How We Made 20.5% In 3 Months With Carl Icahn

[John Thomas]

If you ask most people, they will say there are two types of people that put money in the stock market.

There are "investors" -- those who put money to work in fundamentally sound companies for the long term. Then there are "traders" -- those who buy stocks for a short-term gain, without much concern for the actual business.

The reality isn't as clear cut. You see, if you aren't using the principles of both investing and trading, then I think you're limiting your returns and increasing your losses.

But it's one thing to tell you this. I want to prove it to you with one of the most widely-followed stocks of the past decade -- Apple (Nasdaq: AAPL).
You're no doubt familiar with Apple. You might have even owned some shares at some point. Maybe you still do.

Apple is one of the most fundamentally sound companies on the planet. For years, the popularity of iPods, iPhones and its computers caused earnings and cash flow to soar. Since 2003, the company's annual revenue has risen from $6.2 billion to $170.9 billion.

Meanwhile, until very recently, Apple carried no debt. Instead, it boasts a $145 billion cash pile. That's enough cash to pay every man woman and child in the United States $460.

And if you were an investor focused only on Apple's fundamentals -- a strong company with a pristine balance sheet that saw earnings soar -- you made a fortune. From 2003 until its peak in 2012, Apple's stock returned more than 9,661%.

If you focused just on fundamentals, however, the joy of owning Apple ended in September 2012. Back then, the stock hit an all-time high near $705 per share. Sure, the company was still making money hand over fist and was among the strongest firms on the planet. That didn't matter. Neither did the fact that Apple initiated a dividend to return billions of dollars annually to its investors.

Since its September 2012 peak, the stock has fallen 26%, despite the S&P 500 index rising 23.5% since that time.

But if you used a few simple trading signals, you could have avoided that drop altogether.

To be more specific, I am talking about "relative strength."

If you've never heard of relative strength, don't worry. It's simple to understand.

Relative strength is found by calculating the percentage price change over the past six months for every stock and ETF. You then sort these changes from high to low and assign the highest value a relative strength rank of 100 and the lowest value a rank of 0.

Every stock is assigned a rank based on where it fits into that range. I like to use 70 as the limit for buys and sells. If relative strength is greater than 70 (meaning a stock is rising more than 70% of the market), the stock or ETF is a buy. I sell whenever the rank falls below 70.

You can see Apple's relative strength charted below its price in this graphic:

[John Thomas]

It was much easier being an optimist before everyone else came around. As I said the other day, I no longer no what to think at this point (see: Now What?).

The data is all more constructive ? Bill McBride (Calculated Risk) thinks we?re on the cusp of a major lift this coming year. But the expectations have already run off to the races at this point. Even the black swan fetishists have dropped the black nail polish routine and crawled out of their Recency Effect caverns and spider-holes.

And so we?re left with a sentiment bubble ? if not fully formed then certainly one in the making. It?s like a the adrenaline surge people get from near-death experiences, a mass realization that things are turning out okay despite half a decade of misery and trauma. It?s almost sexual in its urgency, its intensity.

Here?s Peter Boockvar of the Lindsey Group on this morning?s spike in bullishness, which is now totally embarrassing and berserk:

Investors Intelligence said Bulls rose again to 58.2 from 57.1 and is just shy of the highest level since October 2007. Bears remained unchanged at 14.3, the lowest since 1987. II said the 4 week average of bulls divided bulls+bears is the highest since at least 2004 and said ?out of the previous twelve instances over the past ten years when this indicator formed a peak in overbought territory there has been just one weak signal and even then a correction came, just several weeks later. Each correction was of the magnitude of at least 5%.? For another comparison, at the current 4 week average read of 79.5%, it compares with about 73% in October 2007.

?and the chart, via Greedometer, who is unapologetically calling this a bubble:




quoth the blogger:

If you don?t see this bubble, you?re probably one of the following:

- a long-only equity fund manager
- someone that sells to long-only fund managers (or needs them on your show)
- you work in a senior position at the Fed
- you are visually impaired
- some combination of the above.

Josh here ? I gotta tell you, a 10% whoosh down sometime soon would be as welcome as rain in the desert. We?re out of the only petrol that makes the market?s motor hum constructively ? Fear.

Read Also:
Now What? (TRB)
Advisors hit new all time record for bullishness. Beware? (Greedometer)
Update: Looking for Stronger Economic Growth in 2014 (Calculated Risk)


The Reformed Broker

[John Thomas]

I'm often asked how I come up with a consistent stream of investment ideas. There is really no single answer to this question.

I have been immersed in the financial markets since my first trade back in 1990. Since that time, my investing library has grown so large that it has overwhelmed my bookshelves and spread into attic storage boxes. I am also a voracious reader of the financial media, reading several magazines and newspapers on a near-daily basis -- not to mention subscribing to real-time news services to stay up on what's happening.

While my investing library has provided the foundation, and the daily financial media torrent turns the knowledge actionable, my favorite fresh idea source is other investors. New ideas can come from anyone, from the most naive beginner to the most sophisticated hedge fund manager and everyone in between. This is the reason I make it a point to talk to every trader and investor I meet about what's working and what's not working in their investing.

Another way to learn from others is by following the big-money players.

There are several large hedge fund managers who have earned my respect, and I watch their every publicly known investment. Fortunately, large money managers are required to file a Form 13F with the Securities and Exchange Commission on a quarterly basis disclosing their equity holdings. By keeping track of these filings, investors can glean profitable ideas as to what stocks these players are buying or selling.

One of the most respected hedge fund managers in the world is Israel Englander, who operates Millennium Management. Millennium has more than $198 billion of gross assets; gross asset value refers to the total value of all assets under management, including leverage. Using this measure, Millennium is by far the largest hedge fund on earth. As a comparison, the next largest funds by gross assets are Bridgewater, with just under $140 billion, and Citadel, with $107 billion as of April.

To put these numbers into perspective, they are larger than the annual GDPs of many countries. It's important to keep in mind, however, that when leverage is not included, Millennium has just under $20 billion in assets.

Calling itself a global multi-strategy opportunistic fund, Millennium was launched in 1989 with just $35 million. The fund has a relatively unusual business model: Englander allocates capital to teams of traders who invest it to the best of their abilities. Traders can remain on the team as long as they're profitable. But as soon as a certain amount is lost, the trader is fired. In this regard, Millennium is often thought of as a trader of traders.

Most interestingly, Englander and his head managers rarely discuss investment themes or strategies with the actual trading teams. He prefers to give them autonomy to follow their own ideas. This team approach guarantees diversification and uncorrelated returns, as each team uses its best ability to outperform. In addition, Millennium does not charge the traditional fixed management fee; rather, it simply passes the actual costs along to the investors. Englander believes that having investors directly involved with the true costs of running the business, rather than paying an arbitrary fixed percentage, is truer to the original entrepreneurial spirit of hedge funds.

Here's what I found when I drilled into Millennium's holdings:

The firm increased its short position in the SPDR S&P 500 ETF (NYSE: SPY) by 576% last quarter. This position now takes up 1.88% of the fund's portfolio. I am not overly alarmed by this move, since more than 15% of the holdings remain long on SPY. However, it is important to note that Millennium decreased its long position in this exchange-traded fund by 52% during the quarter. While I don't think this is signaling a basic macro shift from bullish to bearish just yet, I will be observing the next filing carefully.

Millennium's No. 1 single stock holding is PPL Corp. (NYSE: PPL). The fund owns more than 8 million shares and increased its ownership by 73% last quarter.

PPL is an energy and utility holding company in the U.S. and U.K. The company boasts a market cap of nearly $19 billion and trailing 12-month revenue of just more than $12 billion. The quarterly gross profit margin is more than 61%, and the company currently offers a 4.9% dividend yield.

Clearly, the traditional steady dividend payouts of utility companies are an attraction to Millennium. (Remember, the dividend strategies Amy Calistri shares in her Daily Paycheck advisory are effective no matter the size your portfolio.)

The technical picture shows the company has set up in a clear trading channel. The price has consolidated between $29.50 and $31 on the weekly chart.

[John Thomas]

The Bank of America Merrill Lynch RIC Report is out and they?ve got ten themes for 2014. As one of these ten ideas, the Research Investment Committee picks up on something that I think is long overdue ? the possibility of a shift away from consumer-driven recovery stocks into something more industrial or commercial.

If they?re right, there?s a huge swathe of the market that has been left in the dust by all the consumer spending plays this year?

6. Warehouses over townhouses
The stock market is in the early stages of a change in leadership from
domestic/consumer-oriented sectors to more global and cyclical/industrial ones,
in our opinion. And, relative performance is shifting away from sectors such as
Consumer Discretionary, Health Care, and Financials that have been significant forces
behind market gains for much of the last two years.

Instead, we expect performance to be driven by areas like Technology, Energy, Industrials, and Materials.
If revenue growth continues to accelerate as we expect, corporations are likely to
invest in their businesses by spending some of the cash accumulated on their
balance sheets. This capex cycle, combined with improving global economic
growth, is likely to benefit stocks in more industrial and cyclical parts of the
economy over those that are more dependent on the consumer. In our view, this
has already started, but probably is in its early stages (Table 5).

[John Thomas]

Getting in shape is no longer just a New Year's resolution.

In its annual Topline Report, the Physical Activity Council, a coalition of sports-related trade groups, found that more than 60% of Americans frequently engaged in fitness sports in 2012. That growing interest in health and fitness has led to a huge surge in the number of people joining fitness clubs.
According to the International Health, Racquet and Sportsclub Association, health club and gym memberships jumped to 51 million in 2012, up from 41 million in 2005.

And looking forward, with Americans increasingly fighting back against obesity and diabetes, and with baby boomers focused on staying in shape as they retire, the $21 billion domestic health and fitness industry is growing quickly.

That's one of the reasons I'm bullish on an industry-leading fitness club company. With 106 locations and more than 800,000 members, it's already a juggernaut. But with plans to double its expansion rate in the next two years, it's in a great position to capitalize on America's growing interest in health and fitness. That has shares up nearly 300% in the past five years.

[John Thomas]

Random Thoughts




Thanks to all who attended my Introduction To Stock Selection webinar last night. We had a good show if I say so myself. Click here to watch.

I can't emphasis enough the importance of doing your homework. As I preach, looking through thousands of stocks daily really gives you a feel for what's really going on. Yes, it's a lot of work. For me though, it's like being on a treasure hunt. I grab a big cup of coffee and dive in. <begin pimping> Spend Saturday with me and I'll show you how </end pimping>.

Considering the above, it seems like the indices are catching up to the internal weakness that I've been seeing lately. This is especially true in the Rusty (IWM) which lost nearly 1% of its value on Tuesday.

The Ps are just shy of all-time highs and the Quack is just shy of multi-year highs. So, it's not the end of the world. The market has lost a little steam though. Net net, the Ps haven't made any forward progress in nearly a month. The Quack looks much better but it too has lost a little steam as of late too.

Foreign shares (EFA) haven't made any forward progress in nearly 3-months.

Back home, internally, the market remains mixed.

Areas like Retail and Restaurants haven't made much forward progress as of late.

Regional Banks appear to be failing to rally out of their recent pullbacks.

Drugs remain at high levels but appear to be losing momentum.

Metals & Mining, especially Gold & Silver had a decent bounce, gaining over 4%. So far though, this only appears to be a dead cat bounce. Remember, the cat was already dead and was accidently dropped so no live animals were hurt during this locution.

Chemicals and the Semis have been sideways intermediate-term but they are hanging out towards the top of their ranges.

On the bright side, Internet broke out to new highs decisively.

I can go on and on. To sum things up, the market remains mixed.

There's no need to get crazy bearish just yet. The indices and many sectors remain near new highs. Therefore, a few big up days can make all the difference in the world. Until and unless that happens, remain in show me mode.

So what do we do? When things are mixed it is important not to make any big picture bets. Don't label yourself as a bull or a bear. Just wait. Be Switzerland. Do become selective on new positions. If you really like a setup and would be very bummed if the stock took off without you, then take it. Just make sure you really like it and as usual, be willing to live with the fact that even the greatest looking setups can sometimes fail.

Futures are flat pre-market.

[John Thomas]

Buying value is an investment philosophy that works. To benefit from a value strategy, investors have to decide on a definition for value.

There are numerous ways to decide when a stock offers value, and many of these methods work well as long as they are applied with discipline. For deciding when a stock market in general offers value, we prefer to use the CAPE ratio defined by Robert Shiller.

The CAPE ratio -- which stands for cyclically adjusted price-to-earnings (P/E) -- is calculated with inflation-adjusted earnings over the past 10 years. This smoothes out the sudden spikes in earnings seen in recessions and at the beginning of an economic expansion, and provides a way to judge a market's value based on a full economic cycle.

In the past, when the CAPE ratio has been high, stock prices have delivered below-average returns over the next few years. Low CAPE ratios highlight long-term buying opportunities.

Shiller's CAPE can be applied to any stock market in the world. Investors looking at CAPE to make investment decisions a year ago may have bought stocks in Greece where the CAPE ratio was 2.6, the lowest of any global stock market. Investors willing to buy Greek stocks have been well rewarded. Global X FTSE Greece 20 ETF (NYSE: GREK) is up about 23% since the beginning of the year.

Irish stocks were also cheap with a CAPE ratio of 5 in December 2012. The iShares MSCI Ireland Capped (NYSE: EIRL) ETF is up nearly 40% year to date.

Other ETFs that would have been buys based on low CAPE ratios are Global X FTSE Argentina 20 ETF (NYSE: ARGT) and iShares MSCI Italy Capped (NYSE: EWI), which both started the year with CAPE ratios below 8 and have delivered double-digit gains. Market Vectors Russia ETF (NYSE: RSX) is the only one of the nine countries with the lowest CAPE ratios and a tradable ETF that shows a loss in 2013.

Looking ahead to next year, several of the countries with low CAPE ratios cannot be bought with ETFs. We have listed the lowest country CAPEs below and noted an ETF when it is available.

[John Thomas]

My friend Larry McDonald is out with a year-end piece at Forbes that looks at a very interesting phenomenon we often see each December ? once the tax-selling pressure abates from losing stocks in one calendar year, they can often go on to become the following year?s grand slams?

Yet those who bought fear at the end of 2012 were handsomely rewarded. From mid-August 2012 to the end of December, shares of Best Buy were off some 43%, while First Solar FSLR shares were torched, off 33% from their March 2012 highs heading into year end. The most pain was felt in Hewlett Packard HPQ, which collapsed over 60% from February 16th to December 26th 2012, off 30% in the 4th quarter alone. These 3 stocks were up on average 90% in the first half of 2013. We say ?buy fear.?

What about 2011? The ugliest sector, no one wanted to own in the 4th quarter of 2011 was the financials. The space was off nearly 25% in 2011, 17% in the 2nd half of the year. Bank of America alone was off 32% from Sept 1st through year end. Over the next 12 months, investors fell back in love with the financials, up 27% on the year, BAC surged 100%.

Can you truly buy fear at this time of year and hold through 2014? If so, your top sector candidates are the gold miners, down an astounding 53% on the year. But ? Larry says to check out how the bond market is treating the paper of any disparaged equity you?re thinking of buying first.

Source:

[John Thomas]

The appeal of clean energy stocks is evident. Billions of dollars are at stake as the world tries to wean itself off fossil fuels.

There can be little doubt that clean energy will account for at least 20% to 30% of our total energy picture a few decades from now. But the road is bound to be bumpy. The sudden plunge in solar stocks in 2011 and 2012 -- not to mention their remarkable rebound this year -- highlights just how risky these clean energy stocks can be. Indeed, many investors have concluded that they just can't stomach that degree of risk.

But there is a better way: a focus on companies that already derive significant revenue streams in support of clean energy projects. These stable firms don't own breakthrough technologies, but they are helping the industry pioneers to scale up their production. And in light of the long-term future for clean energy, these firms face robust growth potential.

My favorite pick in this group: Spain's Abengoa (Nasdaq: ABGB), which derives more than $10 billion in annual sales by helping construct clean energy power plants, water desalination systems, biofuel production facilities and highly efficient energy transmission networks.

[John Thomas]

I am a firm believer in using both technical analysis and fundamental research as stock picking tools. Many investors mistakenly specialize in one discipline or the other rather than a mixture of the two.

Market technicians are often guilty of reaching the conclusion that all the fundamental information is already inherent in the price of a security, therefore researching fundamentals is redundant. At the same time, hard-core fundamentalists believe that technical analysis only charts the past and thus cannot help with projecting the future.

I have found both of these sentiments to be correct and to be wrong at the same time. All the fundamental information about a stock is inherent in its price. However, studying price alone will not increase your odds of making a winning trade.

Knowing fundamentals while ignoring the technical picture may provide a reason for the stock movement, but does not confirm that price will move in any specific direction. Focusing solely on the technical picture will tell you what has happened and what may happen. But there are no guarantees or statistical tests that have uniformly proven much of traditional technical analysis works to provide an edge.

So what's an investor to do?

The answer is to use both fundamentals and technical analysis to choose stocks. If both disciplines agree on a particular stock, that stock becomes a strong candidate to add to your portfolio or to short. When there is disagreement, a short-term trade often presents itself.

Today's trade is an example of a classic case of fundamentals and technical analysis disagreeing.

The stock is Camtek (Nasdaq: CAMT), an Israeli designer, developer and manufacturer of automatic optical inspection (AOI) systems. AOI systems are computer-driven systems that inspect electronic components for defects at the manufacturing level. The company also makes products for the printed circuit board industry.

Additionally, it is in the advanced stages of developing a digital 3-D printing system called the GreenJet System. This printer is intended to be used for the disposition of solder mask on circuit boards. The first commercial sales of this product are slated to take place sometime in 2014.

Camtek, which has a market cap of about $150 million, posted solid results for the third quarter with revenue of $21.7 million and operating cash flow of $3.1 million. It ended the quarter with a cash position of $20.3 million.

Shares soared higher late last month on rumors that the company was launching the 3-D printer system. It turns out the company will only be testing the system with a client at the start of 2014. Profits are only expected should the testing produce positive results, and then not until the tail end of 2014.

While there is certainly nothing wrong with the known fundamental health of Camtek, the technical picture paints a clear short selling opportunity.