If you recently got hammered with big losses in Google, Yahoo or Intel, here are a few pointers to help you avoid making the same mistakes again. Every trader and investor experiences losses, but the great ones learn from their mistakes and move on.
Two weeks ago, Yahoo and Intel released earnings that were below analysts’ estimates and the stocks were crushed. They each fell about 20 percent in only a few days. If you own these stocks, that money was yours until it was wiped out. I don’t want to hear anything about paper gains not being real. If you sold Yahoo at $44 last month, you could have spent that money. Now, you are only going to get $34 for your stock. You have suffered a 23-percent drawdown, and you can’t take that to the bank.
The first and most important analytical tool I use is technical analysis, or the study of price and volume. All three of these now-broken stocks did the same thing just days before cratering, and this clue could have saved you big money. They each fell below their 50-day average price line. Strong stocks typically do not fall below these lines. Instead, you will frequently see powerful stocks quietly fall to the lines, then bounce off of them.
Another valuable analytical tool is relative price strength, and it would have provided a warning about both Intel and Yahoo. The relative price strength of those stocks was below 65 percent before the large declines. This means that at least 45 percent of all stocks have been performing better over the last year. Anything below 80 percent needs to be treated with caution.
Google had the opposite thing going-it was one of the strongest stocks in the market. In this case, we can rely on an alternative analytical method called quantitative.
To use that approach, we look at Google’s earnings growth rate compared with its price-to-earnings ratio, and see how that stacks up to other stocks, both in the same industry and others.
The basic idea is that the earnings should be growing faster each quarter. Earnings growth, before the latest release, slowed from 143 percent to 134 percent to 121 percent. Things were moving in the wrong direction, but the stock kept moving higher. The latest release showed only a 73-percent growth rate. Wall Street rewards companies with high price-to-earnings ratios only if the companies exhibit earnings acceleration.
The last key to avoiding big losses is watching the general market environment. Things are not as strong as they were three years ago. The risks to owning stocks for the longer term are beginning to outweigh the rewards. This makes it critical to own only the strongest stocks in the market.
If you bought Google last year for $250 a share and still own it, this might be the time to cut and run. By the time the April reporting period comes around, these one-day, 15-percent-to-20-percent drops may be the rule instead of the exception.
Don’t get caught watching the paint dry. Take action by getting rid of weak stocks and committing capital only to the most worthy candidates. As I’ve said for a while, 2006 might turn out to be a tough year for the buy-and-hold crowd.
Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer’s. Hauke can be reached at 566-2162 or at firstname.lastname@example.org.