, off 68% from its July 2007 high near $19.50.
A bullish chart
The November low formed the head in an inverse head-and-shoulders pattern as shown in the stock's daily chart below. The left shoulder formed during October, the head in November, and the right shoulder in December. The neckline was broken last Friday indicating that the stock is poised for a strong upwards move. Theoretically, one wants to see the neckline broken on heavy volume but last Friday's lackluster action can be forgiven since it was a holiday-shortened trading day with many people on vacation. Today's action, however, more than made up for Friday's shortfall with the PEJ trading over twenty times normal volume! (Average daily volume is only around 9000 shares.)
Profit expectations
Once a stock convincingly breaks its right neckline, theory tells us that we can expect it to move to a value given by the neckline +/- (neckline – top of head). (+ for inverse formations; - for normal head-and-shoulders formations.) For PEJ, the neckline is at $9.40 and the top (or bottom, depending on your point of view) of the head is at $6.20 which means we should expect to see the stock rise to the $12.60 level. This represents a 28% increase over today's closing value of $9.85. Not a bad return! [Note: PEJ is not optionable, alas.]
Top 10 PEJ holdings
The table below shows the most recent top ten holdings for the PEJ. All together these stocks comprise almost 47% of the fund. From looking at the component charts, it's no wonder the fund has broken out. All of these stocks have been badly beaten down with the sole exception of MacDonald's which is nearing an all-time high.
If you're a DIYer and would rather concoct your own basket of stocks from this list, you may wish to start with Yum, Liberty Media, Brinker, and Ticketmaster which have all charged out of their recent black holes and broken out of their bases. Close on their heels are Marriot, McDonald's, Carnival, and Starbuck's. Pulling up the rear is International Gaming which needs to break $15 before I'd be a buyer. Disney is the only stock that seems to lack clear direction. It's been bouncing around the the low to mid-20s for several months and I'd prefer to see it break $26 (or better yet, $28) before stepping in. Based on previous price highs, this stock has less room to run translating into a lower potential return compared with the others.
[Note: The "Comment" column in the table represents the PEJ portfolio percentage.]
Summary
I'm not sure what a breakout in consumer discretionary means for the overall economy, but it suggests that fear in the financial markets could be unwinding and those stocks that have been brutally and perhaps unfairly discounted are being re-evaluated. Or, maybe it's just that folks are getting tired of all this fiscal belt-tightening and are looking to kick up their heels. I don't know, but whatever the reason, the charts are telling me that now is a good time to take a gamble on this sector.
Notes:
1. Liberty Media has three ticker symbols--LINTA, LMDIA, and LCAPA. I don't know the difference between them so I chose the one with the highest average daily volume.
2. PEJ currently pays an annual distribution (dividend) of just over 1%.
A bullish chart
The November low formed the head in an inverse head-and-shoulders pattern as shown in the stock's daily chart below. The left shoulder formed during October, the head in November, and the right shoulder in December. The neckline was broken last Friday indicating that the stock is poised for a strong upwards move. Theoretically, one wants to see the neckline broken on heavy volume but last Friday's lackluster action can be forgiven since it was a holiday-shortened trading day with many people on vacation. Today's action, however, more than made up for Friday's shortfall with the PEJ trading over twenty times normal volume! (Average daily volume is only around 9000 shares.)
Profit expectations
Once a stock convincingly breaks its right neckline, theory tells us that we can expect it to move to a value given by the neckline +/- (neckline – top of head). (+ for inverse formations; - for normal head-and-shoulders formations.) For PEJ, the neckline is at $9.40 and the top (or bottom, depending on your point of view) of the head is at $6.20 which means we should expect to see the stock rise to the $12.60 level. This represents a 28% increase over today's closing value of $9.85. Not a bad return! [Note: PEJ is not optionable, alas.]
Top 10 PEJ holdings
The table below shows the most recent top ten holdings for the PEJ. All together these stocks comprise almost 47% of the fund. From looking at the component charts, it's no wonder the fund has broken out. All of these stocks have been badly beaten down with the sole exception of MacDonald's which is nearing an all-time high.
If you're a DIYer and would rather concoct your own basket of stocks from this list, you may wish to start with Yum, Liberty Media, Brinker, and Ticketmaster which have all charged out of their recent black holes and broken out of their bases. Close on their heels are Marriot, McDonald's, Carnival, and Starbuck's. Pulling up the rear is International Gaming which needs to break $15 before I'd be a buyer. Disney is the only stock that seems to lack clear direction. It's been bouncing around the the low to mid-20s for several months and I'd prefer to see it break $26 (or better yet, $28) before stepping in. Based on previous price highs, this stock has less room to run translating into a lower potential return compared with the others.
[Note: The "Comment" column in the table represents the PEJ portfolio percentage.]
Summary
I'm not sure what a breakout in consumer discretionary means for the overall economy, but it suggests that fear in the financial markets could be unwinding and those stocks that have been brutally and perhaps unfairly discounted are being re-evaluated. Or, maybe it's just that folks are getting tired of all this fiscal belt-tightening and are looking to kick up their heels. I don't know, but whatever the reason, the charts are telling me that now is a good time to take a gamble on this sector.
Notes:
1. Liberty Media has three ticker symbols--LINTA, LMDIA, and LCAPA. I don't know the difference between them so I chose the one with the highest average daily volume.
2. PEJ currently pays an annual distribution (dividend) of just over 1%.
Friday, January 2, 2009
A trader's New Year's Resolutions
To me, New Year's represents not only a time for wild celebration (which seems to occur less and less the older I get), but also as a time for a “State of my Life” review of the previous year. Part of that review involves examining the efficacy of my stock trades and trading strategies and how both can be improved.
Without further ado, here's my list of New Year's resolutions that I believe can be of benefit to any trader.
This year I vow:
1. To stick to my trading plan. People generally lose money in the market not because they don't have a trading plan, but because they don't stick to the rules. For example, the famous Turtle trading experiment conducted by market wizard Richard Dennis showed that those students who were diligent in following his trading rules were much more successful than those students who didn't. (See my May 13th blog, "The Legend of the Turtles," for further info.)
2. To write down my profit and loss points before entering a trade. Doing so will go a long way in helping me sleep at night.
3. To not put all of my eggs in one basket. This means not placing all of my money in a single stock or mutual fund, or with only one money manager. (I call this the Madoff rule.)
4. To do my own due diligence and not trade solely on a “hot tip” given by a friend, a CNBC talking head, my broker, or anyone else. Remember that some else's opinion is just that—their opinion, and that includes me.
5. To keep on top of my trades. This means that if I initiate a trade with a time horizon of only a few days, I will check that position on an intra-day basis. If I can't commit to doing that, I won't enter such a trade in the first place.
6. To adopt a Zen-like attitude. The best traders are not emotionally invested in their trades making them much more likely to stick to their rules. Out of greed, fear, and hope, note which of these emotions most affects your trading. You can do this by adopting the next rule.
7. To diligently keep a trading journal. I always start out the New Year by keeping one but abandon it around April when laziness sets in. However, the times that I have kept one have always been beneficial, alerting me to detrimental trading patterns and strategy weaknesses. I also learned that greed and fear were not my emotional enemies but that, surprisingly, hope was. Hope has blinded me to technical breakdowns in a stock's chart by lulling me into thinking that my great stock can't go down any further. I keep holding on, ignoring their continued downward slide. Sure, some of them did come back, but it took years. Hope is the one emotion that still gets the better of me but the occasions when it does are becoming much more rare--at least I'm learning!
8. To keep up with the latest market news and trends. As with any other discipline, the more you know the better you'll be as a trader.
9. To gingerly trade in bear markets. I'm in the middle of doing research which is showing that in the long run trading in bull markets is more profitable and less risky than trading in both bull and bear markets. Trade timing (i.e., knowing when to enter and exit positions) seems to be the key factor to success in bear markets; in bull markets, trade timing is less of an issue as the overall trend generally lasts longer and the market is less volatile.
10. To suspend trading (except for closing out trades) when I'm feeling under the weather or after suffering a string of losses. I've found from previous experience that illness impairs judgement and a string of losses undermines confidence. Time off helps me regain my trading mojo.
11. To remember that not every trade will be a winner. In these instances it's useful to recite the Trader's Serenity Prayer: “God, grant me the serenity to accept the market as it is because I do not have the power to change it, the courage to adjust my trading strategies as indicated by the diligent notes I've been keeping in my trading journal, and the emotional detachment (read: wisdom) to faithfully execute my trading plan.”
12. To have the discipline to stick to these resolutions!
Here's to a healthy, happy, and prosperous New Year!
Without further ado, here's my list of New Year's resolutions that I believe can be of benefit to any trader.
This year I vow:
1. To stick to my trading plan. People generally lose money in the market not because they don't have a trading plan, but because they don't stick to the rules. For example, the famous Turtle trading experiment conducted by market wizard Richard Dennis showed that those students who were diligent in following his trading rules were much more successful than those students who didn't. (See my May 13th blog, "The Legend of the Turtles," for further info.)
2. To write down my profit and loss points before entering a trade. Doing so will go a long way in helping me sleep at night.
3. To not put all of my eggs in one basket. This means not placing all of my money in a single stock or mutual fund, or with only one money manager. (I call this the Madoff rule.)
4. To do my own due diligence and not trade solely on a “hot tip” given by a friend, a CNBC talking head, my broker, or anyone else. Remember that some else's opinion is just that—their opinion, and that includes me.
5. To keep on top of my trades. This means that if I initiate a trade with a time horizon of only a few days, I will check that position on an intra-day basis. If I can't commit to doing that, I won't enter such a trade in the first place.
6. To adopt a Zen-like attitude. The best traders are not emotionally invested in their trades making them much more likely to stick to their rules. Out of greed, fear, and hope, note which of these emotions most affects your trading. You can do this by adopting the next rule.
7. To diligently keep a trading journal. I always start out the New Year by keeping one but abandon it around April when laziness sets in. However, the times that I have kept one have always been beneficial, alerting me to detrimental trading patterns and strategy weaknesses. I also learned that greed and fear were not my emotional enemies but that, surprisingly, hope was. Hope has blinded me to technical breakdowns in a stock's chart by lulling me into thinking that my great stock can't go down any further. I keep holding on, ignoring their continued downward slide. Sure, some of them did come back, but it took years. Hope is the one emotion that still gets the better of me but the occasions when it does are becoming much more rare--at least I'm learning!
8. To keep up with the latest market news and trends. As with any other discipline, the more you know the better you'll be as a trader.
9. To gingerly trade in bear markets. I'm in the middle of doing research which is showing that in the long run trading in bull markets is more profitable and less risky than trading in both bull and bear markets. Trade timing (i.e., knowing when to enter and exit positions) seems to be the key factor to success in bear markets; in bull markets, trade timing is less of an issue as the overall trend generally lasts longer and the market is less volatile.
10. To suspend trading (except for closing out trades) when I'm feeling under the weather or after suffering a string of losses. I've found from previous experience that illness impairs judgement and a string of losses undermines confidence. Time off helps me regain my trading mojo.
11. To remember that not every trade will be a winner. In these instances it's useful to recite the Trader's Serenity Prayer: “God, grant me the serenity to accept the market as it is because I do not have the power to change it, the courage to adjust my trading strategies as indicated by the diligent notes I've been keeping in my trading journal, and the emotional detachment (read: wisdom) to faithfully execute my trading plan.”
12. To have the discipline to stick to these resolutions!
Here's to a healthy, happy, and prosperous New Year!
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