Thoughts about the market correction

In the previous post I discussed changes I’m considering in how I handle very high trailing growth rates in figuring 1YPEG’s and wrote that It wouldn’t have affected some of our stocks that have recently come off their highs, such as SKX, SWKS, AMBA, BOFI, or INFN, who would all still have had low 1YPEG’s. I said I’d discuss my thoughts about them in the next post. Here it is:

I think that those stocks were each affected by a different factor entirely:

I feel the largest, and major, factor (one that affected them all), was the market correction that started in August. When the market is going up even major problems in a growing stock are excused and ignored, but when the market is going down, the most minor problems are exaggerated, and others are imagined, even if they aren’t really there.

All of these stocks had had big gains, and in the market correction, stocks that had gone up a lot were knocked down, whether they had merited the advance or not. In fact, just about EVERY stock I look at: ones I am holding, ones I sold, ones I thought of buying but didn’t, they are all down from their highs. That’s what happens in a correction.

SKX (my opinion here) was also affected by the memory of their tone-up debacle in the past. People may also think of Skechers as a fashion item and therefore one that may go out of style, which means that they don’t know anything about the company. What sells Skecher shoes is not fashion, it’s comfort. But especially, I like a suggestion that Neil made, that someone must have not updated their computer for the 3:1 stock split which immediately preceded the earnings announcement, and the computer thought that earnings were only a third of what they were and sent out wild sell signals. (That’s the only rational explanation for a 30% drop in price in response to all-time record revenue, up 27% year over year, earnings up 30%, etc - a 10% drop, okay, but a 30% drop in a stock which was only at a PE of 30 or so? A computer not being updated, while an off-the-wall explanation, makes more sense in trying to explain something which seems entirely irrational).

SWKS - As one of the analysts wrote: “People just don’t get this company yet. They still think of SWKS as an ‘Apple supplier’ who may lose their business overnight”. At their high of $112 they were only at a PE of about 23. Their PE is now 17 and their trailing rate of growth is over 70%.

AMBA has fallen because of worries that they are too dependent on GoPro and that GoPro will flare out (last quarter GoPro’s revenues were up 70%, so not quite flaring out. We’ll see). Another possibly valid worry is that good-enough-and-cheaper chips will cut their margins.

BOFI fell for it’s own reasons that have been well discussed.

INFN fell because (like SWKS) it’s lumped in with others in its group, and when others go down (even if it’s because INFN is taking their market share), it’s a signal to sell INFN too. For a comical example of this, the other day an analyst sent out a report about a competitor of SEDG, saying that SEDG was clobbering it, and saying that the competitor was a sell. The competitor sold off 15%, and SEDG sold down a few percent in sympathy, because some people saw the competitor selling off and figured there must be some problem with the sector.

I believe that a lot of the big mutual funds, ETFs, and hedge funds, are managing so much money that they have to follow enormous numbers of individual stocks, and that the companies become just stock symbols to them (“Oh, yes, this one, this one, and this one, are in that sector, and those five are in this other sector, etc”). They can’t possibly read all the reports, listen to all the conference calls, and have the information and understanding about the individual companies that we do. That doesn’t mean we’ll always be right, but we do have a big advantage in terms of seeing the company as an individual and not just a stock symbol in a sector.

Best,

Saul

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Saul, Thanks for your input. I definitely tend to agree with you and that is the one huge advantage that private investors have over the institutions. We have flexibility, we don’t have to meet benchmarks (even though we land up trouncing them and we have time on our side.

Given what you are saying it would seem that all of those mentioned (BOFI aside - Jury still out and risk still high) are buys to screaming buys and I am looking forward to your update to see how your allocation has changed and how you allocated your BOFI funds.

As to your proposed change I do agree that it will make the YPEG numbers more realistic I also agree with the posters that YPEG is only a screen and in the event that a one time earnings shift occurs or a non sustainable earnings growth occurs further DD will reveal that.

For that reason as well I would say that a 1YPEG that is a little over one but where revenue acceleration is occurring should not be discounted because a one time hit can screw that 1YPEG to the other side.

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I definitely tend to agree with you and that is the one huge advantage that private investors have over the institutions. We have flexibility, we don’t have to meet benchmarks (even though we land up trouncing them and we have time on our side.

Given what you are saying it would seem that all of those mentioned (BOFI aside - Jury still out and risk still high) are buys to screaming buys and I am looking forward to your update to see how your allocation has changed and how you allocated your BOFI funds.

As to your proposed change I do agree that it will make the YPEG numbers more realistic I also agree with the posters that YPEG is only a screen and in the event that a one time earnings shift occurs or a non sustainable earnings growth occurs further DD will reveal that. For that reason as well I would say that a 1YPEG that is a little over one but where revenue acceleration is occurring should not be discounted because a one time hit can screw that 1YPEG to the other side.

Hi Craig, I like what you wrote, and agree with almost all of it. I do see risk with AMBA though, enough that I wouldn’t make it one of my really huge positions.
Saul

I like a suggestion that Neil made, that someone must have not updated their computer for the 3:1 stock split which immediately preceded the earnings announcement, and the computer thought that earnings were only a third of what they were and sent out wild sell signals. (That’s the only rational explanation for a 30% drop in price in response to all-time record revenue, up 27% year over year, earnings up 30%, etc - a 10% drop, okay, but a 30% drop in a stock which was only at a PE of 30 or so? A computer not being updated, while an off-the-wall explanation, makes more sense in trying to explain something which seems entirely irrational)

Well, first of all it plummeted after hours, and I don’t think you get too much computer trading after hours because the volume is not there. Second, if one computer program screwed up, wouldn’t the algorithms of the “sane” computers see a great deal at the oversold condition and snap it up. I think there is more going on than a bad computer. Like you said, when the market is in trouble, people bail a lot faster. While the IBD still has the market in a confirmed uptrend, I do worry about the divergence of the few big index leaders (Goog, Aapl, FB, NFLX, etc) vs the many smaller stocks that are no where near new highs, or even in their own bear markets.

On the other, other had, as I noted before, China and the ECB said they are bringing more booze to the party, so chugalug.

Pete

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Pete,

Do you have any data on number of new highs and new lows or % above 200 dma and under 200 dma? The divergence among the few, large and the many, small keeps the weighted averages up (as you know) and has preceded tech sell offs in the past.

KC

Never mind, I see that 37.39% are above their 200 DMA. This percentage was about 85% at the beginning of 2013 after the great recession and has trended down since. Bottomed at about 18% this August and rebounded to 38% now, but long trend still down. For whatever that means. (That is NYSE composite companies).

KC

I like a suggestion that Neil made, that someone must have not updated their computer for the 3:1 stock split which immediately preceded the earnings announcement, and the computer thought that earnings were only a third of what they were and sent out wild sell signals. (That’s the only rational explanation for a 30% drop in price in response to all-time record revenue, up 27% year over year, earnings up 30%, etc - a 10% drop, okay, but a 30% drop in a stock which was only at a PE of 30 or so? A computer not being updated, while an off-the-wall explanation, makes more sense in trying to explain something which seems entirely irrational)

Well, first of all it plummeted after hours, and I don’t think you get too much computer trading after hours because the volume is not there. Second, if one computer program screwed up, wouldn’t the algorithms of the “sane” computers see a great deal at the oversold condition and snap it up. I think there is more going on than a bad computer. Like you said, when the market is in trouble, people bail a lot faster.

Hi Pete, I didn’t really think that that was what happened. I was trying to give a ridiculous alternative to emphasize how ridiculous and unexplainable the SKX drop had been.
Saul

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In talk of divergence you can use ICJ as a proxy - https://www.cboe.com/delayedquote/advchart.aspx?ticker=ICJ

Granted based on S&P, but a good proxy for a market of stocks vs a tide that moves all boats

Kevin,

Here is one article with charts talking about some divergence…
http://www.marketwatch.com/story/long-term-signposts-suggest…

Ajaskey over on the old “rat” board liked these charts for bullish percentages. He had a strategy of moving to PIMCO “total return” fund when the 10 day moved below the 20 day average and then back when it crossed back positive.
http://stockcharts.com/h-sc/ui?s=$BPCOMPQ&p=D&yr=0&a…

http://stockcharts.com/h-sc/ui?s=$BPspx&p=D&yr=0&…

Bullish Percentage is based on the number of Point & Figure charts in a bullish pattern.

Stocks above 200dma - but I just found this and am not sure how many and which stocks it measures…
http://www.barchart.com/charts/stocks/$MMTH

The percentage of stocks trading above a specific moving average is a breadth indicator that measures internal strength or weakness in the underlying index
here is Naz 100 chart (which is a bad sample of the whole nazdaq)
http://stockcharts.com/h-sc/ui?s=%24NDXA200R&p=D&b=5…

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Well, first of all it plummeted after hours, and I don’t think you get too much computer trading after hours because the volume is not there.

…I think, by rule, after-hours should be suspended for companies releasing quarterly earnings…

…it’s a time where limited liquidity can impact the price of a stock, especially those with smaller market capitalizations or thinly traded to begin with…

…close the market at 4pm, allow companies to release earnings, conduct their conference calls, and then manage the opening with a fair, open market, not a limited after hours market…

…as for stock splits…allow them outside of a window, perhaps two weeks before, and after earnings, to eliminate confusion…

…I remember when QSII split their shares on earnings day, and countless articles had it wrong, announcing earnings per share that were half of what the company announced, as the adjustment in share count wasn’t made…

…stock was crushed as a result…

…if the market wants an orderly flow (arguably they don’t) they could institute these simple measures to prevent what ‘appears’ to be manipulation by the minority…

…long term shareholders merely hold on for the ride, but it sure is frustrating at times…

…good luck!..

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