Poker and the Stock Market

...I was out of town this weekend in Southern NJ, Atlantic City to be exact. After finishing my business at the convention center, I traveled back to the newest casino, the Borgata where I was staying for the night. I don’t consider myself a gambler and have never enjoyed losing money at the tables. When I do gamble, my preferred games have always been craps and blackjack. Until recently, I had never played at a poker table in a casino environment but I enjoy the game of poker and have only played in backyard and basement games with old buddies. Many people consider the game of poker pure luck but this is not an accurate observation. Many factors run parallel with the game of poker and the game of stock market investing. Luck may play a part but rules, odds and money management are the largest components of the two entities.

When investing in the stock market, it is essential to have a sound set of rules or a system that has been tested in real time, no back testing or historical testing needed. After the system has been tested, the investor needs to follow rules in order to preserve capital and cut losses. The investor must also consider the odds of his/her stock making a gain or making a loss. Price objectives and targets should be a large part of every investor’s system. With proper money management and calculated expectancy, the investor should aim to trade only in situations where the odds are in his/her favor. In a strong bull market, it may not be wise to start shorting many stocks; the odds of making a big gain with this strategy could be very low. Another major component that works its way into investing is psychology and/or human emotion. Stocks are made up of human character traits, similar to the type of people that own them. Some stocks are risky and volatile while other stocks are conservative and predictable. The market repeats cycles and specific chart patterns because humans repeat their actions and character tendencies.

Now, back to the poker table; as I sat down and started to play, my first goal was to become familiar with the character traits of the players around me. With 10 players at the table, I had plenty of time to evaluate the people I was playing with, without risking a great deal of money. After several rounds of play, I was aware that the gentleman to my right would only bet high odd hands and would fold every other hand. He was very edgy and nervous and folded his cards with force when he was angry. The gentleman to the left would also play hands with high odds but I did see him call bets with some hands that were risky with lower odds. One gentleman across the table was the bluffer and always had a smirk on his face with a pair of dark glasses. I challenged this man on several occasions and paid to see his cards because I felt he had nothing. More times than not, I was right and still beat him with an average hand. I could go on but you understand the point I am trying to make: all poker players and investors bring their emotions to the table.

I won’t get into the exact rules of playing poker but I can tell you that only two players are required to bet per round while the other eight can view their first two cards without risking a cent. My game of choice is Texas Hold’em, the current craze across the country and one that excites me when I am in the environment. The two players required to bet represent the big and small blinds. If you are the dealer or anoy other players at the table, you can view your first two cards for free without an bet. If the hand is weak, you can fold and keep your gambling stake.

Here is where it gets interesting; if I have a decent hand, I can decide to call the larger blind and see the next three cards on the flop, which is still a low risk investment. If the flop doesn’t provide me with the cards I need, I can immediately cut my losses short by folding and wait for the next game. The same is true in investing; I can cut a loss short and wait for the next opportunity without risking the farm if I realize an immediate loss. If the cards are good and my probabilities of winning the hand are high, I can call the bet or raise the bet. A fourth and fifth card (the turn and the river) are placed on the table after the flop and betting continues with each round. Again, I can decide if I would like to call, raise or cut my losses short. The connection I am trying to make with investing in the stock market and playing poker relates directly to cutting losses short (capital preservation and money management) and my odds of winning the game (in the stock market this could be called expectancy).

In my opinion, the best game to play at the casino is $1-$2 no limit style. This means that the blinds are held to a minimum and it will only cost you a couple of dollars to see the flop in many cases. The “no-limit” aspect allows your upside potential to be unlimited which carries through to investing. If you cut losses short and ride your winner, the up-side potential in investing can also be unlimited, especially when using options (but that is for another discussion). Last night, I could see my first two cards for free, eight out of every ten hands and I could fold if they were no good. If they were good, I put money on the table after my idea. In the real world, the world of stock investing, you should always put money after your best ideas. The ensuing gain or loss will tell you if you are right. Again, for the umpteenth time in this article, the most important part of both games is cutting losses short and moving on without mixing emotions into the decisions.

All investors and poker players bring emotions to the table, some people control them better while other people employ better systems and understand the odds on a higher level. The bottom line is to understand the situation around you and to use a sound system to raise your odds. Never bet a hand that represents a low chance of winning and never ride a loss that could multiply overnight. Cut losses short and get out of the game and wait for the next opportunity because they are always around the corner.

Breakout

Last night I said this about one of our MSW weekly screen stocks:
“SSNC – 33.00, the handle is forming for this pattern, pivot point is $35.10 with qualifying volume near 334,368.”

Well, at 12:38pm, the stock is at $36.47 and volume is over one million shares. The open gaped-up but SSNC has been on the weekly screens for months as the base has been building.

SS&C agreed to be acquired today for $982 million. This translates into a payout of $37.25 to stockholders from Carlyle’s Sunshine Acquisition Corp. This is a 15% premium over the average closing price for the past 30 trading days.

If you have questions about the breakout or entry strategies if you have missed the stock, send me an e-mail and/or wait for a discussion tonight on the daily screen.

Piranha

Market Talk

Someone I have had conversations with on another forum posted his frustration with AFFX and the 20% drop last week. I completely understand his frustration and have lived through the same type of drop that has blown past my stop loss. I don’t use stop limits but a drop like the one AFFX had would never trigger the stop limit unless the stock moved back up to the limit price, then the stock would be sold automatically. I responded to this investor’s post and his two comments about AFFX and the general market conditions:

“I know what you mean when it fell overnight. I have been hit by that kind of action and trailing stops are crushed. A stop limit would never get triggered and a stop loss would get filled much lower than the target price. It happens and is part of the game; this is why I use mental stops. I talked at length about this early last year when I kept getting burned by the MM’s. I still use physical stops but I try to sell "at the market" during earnings season and from MM’s. You may want to buy a put option to hedge your position during earnings season. For a minimal fee, you can buy the put option and use the leverage when a 20% drop happens like the one you witnessed. I rarely use this method (but have on a few occasions) but know of several people that feel comfortable employing this strategy often.

As for your market analysis, I agree. Something is up with the market but I don’t see a huge downturn. Maybe a correction as Kevin (MSW community member) pointed out. I was sold out of two of my positions last week and my watch list for new buys got hit with red ink. The daily new highs are still positive so I am not getting all of the concrete red flags that this market will totally flop. This year is just another post election year with sideways action. Tough investing year! Watch the critical 2100 level for the NASDAQ, this provides major support.”
Piranha

Checking the Financials

Last night, I allowed a very small stock with very low volume make the “Interesting Stocks” section of the daily screen. I also said that I would look into the numbers deeper (fundamental analysis). WIRELESS XCESS (XWG) is engaged in the nationwide sale and distribution of a wide range of products, accessories and components for cellular phones, including batteries, chargers and antennae. The Company's products are generally sold through third party retail stores or Web sites and directly to customers on the Company's Web site.

After researching the Annual Income Statement, I have come to these early conclusions:
Revenue rose from fiscal year 2003 to 2004 from $11,469 to $15,307 (all numbers in thousands in this analysis) but the total revenue in 2002 was at $14,068. Looking at these numbers, you can see how revenue fell in 2003, only to rebound in 2004.

Next, I looked at the Net Income applicable to common shares and I saw an increase from 2002 to 2004:
2002: ($541)
2003: ($164)
2004: $1,008

Remember that numbers in parenthesis are represented as negative, so the ($541) and ($164) represent losses.

The increase would be great except that sales are not increasing with the same consistency. Companies have two ways to increase their bottom line:
1. Slash costs and operating expenses
2. Increase Sales

I prefer companies that are increasing sales rather than slashing operating expenses. To defend my opinion, a company can only cut costs by so much for so long, meaning the rise in the stock price will eventually stop. Companies that increase sales generally have products that are in demand and can continue to increase earnings though greater revenue streams. The best companies do both, cut costs and increase revenues, allowing the EPS to rise quarter over quarter.

Looking at the bottom line for Operating Income or Loss for Wireless Xcessories, we can see a decrease in operating expenses, therefore giving the bottom line room to grow:
2002: ($524)
2003: ($171)
2004: $909

When I look to Assets, I see an increase in cash from 2002 to 2004 but I see a decrease in Net Receivables from $1,213 to $1,144. The inventory has also increased which isn’t the best thing if sales aren’t also increasing. The total current assets have increased year over year but I am a bit skeptical because liabilities have also increased slightly.

After checking out the cash flow statements, I can see that borrowing has declined but total cash flow from operating activities are down from 2002 to 2004 from $1,487 to $1,066.

The CEO has been selling shares in June in the $8 range but I don’t have any concrete data other than basic yahoo finance to finalize my opinion. As far as earnings are concerned, I haven’t been able to come across reliable information as the company is young and was a penny stock as recently as last year.

Bottom line, the company may continue to increase its stock price based on speculation and cost cutting but I won’t be very interested in buying shares in the company until revenues increase by at least 25% per quarter.

I hope this helps with your own analysis,

Piranha

Buy High and Sell Higher

...Hansen Natural Corp. (HANS) has gained a total of 37% for MSW community members since debuting on the weekly screens May 7, 2005 at $66.56. The closing price on Friday, July 8, 2005 was $90.97, only $10 away from the triple digit threshold. The stock had already run up over 1100% ($5 per share in August 2003) at the time I decided to start coverage. Several community members sent me e-mails asking why I would only start to profile a stock after a huge 11-fold run. My answer was simple: The stock is in a strong long term up-trend and the direction of the stock doesn’t show signs of changing at this time. The point and figure charts continue to provide me with ample opportunities to initiate a new position or add shares to an established position.

Taking a quote from William O’Neil, I also believe in the “buy high and sell higher” philosophy. HANS serves as the perfect example of this theory. Most of the stocks covered on this website are at or approaching new 52-week highs. Every MSW all-star stock listed in the left hand column of our site has been or was trading at new 52-week highs as they made gains of 100% to 300% in less than one year.

HANS has been featured in 9 weekly screens and highlighted in almost two dozen daily screens since its debut in early May. I continue to say that stocks that make multiple weekly screens tend to be the strongest performers among their peers, regardless of their current price level.

Many novice investors have a difficult time buying stocks that have already advanced a couple hundred percent or are making brand new 52-week highs. They fear that the stock will start to fall and lose money when they enter. Other inexperienced investors try to short stocks such as HANS because they feel that the stock is too high or extended. They start shorting the stock with no other reason than the current price level. This may be one of the biggest mistakes an investor can make as the stock must give you other reasons to become a short candidate; such as decreasing earnings, a new downtrend on the charts, breaking major moving averages or all of the above. Jesse Livermore once said: “stocks that appear high to one investor; may be low to another.” Hansen demonstrates this trait more than any stock of recent memory. An emotional battle must be fought for any level investor when they purchase a stock that is already up over 1000% in one or two years. Basic logic would say to sell the stock short because it must come down. The market isn’t logical or efficient and that is why we follow strict rules and study chart analysis, also known as technical analysis when making market decisions.

Using the 50 day moving average as support, we can establish new positions in HANS as it pulls back to the line and holds tight as it continues to rise. We will not raise a red flag until the stock starts to act out of character. A quick glance at the fundamentals and a long term weekly chart will show us that the stock has acted according to character for over two years. HANS also entered the $60-$100 fast track theory that I have been speaking about in great detail on the daily and weekly screens. We all see that HANS crossed $60 in early April and then again in May and has quickly moved to over $90 per share in two to three months with a 40% gain. As I finish editing this article, the stock is currently trading at $92 on July 11, 2005. I am not ready to sell and will not consider selling until I am given a reason by either the stock itself or poor general market conditions that affects my stock.


When speaking about buying stocks at high prices and then selling them higher, I can offer you a few reasons why this is very sound advice. Stocks at new 52-week highs don’t have any overhead resistance or weak holders that are looking to bail on their position, forcing the stock to slide. The stock can continue to take off and give its investors the best return possible with only minor healthy corrections. A minor healthy correction should always come on below average volume. Stocks at new 52-week highs also have the strongest relative strength ratings, compared to the remaining market, making it attractive to institutional investors that haven’t jumped on board.

If you haven’t noticed by following my latest final weekly screens, stocks that make new highs, continue to make new highs. Since solidifying our weekly screens to the top 30 stocks in the market with the best probability of moving higher, we have witnessed a handful of these candidates with double digit gains in only 6 weeks. Never discount a stock because it seems too high or because you can’t purchase 1000 shares. Investors should only be concerned with the final percentage gain on each position rather than the high price of the stock, the small number of shares you can purchase due to the high price or the recent positive action (doubling the past few months).

Newton’s law of motion states: "An object at rest tends to stay at rest and an object in motion tends to stay in motion with the same speed and in the same direction unless acted upon by an unbalanced force." Objects keep on doing what they are doing and stocks follow this same logic. So please, don’t sell a stock short because your own logic tells you that it is too high, because you may come to find out later that several institutional investors thought it was still too low.

Piranha

Sharing a Daily Screen

...I decided to share last night's daily screen with my blog readers to give you an idea of the type of analysis that I perform every night after the markets close. The daily screens are formatted for the site but I pasted them here to resemble a blog post. Enjoy

Energy, Medical and Retail sectors lifted the market today with oil and gas stocks outperforming everyone. We managed to list a few energy related stocks below but the majority of the stocks making new highs or nearing a breakout didn’t completely qualify for the daily screen. Overall, sixty two energy related stocks made my initial fundamental screen with the main criteria set with EPS ratings of 70 and above and RS ratings at 70 and above with the stock making a new 52-week high. Ninety one stocks made a new 52-week high within the sector without using any fundamental screeners. Half of those stocks did it on above average volume but only three stocks made it to the final MSW daily screen. Possibly, a couple other stocks could have made the final cut but we will wait to see how the week plays out.

The medical sector also stepped forward with 42 total stocks making new highs with 24 of them passing the initial fundamental screens. Nine of those stocks passed the technical criteria with four of the stocks as members of the most recent weekly screen. Syneron Medical has made over 50 daily and weekly screens since the fall of 2004 but has made a few daily screens in recent months, listed under the “interesting stocks within 10% of a new high” section of our screens. ELOS, an MSW All-Star stock, has a total gain of 152% in less than one year (9 months). We also listed the pivot point at $39.10 on the recent weekly screen appearances. Laserscope (LSCP) and LCA Vision (LCAV) are both members of our All-Star stocks of 2004 and 2005. LCAV is nearing a 200% gain while LSCP is now above a 125% gain.

The markets were up today on volume larger than the quiet pre-holiday close last Friday but still well below average volume levels. We need a strong follow-through later this week with above average volume to make this advance mean anything. The strongest evidence of strength today was the daily new high/new low ratio which ended at 534-42. A ratio with new highs topping 534 is a positive sign, one that I always speak about. The next step is to look for consecutive 500+ days with large volume accompanying breakouts for both individual stocks and major market indices.

The most recent Weekly Screen Members are highlighted with blue text.

Medical:

ELOS – 39.89, a new 52-week high with a 4.48% rise on volume 259% larger than the 50-d m.a. Made a weekly screen in May and June with 20 additional weekly screens since October. Eleven total weekly screens in 2005 with more than 20 daily screens. Recently, the
daily screen occurrences have been in the “stocks within 10% section”. Our pivot point was listed as $39.10 on its recent weekly screen appearance. I will note that the stock fell from intraday highs ($42.22).

AFFX – 56.58, frequent daily screen member made a new high with a 5.19% gain

LCAV – 49.83, broke above $50 intraday, only to close slightly below on above average volume.

MATR – 33.60, sloppy daily screen but a new high on the weekly screen. Nice triple top breakout on the P&F.

CVH – 72.84, hit a low of $63.16 in mid-may, only to make a new high on above average volume. The ceiling of $72 was finally sliced after two prior failures.

KOSP – 69.11, up 3.82% on average volume. I wrote off Kos in early June but it has continued to trend higher. Very extended from the 200-d m.a.

LSCP – 43.25, new high with volume 17% lower than the 50-d m.a.

HITK – 33.39, seventh consecutive up-day but the volume stayed below the average

IVGN – 84.90, a 1.58% move to close within $0.10 of $85. Up $10 since the first weekly screen in 2005, May 2005.

Retail:

LUB – 12.24, Lubys is back on the daily screens this week. Up 3.2% on volume 101% larger than the 50-d m.a.

PEET – 35.13, familiar face making a new high with a 3.32% jump on volume 66% larger than the 50-d m.a.

HIBB – 39.30, new 52-week high but volume was weak.

CTRN – 20.37, recent IPO with an interesting chart setting up. Triple top breakout confirmed today above $19.50. First screen ever.

Energy:

GMXR – 15.27, up 5.53% on volume 135% larger than the 50-d m.a.

SWN – 52.90, a 2 for 1 split early last month. The stock is up 48% since the split. We screened the stock (weekly) two times in May. ($33.49)

UPL – 32.04, weekly screen member 14 times from February 2004 to February 2005. Ultra hasn’t made the screens until now, due to the sideways movement.

Others:

TS – 81.47, closed above the round number of $80. Closed at $58.76 on May 2, 2005 and moved above the $60 threshold the following day. Now it is halfway to $100. Screened in March and May and mentioned as a $60-$100 candidate.

RMCF – 22.40, new high on average volume.

Interesting Stocks within 10% of a New High:

CTRP – 54.79, cup, handle, breakout! Still below the 52-week high. RS line in new high territory.

FORD – 20.04, removed from the weekly screen this past week but it recovered the 50-d m.a. on above average volume. We will watch to see what happens. I have been shaken out of this stock in the past, only to see it recover and move higher. Not a big deal to reestablish a position if strength continues.