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.On August 10, 2006, Brinker International (stock symbol EAT)posted its financials for the quarterly period that ended on the lastday of June (its fourth quarter).The earnings, excluding specialitems, came in at $0.75, versus the consensus estimate of $0.65.It snot every day a company beats the general consensus by a dime,so that in and of itself was huge, and there was no way it would bereflected in the share price in a single session. ccc_payne_171-198_ch07.qxd 3/13/07 8:00 AM Page 174174 TOOLS AND RULESHeading into the earnings announcement, the stock was driftinglower and lower and looked dead in the water.(See Figure 7.2.)This is the perfect setup, a stock that has come down gradually.This was a reflection of indifference, so the sellers didn t have anax to grind, they had simply lost faith.This is great, because oncethe stock begins to move higher, there won t be an entrenchedcampaign to keep it down.The short position was 6.6 percent ofthe float, kind of high but not a jihad just a few folks whowanted to ride the stock as low as it would go.To understand just how little faith there was in the stock, theshares closed at $32, just eight cents off the low of the session,down $1.14 the day before the earnings were released.The nextmorning the stock opened at $33 and it was off to the races.BySeptember 15, buyers at the open on August 10 were up 27.3 per-cent.I bet 95 percent of all hedge fund managers would give theirleft arm, or maybe their Presidential Rolex, for that kind of returnin just one year.Of all the reasons to chase a stock, none is better than chasingFIGURE 7.2 Buying Up for Great EarningsChart courtesy of Prophet Financial Systems (www.prophet.net). ccc_payne_171-198_ch07.qxd 3/13/07 8:00 AM Page 175Chasing Stocks 175earnings, particularly if the stock isn t already orbital and if thevaluations suggest the stock is still undervalued.Chasing Stocks (Brokerage Upgrades)I must say Wall Street researchers have become a scary lot.Theseguys are walking around like gazelles on the African plains, won-dering when they re going to have to run for their lives.Onceupon a time Wall Street analysts were king of the jungle; they werethe lions that kept the story going and investors excited.Of course,this position was abused and now analysts have been bumpeddown the food chain.To be sure, I see better reactions to upgradesand downgrades, but it s amazing that the Dow marched from7,600 to 12,000 and there were hardly any strong buys.In fact,most of the ratings on individual stocks were middle-of-the-roadstuff like market performer or neutral. And you get the feeling, when they decide to upgrade a stock,they re like gazelles migrating across a great river infested withcrocodiles.Ironically, this development is turning out to be goodfor investors.Back in the day, buy recommendations were a dimea dozen and strong buy recommendations were commonplace,even when there were no fundamentals to validate such ratings.These days you have to send out a search party to find a strongbuy, and only after the coast is clear are we seeing new buy recom-mendations from the Street.That fear of being on the wrong sideof a stock has made the buy rating more believable, such that un-der the right circumstances the buy rating is worth chasing.Just as it s better to chase stocks propelled by earnings whenthey are at or near a low, so too is better to chase brokerage up-grades when a stock has been languishing.Real-Life ExampleOn the morning of September 12, 2006, there were eight brokerageupgrades from eight different firms.The action in the share pricesof these stocks over the next week is a perfect template for how toplay brokerage upgrades.Of the upgrades listed in Table 7.1, onlytwo stocks were already significantly higher from the year-ago pe-riod.Of the six that were lower over the course of the previous ccc_payne_171-198_ch07.qxd 3/13/07 8:00 AM Page 176176 TOOLS AND RULESTABLE 7.1 A Typical Day of Brokerage UpgradesCompany Symbol Firm Rating (Upgrade)IPSCO IPS UBS BuyNATCO Group NTG Matrix Research BuyAdvanced Micro AMD Lehman OverweightSteris STE Key Banc BuyApplied Materials AMAT Credit Suisse OutperformGenentech DNA Robert Baird OutperformMatria Healthcare MATR First Albany BuyLone Star Tech LSS Bear Stearns Outperformyear, only one didn t make a substantive rally in the days after theupgrade.On September 11, 2006, IPSCO (stock symbol IPS) shares closedat $87.20, down $5 for the day but still higher than a year earlierwhen the shares were changing hands at $66.Essentially the firmwas trying to catch a falling knife.Perhaps sensing that they hadmissed the initial move higher, this was a chance for the analyststo get in the game at a reasonable price, or at least that s the way itappears.A week later the stock was still struggling to gain trac-tion, trading well below the $91 share price reached on the day ofthe upgrade.(See Figure 7.3.)NATCO (stock symbol NTG) was also already in a strong up-trend when the stock was upgraded to buy from neutral at UBS.Like IPS, this stock was under recent pressure, but the share price,which closed at $30.68 the day before, was still much higher thanthe $23 it fetched a year earlier.The stock got to $31.90 the day itwas upgraded but resumed its horrific slide later in the day and inthe immediate days to follow.(See Figure 7.4.)Matria Healthcare (stock symbol MATR) was trading at $44 inMarch 2006 before getting slammed a few times and landing at $20in June.The stock was upgraded by First Albany, which is a finefirm but doesn t have the ability to generate excitement beyond itsown corner of the world.Still, the stock rallied the day of the up-grade and held up over the next several days.(See Figure 7.5.) Thiswas a difficult stock to chase based on the mix of pros and cons. ccc_payne_171-198_ch07.qxd 3/13/07 8:00 AM Page 177Chasing Stocks 177FIGURE 7.3 IPSCOChart courtesy of Prophet Financial Systems (www.prophet.net).FIGURE 7.4 NATCO GroupChart courtesy of Prophet Financial Systems (www.prophet.net). ccc_payne_171-198_ch07.qxd 3/13/07 8:00 AM Page 178178 TOOLS AND RULESFIGURE 7 [ Pobierz całość w formacie PDF ]
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.On August 10, 2006, Brinker International (stock symbol EAT)posted its financials for the quarterly period that ended on the lastday of June (its fourth quarter).The earnings, excluding specialitems, came in at $0.75, versus the consensus estimate of $0.65.It snot every day a company beats the general consensus by a dime,so that in and of itself was huge, and there was no way it would bereflected in the share price in a single session. ccc_payne_171-198_ch07.qxd 3/13/07 8:00 AM Page 174174 TOOLS AND RULESHeading into the earnings announcement, the stock was driftinglower and lower and looked dead in the water.(See Figure 7.2.)This is the perfect setup, a stock that has come down gradually.This was a reflection of indifference, so the sellers didn t have anax to grind, they had simply lost faith.This is great, because oncethe stock begins to move higher, there won t be an entrenchedcampaign to keep it down.The short position was 6.6 percent ofthe float, kind of high but not a jihad just a few folks whowanted to ride the stock as low as it would go.To understand just how little faith there was in the stock, theshares closed at $32, just eight cents off the low of the session,down $1.14 the day before the earnings were released.The nextmorning the stock opened at $33 and it was off to the races.BySeptember 15, buyers at the open on August 10 were up 27.3 per-cent.I bet 95 percent of all hedge fund managers would give theirleft arm, or maybe their Presidential Rolex, for that kind of returnin just one year.Of all the reasons to chase a stock, none is better than chasingFIGURE 7.2 Buying Up for Great EarningsChart courtesy of Prophet Financial Systems (www.prophet.net). ccc_payne_171-198_ch07.qxd 3/13/07 8:00 AM Page 175Chasing Stocks 175earnings, particularly if the stock isn t already orbital and if thevaluations suggest the stock is still undervalued.Chasing Stocks (Brokerage Upgrades)I must say Wall Street researchers have become a scary lot.Theseguys are walking around like gazelles on the African plains, won-dering when they re going to have to run for their lives.Onceupon a time Wall Street analysts were king of the jungle; they werethe lions that kept the story going and investors excited.Of course,this position was abused and now analysts have been bumpeddown the food chain.To be sure, I see better reactions to upgradesand downgrades, but it s amazing that the Dow marched from7,600 to 12,000 and there were hardly any strong buys.In fact,most of the ratings on individual stocks were middle-of-the-roadstuff like market performer or neutral. And you get the feeling, when they decide to upgrade a stock,they re like gazelles migrating across a great river infested withcrocodiles.Ironically, this development is turning out to be goodfor investors.Back in the day, buy recommendations were a dimea dozen and strong buy recommendations were commonplace,even when there were no fundamentals to validate such ratings.These days you have to send out a search party to find a strongbuy, and only after the coast is clear are we seeing new buy recom-mendations from the Street.That fear of being on the wrong sideof a stock has made the buy rating more believable, such that un-der the right circumstances the buy rating is worth chasing.Just as it s better to chase stocks propelled by earnings whenthey are at or near a low, so too is better to chase brokerage up-grades when a stock has been languishing.Real-Life ExampleOn the morning of September 12, 2006, there were eight brokerageupgrades from eight different firms.The action in the share pricesof these stocks over the next week is a perfect template for how toplay brokerage upgrades.Of the upgrades listed in Table 7.1, onlytwo stocks were already significantly higher from the year-ago pe-riod.Of the six that were lower over the course of the previous ccc_payne_171-198_ch07.qxd 3/13/07 8:00 AM Page 176176 TOOLS AND RULESTABLE 7.1 A Typical Day of Brokerage UpgradesCompany Symbol Firm Rating (Upgrade)IPSCO IPS UBS BuyNATCO Group NTG Matrix Research BuyAdvanced Micro AMD Lehman OverweightSteris STE Key Banc BuyApplied Materials AMAT Credit Suisse OutperformGenentech DNA Robert Baird OutperformMatria Healthcare MATR First Albany BuyLone Star Tech LSS Bear Stearns Outperformyear, only one didn t make a substantive rally in the days after theupgrade.On September 11, 2006, IPSCO (stock symbol IPS) shares closedat $87.20, down $5 for the day but still higher than a year earlierwhen the shares were changing hands at $66.Essentially the firmwas trying to catch a falling knife.Perhaps sensing that they hadmissed the initial move higher, this was a chance for the analyststo get in the game at a reasonable price, or at least that s the way itappears.A week later the stock was still struggling to gain trac-tion, trading well below the $91 share price reached on the day ofthe upgrade.(See Figure 7.3.)NATCO (stock symbol NTG) was also already in a strong up-trend when the stock was upgraded to buy from neutral at UBS.Like IPS, this stock was under recent pressure, but the share price,which closed at $30.68 the day before, was still much higher thanthe $23 it fetched a year earlier.The stock got to $31.90 the day itwas upgraded but resumed its horrific slide later in the day and inthe immediate days to follow.(See Figure 7.4.)Matria Healthcare (stock symbol MATR) was trading at $44 inMarch 2006 before getting slammed a few times and landing at $20in June.The stock was upgraded by First Albany, which is a finefirm but doesn t have the ability to generate excitement beyond itsown corner of the world.Still, the stock rallied the day of the up-grade and held up over the next several days.(See Figure 7.5.) Thiswas a difficult stock to chase based on the mix of pros and cons. ccc_payne_171-198_ch07.qxd 3/13/07 8:00 AM Page 177Chasing Stocks 177FIGURE 7.3 IPSCOChart courtesy of Prophet Financial Systems (www.prophet.net).FIGURE 7.4 NATCO GroupChart courtesy of Prophet Financial Systems (www.prophet.net). ccc_payne_171-198_ch07.qxd 3/13/07 8:00 AM Page 178178 TOOLS AND RULESFIGURE 7 [ Pobierz całość w formacie PDF ]