Ignoring portfolio balance for buying dips

SWKS appears to be an undeniable bargain right now, I can’t imagine it getting much better. I want so badly to add a bunch, but it’s already my largest holding.

My returns are currently negative on SWKS because I took my time migrating from the infinite # of SA, RB, and Best Buy Nows (I hated that portfolio- it was chaos; couldn’t keep track of the companies) to this board’s philosophy (which I like a lot). So I added most (not all) of my SWKS late (no regrets- still an amazing performing company).

I’m not a “must keep my portfolio balanced” sort of personality. I want to buy the best growth companies, with only mild deference to “too many eggs in one basket”. Risk averse is NOT a term that describes me.

I’m late middle aged, but still in my prime earning years (and living WAY below my income level), so I don’t anticipate needing my portfolio $$ anytime soon.

I’ve played the “catch a falling knife” game before(dumb- SODA), but this ain’t one of those times. Night and day difference.

I’m a big boy and can make and live with my own decisions and actions, but I wanted to appeal to this board because of the collective wisdom I see here.

As always, thanks. I’ve learned much from this board, still soaking it in.

-Bob

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You do what you gotta do. But Morningstar (8/20/15) maintains:

“Skyworks Solutions reported another quarter of outstanding financial results and provided investors with a healthy outlook for its fiscal fourth quarter that implies steady, if not growing, content in Apple’s upcoming iPhone 6s launch. We will maintain our $75 fair value estimate and no-moat rating, and we continue to view the shares as overvalued. We remain concerned about long-term pricing power in the smartphone radio frequency chip space.”

SWKS was a momentum darling of the IBD crowd. That’s fine. But these are strictly trading stocks. IBD’s discipline is to limit a loss to 7%, period. (http://education.investors.com/investors-corner/585359-ibds-…)

“Market Edge,” which focuses on technical action in individual stocks, has had an “Avoid” rating on SWKS since Aug. 3.

Could SWKS bounce back to 90? Of course it could. But beware of falling in love with trading stocks.

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Hi Bob,

I think I completely understand. I agree that SWKS is incredibly mispriced right now. In fact, IMO it’s the best bargain that I see at the moment. If management hits what they are saying they will hit next year (i.e. $7 EPS) then we will have a stock at a P/E of 11.2 and a 1 year growth rate of 33% giving it a 1 year PEG of around 0.34. These calculations are using next quarter (Q4) guidance of $1.51 and full year FY16 of $7 EPS. Let’s say that the market comes to its senses by then and awards SWKS a P/E of 23 as it has in the recent past. This would imply a stock price of $161 in 14 months or a 104% return not including the $1.04 (assuming no increase) dividend collected.

So if you’re going to over allocate then I think you really want to think about the possible risks to the company. When I look a SWKS, it’s kind of hard to imagine what might go wrong. But let me try anyway.

  1. Fraud. It looks great but what if it turns about to be another Enron.

  2. Solar flare that fries out all electronics. The global economy would pretty much be in deep poop for a while if this happen and SWKS would be especially affected.

  3. SWKS facilities destroyed so they can’t manufacture.

  4. Anything else that affects the world economy such as nuclear war. I tend not to worry about these because they would affect most assets.

When I find a situation like SWKS where my conviction is super high and the downside seems minimal, I tend to “over allocate” with options. If my allocations is already at the upper limit I might do one of three things:

a) don’t increase my allocation

b) buy call options; if I do this I want to minimize the chance that my timing is wrong as stocks can remain misplaced for a long time. I try to buy calls that are as far in the future as possible (currently those are the Jan17 expiration options). I usually buy strike prices near the current price. When choosing this option, keep in mind that you are risking your entire investment if you are wrong on the timing.

c) you could break the allocation rule and buy more shares. My rule is the same as Saul’s—20%. I am not currently comfortable exceeding this rule no matter how strongly a feel about a particular company. I always must consider the possibility that I am wrong or that some fluke event causes a severe company specific problem.

Hope this helps.

Chris

18 Likes

[quote] if you’re going to over allocate then I think you really want to think about the possible risks to the company. When I look a SWKS, it’s kind of hard to imagine what might go wrong. But let me try anyway.

  1. Fraud. It looks great but what if it turns about to be another Enron.

  2. Solar flare that fries out all electronics. The global economy would pretty much be in deep poop for a while if this happen and SWKS would be especially affected.

  3. SWKS facilities destroyed so they can’t manufacture.

  4. Anything else that affects the world economy such as nuclear war. I tend not to worry about these because they would affect most assets.[quote]

Chris, I appreciate your tongue in cheek risks. I think the more real risk is that demand falls through the floor for smartphones. There are already indications that most people that want phones already have phones and with china looking like it is going to take a deep breath then I think there very real concerns about where growth is going to come in the SOC space.

Be careful…don’t over allocate because ultimately we only know what we are told.

Best,

ethan

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SWKS was a momentum darling of the IBD crowd. That’s fine. But these are strictly trading stocks. IBD’s discipline is to limit a loss to 7%, period.

There is an important assumption that goes with that - you “buy right”. That means first that the stock meets a number of fundamental (growth) criteria and then buying right based on the chart. That is buy on a breakout that has strong volume because that says the big boys are behind it and they will take weeks to get all the shares they want and you can get all you want at the time of the break out. The expect 3 of 4 buys to fail and you stop loss at 6-8% (from your buy point) The 1 that works is expected to make 20-25% before you take profits. But every now and then there is a great stock that you hold for a long time for huge gains. So it is a break even game until you hit that occasional big one. There are varoius rules and guidelines but it can be hard to “de-emotionalize” yourself and truly follow the rules. But I guess that is what we are trying to do here too.

IBD (CANSLIM) NEVER “buys on the dip” during a market decline. They say if the market is in a confirmed downtrend (as it is now), do not buy anything and the rules should have gotten you into a lot of cash by now. You will start getting strong buy opportunities and breakouts when the market changes to a confirmed uptrend. Their back testing defines it (basically) as such:
When you get an up day in a downtrend market, then you start looking for a “follow through” day. This is an upward move of about 2% on STRONG volume 3-7 days after the first move up. (1-2 days after is too soon 10 days after is too late to be a follow through day.)

I find it helpful to watch for this follow through day to get the psychological confidence to start committing real money (even if you do not follow breakout theory). After all, the market direction acounts for about 75% of the movement of stock so why fight it too much.

FYI, March (11 or 13 I forget), 2009 was an official follow through day at the time.

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Thanks everyone for the feedback!

-Bob