Question: Which of my stocks are cheap?

The takeover put, basically limits the share prices from going down significantly from here.

Can you describe this “takeover put” in more detail, please?

Being one of those who thinks of TA as seeing things in the tea leaves, I am disinclined to use any of these “signals”, but I will say that I am now more inclined to look for dips and set mental thresholds for when I will buy.

For me, the phrase “Technical Analysis” is a misnomer. I view it as recognizing that people often let their emotions drive their decision making, and attempting to predict how those emotions drive buy and sell behaviors in the absence of fundamental news on the stock.

So, it’s not really technical, but psychology.

Can you describe this “takeover put” in more detail, please?

When a company is a potential candidate for takeover, certain arbitrage funds, hedge funds will always be willing to step in to buy on any weakness. This sort of provides a floor to the stock price for the company.

In the case HDP, the takeover value proposition is their positioning in the Hadoop market and expected industry growth. So the valuation would be around x times of sales based on the recent such deals, I am expecting if HDP is taken over the valuation will be closer to $1B. The buyer often an established player can significantly reduce the SGA, and also has their existing installed/ client base to sell in addition to the market HDP is selling. This makes an interesting proposition for the acquiring company who can make profit and benefit from sales growth and positions them in new technology area.

Now, investment banks, arbitrage funds and hedge funds take significant positions and then sort of shop the company to potential acquirers. So if a company is in “play” then there is a takeover put.

The other side of this is Twitter. TWTR stock raised to $22 on takeover chatter and various companies looked at it and no deal was consummated. But the takeover put was holding the price earlier and ever since the deal failed to consummate the price is steadily declining.

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If you think this methodology works, you shouldn’t trade stock at all. Trade options in order to take advantage of the leverage. Sure, it’s all S/T capital gains, but if you’re raking in the dough, why should you care about the tax? Me, myself, I just once in awhile sell a covered option. I have zero confidence in my ability to time a stock price. I’m pretty mathematically inclined, but I find TA to be akin to voodoo.

Sure, it’s all S/T capital gain…

Not if you trade within a Roth!

Pete

Howdy everyone.

Jim M. here. Long time lurker, first-time poster (for this board). I apologize in advance for the length of the post… but I promise, it’s relevant to the thread.

I’m pretty mathematically inclined, but I find TA to be akin to voodoo.

I’m a long-time follower and user of the Investor’s Business Daily CANSLIM strategy. I’ve used TA (Technical Analysis… charts) to move to cash in every major correction since 1999. I haven’t gotten out right at the peak, but it’s what gives me the sense the bull is yielding to the bear.

In 2002-ish, when the bull market returned, I missed getting back in because I lost interest during the bear market. For those that don’t know, bear markets in the CANSLIM strategy are for research and planning to invest once the bull returns. For a 30-something parent working full-time, easy to lose interest. For the record, IBD has a tremendous track record for finding the top of an extended bull or bottom of an extended bear market. I just wasn’t paying any attention.

I didn’t have the same problem after the 2008 fiasco… the pain of missing 75% of the return to pre-bear market pricing will make one pay more attention in subsequent opportunities.

Basically, the chart is telling you what the big money is doing. The fundamental driver of the CANSLIM strategy is that the most money is made in stocks when the big players are accumulating during a bull market. And charts show you that very clearly. When supply is significantly lower than demand, prices and volume go up in tandem. Opposite for selling… easily visible on the chart over time. It’s intuitive to realize that funds investing millions move the stock price to get a meaningful position.

Another component of the CANSLIM strategy is finding companies with incredible opportunities ahead… the long runway spoken of here, along with the moat. When I first started reading this board, I was fascinated that y’all were consistently discussing and buying stocks at the same time they were on the IBD Top 50 lists. (You’re using many of the same criteria, and much of the same analysis.)

Yet another component is something else I read on this message board here - “cheap” companies don’t make the huge gains, at least not without a “game changer” catalyst. And you really don’t know if or when it will occur. Activist value investors create the catalyst by establishing a huge position and then influencing management to create value. You and I can’t really do that.

According to William O’Neill (CANSLIM creator), the biggest stock price gains are made by companies at or near 52-week high’s… with incredible runways… being aggressively accumulated by huge funds… and executing their plan… and… well, you get the idea.

Back to the chart - when you buy or sell a multi-million dollar position, it’s difficult to hide. When several funds begin to buy large positions, volume goes way up as the price rises… simple supply and demand. When you hear “price was up on above-average volume” several times, that’s accumulation… demand exceeding supply.

The advanced TA patterns that TA “guru’s” look for, I don’t look for so much. Nor do I think I’m missing much by not seeing them (for the way I invest). What the patterns represent, though, is a graphical example of buying or selling strategies that huge investors use to enter or leave their positions.

The sixth sense folks refer to here (most recently Saul…), well those are very likely unconscious recognition of the price/volume action changing from the long-standing pattern… you hear an announcement or earnings report that’s not materially different from those before and the price reacts differently than it had been. The stock chart can’t help in “feeling” the company performance is changing as indicated in reports or conference calls, but it will show you if the reaction to the type of news is changing.

In any case, try to think of stock charts as a graphical representation of cumulative market’s buying and selling a stock, with the added benefit of displaying the change in psychology regarding a stock.

It’s really not tea leaves… it can really add to your sixth sense that the stock is not acting right… and make you consider why. Just make sure it’s not your only tool… use it together with the fundamental analysis.

Cheers!

TL;DR: CANSLIM is an involved method of quantifying much of what investors on Saul’s board members appear (to me) to do to select winning stocks.

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