Here’s the transcript to this week’s Live Q&A chat. Join me next Wednesday at noon at https://tradingwithcody.com/chat or send me an email with your question at email@example.com.
Let’s hit it. Ask me anything.
BTW, we’re almost done putting together the finished Everything You Need to Know About Investing book and the feedback from subscribers who requested an advanced copy has been very helpful. If you volunteered to read the First Draft of the book and haven’t sent me your feedback, please do it today or tomorrow. I plan on getting the finished product out next week — including a paperback version of the book that I’ll make available to you guys for my cost + shipping.
Q. Let your winners run and cut or limit your losers. I know you’ve said this many times in the past and of course it makes total sense. My question is how do you know when a winner has become a loser and you have to cut it before your profits disappear?
A. That is a truly great question. The answer has to do with your time frame. If you bought Apple at $7 and it went to $50 but then it fell to $30 and then it rallied to $200 and then it fell to $80 and then it rallied to $600, it would have been very hard to have remained long the whole time, as I and many of my followers did. Meanwhile, if you bought Dollar General at $10 and rode it to $55 and it’s now fallen to $50 what would make you think that it’s not a winner anymore and this latest pullback isn’t just another pullback on its way to $100. That concept is part of why I shun technical analysis so much and why I think that you have to use some fundmental analysis to help you see a fundmental turn in the business happen rather than just selling because the stock fell some certain percentage or through some certain line on a chart that gets you out of a winner like AAPL instead of letting you hold on through the wild gyrations that every stock will have over time. At some point, Apple too, will top and then topple and we’ll certainly want to have sold it before then.
Q. How do you trade around these macro events like Europe, the China slowdown, the fiscal cliff, employment numbers, etc.? Do you buy when they announce something that takes everything down? Do you buy when they announce “good” news? Seems like the macro affects everything else.
A. It didn’t use to be this way, but yeah, the macro often drives the markets and thereby our individual stocks for days/weeks on end these days. The broader economic trends have always influenced both profits and multiples making swings in the markets exaggerated over years and decades. But the wild macro-sentiment-driven swings that occur over days and weeks these days seem to be completely and wholly driven by a negative feedback loop of sell-offs and “The Debt Crisis Sky is REALLY, REALLY, I MEAN REALLY Going to Fall This Time” headlines reversing eventually to a positive feedback loop of rallies and “Oh, Turns Out the Debt Crisis Was Finally Solved By Magic Bureaucrats and Politicians” headlines. And yes, as long-time subscribers have seen me do repeatedly since TradingWithCody.com’s inception, I try to buy the extreme panics/sell-offs and sell the extreme reliefs/rallies.
Q. What is your take on sentiment and upward/downward momentum driving share prices? The vitriol against FB and ZNGA is palpable and has certainly played a part in the collapse of the price of these stocks in particular. What turns the tide one way or another?
A. Great question and I’ll quote the great Benjamin Graham for my answer to that one. From Wikipedia: “Graham wrote that the owner of equity stocks should regard them first and foremost as conferring part ownership of a business. With that perspective in mind, the stock owner should not be too concerned with erratic fluctuations in stock prices, since in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine (i.e. its true value will in the long run be reflected in its stock price). Graham distinguished between the passive and the active investor. The passive investor, often referred to as a defensive investor, invests cautiously, looks for value stocks, and buys for the long term. The active investor, on the other hand, is one who has more time, interest, and possibly more specialized knowledge to seek out exceptional buys in the market. Graham recommended that investors spend time and effort to analyze the financial state of companies. When a company is available on the market at a price which is at a discount to its intrinsic value, a “margin of safety” exists, which makes it suitable for investment.”
Q. Hi Cody, I sent questions via email, will you answer those as well?
A. Yes, definitely. I will answer the questions you guys submit by email for the Live Q&A and we’ll include those in the transcript. Please email your question each Wednesday to firstname.lastname@example.org and we’ll get you question answered.
Q. Ok, don’t have them in front of me but something like this: (1) What is the reason for the LVLT sell call? The buy thesis was based on a long-term outlook that they’d ramp up their cash flows through their infrastructure build-out yet you sold due to a bad quarter. Can you elaborate?
A. The cash flow and the margins were so bad in the quarter, relative to what I need to see to feel confident about them not having to dilute me and/or borrow a bunch more money at high interest rates, that I wanted out no matter what. Just too risky for my blood now because now, after seeing those latest results and projections, it looks like they are going to need cash much sooner and on harsher terms than I would feel comfortable with.
Q. (2) What is your opinion of Equinix (EQIX). It has been a big winner for me and I wanted to get your take if this is something you’d like to add to the Revolution Portfolio. They apparently have multi-year secular growth in front of them in data center outsourcing.
A. Yes, I like EQIX and it’s just one of those that hasn’t made the buy list yet. As in, you can’t own ’em all.
Q. There seems to be a great deal of very strong opinion regarding Facebook, its relationship with Zynga, its ability to monetize its business, etc. There is also some discussion about the additional stock that will be available for sale this month and the possible additional pressure on the sale price as a result. Meanwhile the stock seems to be in a tailspin, going down every day. I have placed a fairly sizeable bet on this stock and the pain is getting to be significant. Have we bought too soon? What would be the best strategy long term from here?
A. I also feel your pain and I am so mad at myself for not having had more patience before initiating this FB long. I always pointed out that this stock could easily fall from our buying prices every time I bought it, and indeed it has. I am biding my time as I don’t know where it will bottom and I don’t want to be overly aggressive any more than I have been in FB already. I do think FB will have a whole lot of upside in coming years, but discipline trumps conviction. I plan on buying more FB common and long-dated calls in coming weeks and months but I won’t let myself rush it.
Q. Hey Cody, just joined in – I’m not sure if I am interrupting in between some other topic. About Zynga, do you think Facebook is going to buy them out? If yes shouldn’t they be buying zynga at these levels from market?
A. You’re not interrupting in any way! No, I’m not thinking that FB has any intention of buying ZNGA. I bought some as a speculative call option that never expires at $3 a share, but I’m not looking to buy more unless it drops a lot more from here.
Q. I asked you this earlier, but when would be a good re-entry point to add FB ( I have a basis pt. in the mid 30’s) and would you buy stock, calls or both. Also, do you still own Znga, did not see it on your post yesterday. Thanks.
A. I am also wondering when I’ll step up to buy FB again, but I’m just not there yet. I want to let the stock trade itself around a little bit and I might end up paying up for the stock if and when it looks to me like it’s put in a bit of a bottom/starts acting better.
Q. With so many following technical analysis doesn’t knowing what they will do help you understand the action? I imagine the technical and fundamental followers as the two major groups that drive stock performance. Am I wrong? Do you think technical analysis is simply a distraction? If you shun technical analysis, how did you know to get out of the market in 2007 / 2008?
A. That’s another great question and as a matter of fact, we just added a bunch of analysis and definitions of popular TA terms to the new book because it is important to at least know what TA is. And if you’ll notice in my FB comment above, I talked about waiting til it started “acting better”, which is a technical analysis phrase, really. Information is power so knowing about Technical Analysis is always better than simply pretending it doesn’t exist.
Q. Hi Cody, if the rumor of a new iPhone release on Sep. 12 is true, do you expect AAPL to rally in the following 6 weeks ahead of the launch? Also, what do you think of the stock split rumor, is it possible?
A. Yes, I think the stock could ramp into the New iPhone launch (I don’t think they’ll call it iPhone 5, but The New iPhone). Look for lots of voice-interaction capabilities and revamped, upgraded software in addition to sleeker hardward in the New iPhone. I am probably going to go pay up full price to get it even though I’m a year away from my contract upgrade option — that’s how cool I expect the New iPhone to be. As for the potential or not of an AAPL stock split — here’s something straight from the upcoming “Everything You Need to Know About Investing” book: So what if the company doubles the numbers of shares outstanding and halves the stock price? What good does that do anybody except the bankers, accountants and lawyers who get paid fat fees for pretending to do the hard math involved and making sure the right papers get filed at the right agencies? Stock splits might have made some sense back in the early 1900s when the value of a dollar was 90% less than it is today, which would have made a $200 stock equivalent to several-thousand-dollar stock. And back then a higher share count might actually have impacted the ability to trade a stock. But why on God’s green Earth should a company with a $200 or a $500 per share stock price split it? Does the market and its billions of shares traded every day seem illiquid to you? NO! Does a $200-per-share price keep small investors out? NO! (Surely nobody’s going to argue that someone who can’t afford to put $200 into one share should be investing in stocks.) A stock split for a company and stock like Apple is meaningless and just a distraction.
Q. Whats a good entry point in Apple?
A. I think Apple’s about to run to $700, so I’d be a buyer now or anytime in the next week or two as long as it remains near $600.
Q. Any thoughts on GMCR? Their patent expires in September. Starbucks is introducing their own machine and coffee with cream. At the same time, they are already down a lot this year. And there was an unexpectedly BIG ramp up this morning which may have been insider trading. Thoughts?
A. Months ago, I suggested shorting GMCR for https://tradingwithcody.com subscribers and I sure wish I had done so in my own accounts, because they were crushed soon thereafter. Down 75% from those levels, as the stock is now, I’d probably be leery about trying to stay short the name. But I’d ultimately defer to David Einhorn on this name and I’d try to just mimic him on it — if he’s still short, I’d keep riding it too, but expect at some point, some big rally just to squeeze and fool the weaker-handed shorts.
Q. 2 parts if I may. CRUS reported GREAT #’s and a rosy outlook- is this in your opinion based on APPLE making lots of new products they plan to sell or CRUS picking up samsung as a customer and demand from the added customer vs. just apple loading up on orders for new products to roll out? 2nd part- I use FB daily for 2 years now (more now than ever in past 6 months) but I have NEVER clicked on any ads at all- nothing presented to me of interest or other a very diff experience than my youtube usage which I click or look at ads or other much more often.
A. Part 1: I got no edge on CRUS to that detail for you without doing some serious homework on that name specifically, which I haven’t done in a while.
Part 2: About FB’s ad click rates — I agree I’ve never clicked on a FB ad in my life. They still get paid a little bit just for showing those ads though. More to the point though, your YouTube observations are dead on and relevant to FB in this way — YouTube started putting ads like that on after it was sold to Google and needed to start being accountable to the public shareholders instead of just being a pure platform of user growth. FB will follow that exact pathway in that now that it’s public and has to be accountable for generating sales growth in addition to user growth, they’ll start putting ads in new places and in new ways. And finally, I don’t care about ad clicks on the current Facebook platform because Facebook is going to get into payments, subscriptions and retailing in coming years anyway.
Q. Hi Cody. I see DDD is a mid-tier holding of your now, but last you posted you mentioned that you only had a “toehold”. When did you buy more, and when might you look to add more? Thanks.
A. DDD’s position in the portfolio relative to the other stocks can also be heavily influenced by the “notional value” of some of my positions being affected so dramatically by call options in the portfolio, even as I don’t have any options in DDD right now (wish I had!). Anyway, I bought a toehold position to get started which put it in the bottom of the mid-tier of my weighted positions and then it’s really rallied while some of the others in the upper mid-tier of the weighted positions fell — so it’s moved a bit higher in the portfolio. I am looking to add to it asap and I probably will do so in the next week or so.
Q. Incredible DDD gonna do 5-6X daily volume was down 13-14% today and now UNCH-
A. Regarding DDD’s intraday, there was a snafu in the system. I’d imagine some of those trades and prices will be nullified. http://blogs.wsj.com/marketbeat/2012/08/01/trader-snafu-the-list-of-the-148-affected-stocks/?mod=WSJBlog&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wsj%2Fmarketbeat%2Ffeed+%28WSJ.com%3A+MarketBeat+Blog%29&utm_content=Netvibes
Q. Google stock is acting so much better since the earnings. Should we be adding here to GOOG instead of all the other ones out there?
A. Great point and yes, I do think Google is a buy right now, also on its way to $700.
Q. Any opinion on Nokia? I sold most of my position, but still have a small number of shares and own a couple of Jan. 2013 calls. Would it make sense to wait too see how the Windows 8 phone does or just sell everything now. Thanks.
A. I can’t fathom the new Windows 8 doing enough to change what’s going on at Nokia. I’d said at $3.50 it was a “run for the hills” and I still think that at $2.38.
Q. Hi Cody, two weeks ago I emailed you about this stock IMOS which does semiconductor testing. I don’t know too much about the business technically but it looks great based on fundamentals. Have you had a chance to look at it? If so, any thoughts?
A. I haven’t done the work on it yet. Sorry, I’ve been working til late every night on this upcoming book.
Q. I know you don’t like politics but who do you think will win the next election? Also when do you think the unemployment rate will go down to the levels pre-recession?
A. I expect either Obama or Romney or Cody Willard to win the Election for President of the United States in 2012. https://www.facebook.com/groups/244132259032170/
Yup, I’m running for President so why wouldn’t I believe I can win? I never thought I’d have my own primetime TV show from the Waldorf-Astoria and get to go on Jay Leno to talk stocks and to get to host a two-hour nationally-televised block party on Wall Street…but I did.
I think we’ll see unemployment “surprisingly” drop closer to 7% in the next year or two and then it’ll rise back to 10% and higher in coming years from there…with the caveat that the Republican/Democrat Regime remains in power. If we can get rid of the R/D Regime and get some kickass prosecutors to come in and send a bunch of political and banking elites to prison, which would immediately foster honesty throughout the society which would immediately foster confidence in the economy which would immediately generate growth and demand for labor…well, then we’d sidestep years of pain and suffering with an imperfect, but at least mostly honest, just and civil society with a booming economy.
Okay guys, that’s it for today.