Waiting Out a Stock Correction

by Paul Goodwin on March 01, 2013
originally from Cabot Wealth Advisory

Stock Market Video

Waiting Out a Stock Correction

The Stock that Cannot Sell Itself is Poor Indeed

In Case You Missed It

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In this week's Stock Market Video, I point out that although the market is jumpy, it has rebounded nicely from its three-day swan dive that began on February 21. Still, different stocks have reacted very differently to both the correction and the bounce, and knowing how to interpret the charts can help you make those all-important buy, sell and hold decisions. Stocks discussed include: First Solar (FSLR), Credit Suisse (CS), Ocwen Financial (OCN), Medicines Company (MDCO), Popular (BPOP) and NXP Semiconductors (NXPI). Click below to watch the video!

First Solar (FSLR), Credit Suisse (CS), Ocwen Financial (OCN), Medicines Company (MDCO), Popular (BPOP), NXP Semiconductors (NXPI)

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Waiting Out a Stock Correction

All insiders in any field have their own private language, and stock investors are as guilty as anyone. After all, if you’re trying to get a lot of information exchanged, using abbreviations and acronyms just makes sense. There’s no reason to say “price to earnings ratio” every time when just about everyone knows that that’s what P/E means.

This can go too far, of course, and anyone who has listened to a cable finance show has probably wondered just what the heck “eebit dah” actually is. (It’s EBITDA, which means Earnings Before Interest, Taxes, Depreciation and Amortization, which is just a way of saying “operating cash flow.”) Some insiders seem to get a lot of pleasure out of being incomprehensible.

At Cabot, we pride ourselves on keeping jargon to a minimum, but even we can get a little opaque at times. I realized this when I reviewed my weekly Stock Market Video and found that I had used the phrase “wearing out the weak hands” in describing the market’s recent action.

I’m not sure that everyone will know what that means, and it’s important enough that I thought you might appreciate an explanation.

“Weak hands” is a phrase that growth investors use to describe stock owners who don’t have a lot of conviction about a stock. These people may have just jumped into a stock because of a piece of good news or a big price increase, but they usually don’t know the company inside out and they haven’t gone over revenue and earnings history, checked out the competition and barriers to entry and done all the other due diligence that leads to confidence.

As an example, here’s a daily chart for Coca-Cola FEMSA (KOF), a Mexico-based bottler of Coca-Cola and a host of other sparking and still soft drinks that are distributed throughout Mexico and Central America and parts of South America. As you can see, the stock (which is in the portfolio of Cabot China & Emerging Markets Report) has been in a nice uptrend for quite a while. But there were probably lots of weak hands who grabbed a piece of the stock during its big move from 100 to over 130 last year, there's no doubt many quickly jumped ship during KOF’s July correction to 110.

KOF Chart, Paul Goodwin, Cabot Heritage Corporation

It took KOF just over two months to overtake that July high again, and that move was followed by a smaller shakeout in October and November. The people who lost patience during that four-month correction missed the stock’s move to new highs in November. But what’s bad for weak hands is meat and potatoes for those with the conviction to wait it out.

It’s important to remember that having conviction doesn’t mean that you can put your sell disciplines on hold. A stock that hands you a 20% loss from your buy price is still a sell, even if the market is healthy. And that maximum loss limit should be tightened up to 15% when markets are in a downtrend. But KOF didn’t hit even the smaller loss limit, and the fair-weather holders who jumped off too early should have known the dangers of being weak hands.

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Here's this week's Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.

Cabot Buttons, The Stock That Cannot Sell Itself is Poor IndeedThe Stock that Cannot Sell Itself is Poor Indeed

Tim’s Comment: Replace the word “sell” with the word “market” and you get a truer sense of the phrase’s meaning. The best stocks don’t need salesmen. Their attractions are evident to the experienced, open-minded analyst.

Paul’s Comment: When I look at this button, I always think about the eight- or 10-page glossy brochures and Web ads that trumpet the sterling qualities of some low-priced stock. They’re always paid endorsements as part of a “pump and dump” scheme, and I always think that if the stock were so fabulous, they wouldn’t need to work so hard to sell it.

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In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 2/25/13—The #1 Investment Rule

In this issue, Mike Cintolo of Cabot Market Letter wrote about the most important rule for growth investors: cutting losses short. That means deciding what your loss limit is even before you buy the stock. Stock discussed: BlackRock (BLK).

Cabot Wealth Advisory 2/26/13—Aggressive Stocks for Retirement

In this issue, I took aim at the overly conservative (in my opinion) advice given by financial advisors. I think retirement portfolios need a significant chunk of growth stock exposure to stay ahead of the game. Stock discussed: Qihoo 360 (QIHU).

Cabot Wealth Advisory 2/28/13—Why Invest in Canadian Stocks

Roy Ward, the value guru behind Cabot Benjamin Graham Value Letter, looks at Canada in this issue and finds a strong economy and many attractively priced stocks. Names discussed are Gildan Activewear (GIL) and Royal Bank of Canada (RY).

Have a great weekend,

Paul Goodwin
Editor of Cabot Wealth Advisory
and Cabot China & Emerging Markets Report

P.S. Chloe Lutts just finished choosing 25 great new income securities—stocks, trusts, ETFs, REITs and mutual funds—for this month’s Dick Davis Dividend Digest, and she’d like to send it to you free.

Click here for details.


Paul Goodwin can be found on Google Plus.