Everyone will have his or her own way of vetting stock tips. But permit me, if you would, to describe what I do when given a stock tip. And just so this a real-time, real-money exercise, let’s work with ARL, which Andy recently bought --this Monday morning?-- at $27.43.
#1. Chart it, using whatever template and time-frame you customarily work with. The first screen capture is my ‘go-to’, default chart where the prices shown are as of Friday’s close. In other words, I want to be putting myself into the same shoes the person might have been wearing when the tip was made and not be pulling the cheap shot trick of having hindsight. Said another way, and as Justin Mamis insists in his book The Nature of Risk and Stan Weinstein in his,
“What evidence was there in the tape that the stock was a timely buy?”
This time, the facts are so obvious that no further charting is needed. On strong volume (relative to previous volume, which --actually-- is tiny), ARL broke out, every day gapping up, six days in a row, inviting this prediction. It has likely maxed its move up and is likely due for a retracement. Therefore, DONT CHASE.
Why did it move up so quickly? Who knows? Likely an earnings announcement, to which I never pay attention. But ARL’s fundamentals might be worth looking at. So let’s hop on over to Simply Wall Street to see what they say.
SWS regards ARL’s 2961.5% earnings growth as a positive thing. I see it as a huge risk, because it’s likely to be unsustainable, especially in a rising interest-rate environment and in an economy that’s in a recession. However, let’s benchmark it against an index that tracks the US real estate sector, such as IYR.
That chart tells you all you need to know that ARL is NOT a ‘defensive’ investment, as Graham defines the term. Nor is it an ‘Enterprising investment’. Instead, it is a Highly Speculative bet and --as such-- if a position were to be taken under more favorable circumstances, the position would have to be a small one. Confirming that label as ‘speculative’ is the fact that ARL is nearly illiquid, with an avg daily vol of just 5,457 shares.
“How small a position?”, you might ask. That would depend on the percentages established in one’s investment plan, which is a post for another time. But for Andy’s current, $1,991 account, I’d suggest that buying just one share is as much as could have been risked, when the three risk tranches of Defensive, Enterprise, Speculative are weighted 3:2:1, with each tranche divided into Wm O’Neil’s suggested ten piles of money.
Lastly, do this. Try to determine where support and resistance are. A 1-year chart with weekly bars suggests nearby support is around $20, with longer-term support around $14. In other words, there’s a lot more downside to this stock than upside. But its balance sheet looks good. So this seems to be yet another instance of “good company, bad stock”, and I’d pass.
