Cody Kiss & Tell: Stock formula, Apple earnings, for-profit education and more…

Here’s the transcript to this week’s Live Q&A chat. Join me next Wednesday at noon at http://tradingwithcody.com/chat or send me an email with your question at support@tradingwithcody.com.

Let’s rock n roll. Ask me anything you want.

Q: When you buy a stock for a trade what are you looking for, a couple of points or more? Is there a formula you go by?
A: I’m usually looking to make a double or a triple or even 10x my original investment or more when I invest in a stock. When I trade a stock for a shorter-term trade, I might be looking for 10-30% or so. A wise man once said, “a trade is a trade is a trade”, and others have said, “Never let a trade become an investment”. The point being that I am flexible in my trading vs. my investing approach but I am always aware of which is which.

Q. So, how do you limit your losses? Do you have a predefined percentage, or it depends of the stock? What would you suggest to learn to learn how to limit losses.
A. You’ve seen me limit my own losses here in real-time by selling/trimming and puking out the longs that aren’t working out for us. Limiting your losses and selling your losers is an art, not a science, but the most important concept is to let your winners work for you and to limit your losses, including opportunity costs, in those that don’t grow to the moon.

Q: Hi Cody, I have been a full time trader for six years. In that amount of time I have made all the typical mistakes. In May I decided to quit the day trade scene and just let my trades work out. Now, everything is under water and every day it just gets worse. This is where the inexperienced would sell at the bottom. Even knowing that, I can hardly take the pain any longer. Yes my trades were made with a long term horizon. I have a cabinet of 200 trading books, seminars, etc. telling me what I should of could’ve done. FIO does the same thing almost every day. Goes up pre market and then the shorts drive it down. Will there ever be a day when the shorts are in pain? Are all the coal mines going out of business?
A: First off, I’m sorry to hear about your pain and I know how bad it hurts. It will get better. Second, unless those books point out the hard truth that I do for you all the time — that EVERY trader and EVERY investor will at some point have a huge draw down from the highs in the portfolios, then they are probably mostly worthless. Nothing but perseverance will serve you now. I don’t know what’s right about buying or selling your particular positions right now, but you’re probably right that since holding on is the hardest trade to make right now, it’s probably the right one. Stay in the game and good luck.

Q. To follow up on the previous response, I note you have not puked out FIO although it is down a lot from your initial buys. Even if you went into it knowing it would be volatile, once it started going down did you think of selling and trying to re-enter once it caught some support?
A. No, I’ve considered FIO from the start to be a “venture capitalist” type investment, meaning that I’m considering myself a very early bettor on a brand new technology that might not work out at all, but might pay me 10x my original investment if it works out five years from now. I always consider selling any position, every time I analyze it, but I’m sticking with my original thesis for FIO because it’s still so early and it looks like it could very well play out.
Thanks Cody !!

Q. Have you had your AAPL but in the other way? I mean, a stock you really have studied, and believed it to grow, but it didn’t?
A. Oh goodness, yes, I’ve had more “bad apples” too. That’s a great question, because learning how to limit your losses on the bad apples is as important as finding the good apples that you can hold forever. I’ve owned hundreds of tech stocks over the years, some of which have worked out great and some of which didn’t, but I found enough huge homeruns like Apple long at $7, Google long at $90, Aone short at $10, Cisco long near $10, RIMM short at $90, FFIV long at $18, and so on and so forth, that those huge homeruns make you huge profits and the other stuff just barely moves the needle to augment those returns.

Q. Hello Cody, on TV they are saying that 2012 is in the same trend that 2010 and 2011 was, which means that next 3 months are going to be a “debacle” (S&P falling to 1075). I know you are a “contrarian” to panic. Could you give us your thoughts about it please?
A. First, I would say that I wouldn’t want to try to get an edge by listening to the guys on the TV — except to try use whatever they’re saying as a backdrop for what is already priced in. Trying to game the what millions of traders and investors from all over the globe are going to be doing in reaction to headline macro economic news and then trying to successfully use that knowledge to actually profit by timing how those markets are going to react to what the mainstream media is focusing on…well, I just don’t think that sounds like a successful strategy for any trader. I might try to use the “TV guys are saying” data point as a contrarian indicator of the very near-term direction of the markets, especially if its a wide consensus from those TV guys.

Q. Cody- Hope you are rebuilding in due course from the fire. I really like your MS short call though I’m not as sanguine about JPM because Jamie Dimon seems to own Congress. MS seems to have all the right ingredients for a drop; it’s clients seem to be leaving in droves and I like your point about the LIBOR investigations being a catalyst for less profit. My question to you is this: Shorting is a pain in the ***. I haven’t done it in years because I’ve found it’s too nerve wracking and as the cliche goes the market can stay irrational longer than I can stay solvent. So I bought a bunch of puts expiring in October. Intuitively it seems like the vultures are already starting to circle over MS. Is there source where investors like me can monitor credit default swaps on MS to gauge the likelihood of a further client and counterparty exodus? Also, what are the odds that the client exodus in MS will increase in the next couple of months, and that it will suffer a Lehman or Bear style collapse? (I guess with the elections it’s more likely to be a slow death, unless some big fish on WS start- ahem- strategically shorting) Lots of money to be made if that happens….
A. Wow, your question was so long, I looked over it thinking it was one of my answers. Lots of information and analysis is baked into your question. Here goes my answers: I’d be worried that October isn’t nearly long enough for this thesis to play out. It could take years. I do think the banks, including JPM and MS, have everything as “Good as it can get” already from a historical perspective but we could be talking about another year or three before the cycle really reverses enough to leave most all of these banks, including JPM and MS, naked at sea.

Q. Cody, more on the previous question to you. When you short a stock from now on, could you also give the subscribers an indication of what puts you might buy if one isn’t comfortable with shorting? The MS and JPM trade would have been perfect for this. Regarding these shorts, could you give an idea of what puts would be worthwhile now, 11 days after you wrote about them? Thank you sir!
A. Great suggestion and yes, I’ll do that from now on, both on longs and shorts — meaning that even if I’m personally buying common, I’ll try to cite some option ideas that might work in the same stock. As far as MS and JPM go, I’d look at puts dated anywhere starting in January 2013 and later and I’d look at buying puts that are slightly out of the money, with strike prices down to about 20% of the current stock quotes. That is, I’d look at longer-dated MS puts with strike prices from $10-12. And I’d look at longer-dated JPM puts with strike prices from $28-30 or so.

Q. Heard a trader say Bezos is the next Jobs. Pretty strong statement. I am holding 75 shares in AMZN going into the earnings report ( that’s a scary thought ). If AMZN can do well when it reports could the trader be onto something?
A. I totally agree with the idea that Bezos is the next Steve Jobs. That said, I don’t think that has anything to do with tonight’s earnings report. It has to do with the fact that Bezos will look into a marketplace five years into the future and start setting up his company to revolutonize that industry before it gets there.

Q. Cody, on board totally long term on AAPL. BUT … just to look with a skeptics’ eye, does the company’s two misses in the Tim Cook era give you any worries?
A. I worry about a lot of things at any of my stocks, but the two “misses” under Tim Cook for AAPL are not in the arena.

Q. AAPL misses revenue & earnings by around 9-10%, outlook is weak and the stock hardly moves. Compare to other less loved growth stocks like CMG, and you get the feeling that something is not quite right here. I would expect if Apple were a “regular” loved stock, we’d see pricing around $530 or so today, given the market is more likely to sell-off on bad news (especially unexpected ie. NFLX). In your opinion, is AAPL just a overly-loved stock right now and if so, can this cause problems going forward? I ask this knowing you are also very bullish as well.
A. Apple’s miss, involved them making $8.8 billion in net profit in the last three months. That’s almost $100 million in profit per day for the last three months. The company should make $50 billion in profits, not sales, but profits in the next 365 days, and the market cap is right now at $500 billion or so…plus they have $100 billion in net cash in the checking account and now we’re getting a good dividend yield to boot. That’s why Apple’s not down much.

Q. Hi Cody, are you holding your AAPL Jan 2013 calls steady?
A. Yes, I’m holding them steady for now but am also considering adding to them.

Q. How low do you think AAPL can go??
A. I don’t think Apple will fall much below these lows of the day, or about $570. I’m considering buying more Apple even though it’s my largest position already.

Q. Cody, Do you think the absorption of the iphone is stalling as more smart phones for much lower selling points hit the market ala samsung? I mean, unless we see a new iphone design and such what is the likely hood to upgrade? I like Siri and why would I upgrade for a 1/2 in larger screen, new Siri etc? Unless we get a whole new iphone design, what’s the point?
A. I think the next iPhone will be wonderful enough in enough ways that it’ll prompt anybody who’s under contract who ever considered buying an Apple iPhone to go ahead and do it. And I expect that free iPhone 3s are likely just a couple quarters away, as older iPhone models move down in price point.

Q. What’s your thoughts on ZNGA and AMZN’s earnings?
A. Feet to fire, I think ZNGA’s likely to impress the markets unless it truly reports a disastrous quarter, but I’d expect a pop after earnings at least for this report. Amzn’s short-term is anybody’s guess — consumer spending on electronics is secularly growing no matter what happens with the broader economy, but AMZN’s infamous for just focusing on the long-term and not worrying what the market does to their stock after an earnings report.

Q. Cody, Should we make a play on ZNGA before earnings? Our initial analysis that made them a holding was that they were doing things differently than the other players in the marketplace and maybe they got oversold. Thoughts on this?
A. See my earlier comments on ZNGA. Feet to fire, I’d guess it pops on earnings, but I’m not playing it.

Q. What’s your feel on the Facebook earnings tomorrow? Anything meaningful to take from it as its first quarter as publicly traded company? Or no matter what, its just the beginning? Even though it has 8-900 or so Million users already, so its not a new company anymore?
A. I don’t know quite how to game what the market will be looking for in the first ever FB earnings report, but feet to fire, I’d guess that mobile revenues will be the biggest catalyst unless the earnings themselves are just so far away from consensus as to truly be shocking. Given that my analysis for FB is looking out into 2013 and 2014 for my reasons to own it, I’m not sure there will be much for me specifically in the report, other than to learn more about the company itself.

Q. Thoughts on CSCO under 16? I am looking at this as a longer term holding (getting paid a 2% dividend while waiting) with limited downside… Do you think the recent VMware purchase will really hit CSCO’s business as the “pundits” were stating?
A. I am liking CSCO near $15 for the mid- and longer-terms. Some of my telecom infrastructure sources are adamant about the upcoming spending they’ll be doing on Cisco routers. Just an anecdotal data point, but interestingly bullish nonetheless.

Q: What are your thoughts on MSFT? Do you think it can be the next RIMM or NOK given AAPL’s disruption of the PC?
A: I think MSFT has enough of a platform established in the hundred million PC users around the globe that it’s safe for many more years no matter how badly it screws up the tablet and mobile businesses it has. I wouldn’t want to own it though.

Q. Think there’s any substance behind the rumor that Seagate will acquire OCZ?
A. No, I don’t think Seagate sounds like a likely buyer of OCZ. Maybe HPQ or some big server/hardware conglomerate would be a more likely buyer.

Q. What was wrong with LVLT?
A. I think the topline was weak, and the company’s large debt pile is too big of a threat for any weakness on the topline to be tolerated by the markets. I’m not impressed with that quarter at all.

Q. Cody, what’s your outlook on homebuilders like LEN given the unexpected decline in new home sales?
A. The homebuilders paid way too much for everything under the sun all the way to the top of the biggest bubble in the history of real estate and they are only solvent today because of endless subsidies, welfares, stimuli and other homeowner-help policies. I wish I had been trading in 2008 when these guys popped the first time. I think the homebuilders of today’s era will end up mostly bankrupt in coming years and up to a decade.

Q. What’s your outlook for AIG given its improving balance sheet and the government increasingly selling out? Thanks for all your insights!!!
A. I don’t know how to game the AIG corruption/bank-bailout-laundering aspect so I don’t even try. Yuck. AIG makes me sick.

Q. Are the for-profit educational stocks like APOL and LOPE still worth shorting?
A. Yes, I think the for-profit educators are still doomed for much lower stock prices and many of them will go outright bust when this welfare-funded business cycle finishes going from boom to bust, as it is now in the process of doing.

Q: In the for-profit education space there is another deteriorating player CECO (Career Education). Their fundamentals have deteriorated even faster than APOL. They’ve fallen big already. Would this be another potential short? Or is it late?
A: I do think CECO is a potential short, but I’ve missed its collapse so far as we’ve been focusing on the APOL. Dang it — wish I’d had them both short on the sheets!

Q. Do you think the $PHO ETF is a good way to play world water market?
A. I don’t like sector ETFs in general, because they limit my edge to sector analysis instead of my added edge that comes with trying to find the single best idea in that sector. I really don’t like the $PHO ETF though because the water industry itself is so government-aided that you will find a lot of corruption and collapse within the sector even in booming times for that sector.

Okay guys, great stuff today once again. Thanks! I’ll be answering the questions that were emailed in and posting them here and then also including them in the transcript tonight, so stay tuned for more Q&A. Rock on.