Follow Up: Nine Stocks for Playing the Long Side Safely

Back in June, I did a column for theStreet.com, titled: Nine Stocks for Playing the Long Side Safely. An emailer yesterday asked for an update on the stock choices, so we whipped out the trusty XL spreadsheet (nine_stocks_safely.xls), and away we go:

The conceit of the article was based on several factors, but the most important were finding stocks with good risk/reward characteristics. These were names near good entry points, and that offered tight stop-loss protection so that losses were a reasonable percentage away.

The list we picked included:

AON  Corp. (AOC)
Input/Output (IO)
Service Corp. (SCI)
Xerox   (XRX)
Mosaic Company (MOS)
Charles Schwab (SCHW)
Schering-Plough (SGP)
Abbott Labs   (ABT)
Warner Chilcott (WCRX)

Someone asked me yesterday how those stocks have performed, and as of last night’s close, the answer was pretty good:

click for full table
9_stocks_safely

 

With the Dow Jones down 5.29% since then, and the S&P500 sliding
6.74%, a gain of 5.10% looks pretty good. Those numbers assume you
bought in at the closing price the day of the recommendation (or the next morning’s open), and
honored all of the suggested stop losses. Nothing gapped
below the stops, so you should have been able to get out at or near the stop prices.

Most of the losses were small, single digit losers — Xerox was a big 15% loss. Mosaic (MOS) was a jumbo winner, AON was a 13.5% gainer, and *Schwab — a stop out loss that we bought back — was also a winner.

* The asterisk: We have a rule about stop losses — if a stock gets stopped out for a reason we find acceptable — we will allow ourselves to buy it back ONLY IF AND WHEN it trades back over the stop loss point.

That’s exactly what happened with Charles Schwab (SCHW). Because of a secondary offering, the stock price traded down through our stop loss of $18.50 to ~$18, and then popped quickly back over it. After getting stopped out, we bought it back for our managed accounts between $18.50 – ~19.50.

The 5.1% gain assumes Schwab was stopped out. If we were to include Schwab, the returns over the same period are even better: ~7.20% (not too shabby). Either way, a 1000 basis point out-performance versus the SPX, WITH VERY LOW LEVELS OF RISK is something to shoot for again in the future.

If I can develop another theme — more safe ways to play the long side? — I’ll try to put together another list like the June version . . .

~~~

This was prepared for a six month update, to be published next week at TheStreet.com.

This assumes you bought equal shares of each. I haven’t done the math on what happens if you bought equal dollar amounts . . . but here’s the XL  doc if anyone wants to bother (nine_stocks_safely.xls).

>

Source:
Nine Stocks for Playing the Long Side Safely
Barry Ritholtz
RealMoney.com, 6/8/2007 4:44 PM EDT
http://www.thestreet.com/_tscrss/markets/activetraderupdate/10361606.html

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What's been said:

Discussions found on the web:
  1. mal commented on Nov 27

    6 were loses, and 1 made 75%, if this was a fund I would be scared, obviously the 75% stock was an aberation.
    ~~~

    BR: Not so obvious: Markets — and portfolios — are driven by a handful of big winners. When a portfolio or indice is up big (i.e., 30 or 40%), it is rarely evenly distributed.

    Indeed, the entire concept behind the “Cut your losers short, and let your winners run.” is this portfolio EXACTLY: Small losers, big winners.

  2. michael schumacher commented on Nov 27

    I asked you for that over one month ago in an email. The results at that time were not positive. They are now??? Just a little timing methinks.

    Ciao
    MS

    ~~~
    BR: Download the spreadsheet, pick a date (i.e., the date of your email, and substitute the closing prices. (why do so many people think I am their bitch?)

    This date wasn’t chosen by me — TSCM asked for a six month update . . .

  3. David Merkel commented on Nov 27

    I know it would be more work, but the getting stopped out could also be applied pro-rata to the benchmarks…

    Looks pretty good, though. Wish I had done so well over that period.

  4. techy2468 commented on Nov 27

    thanks barry..

    finally something which can be applied to trade rather than we talking about macro and end of the world whole day long…

    i am looking forward to your next list.

    it will help if you can create a seperate blog (or a new thread everyday with your long term bullish and bearish hunch about couple of stocks), where you can point out stocks on which we can spend time to research before you recommend, so that we can go into the trade with more confidence or we can debate pros and cons.

  5. wally commented on Nov 27

    About the same as an FDIC insured CD, but with greater transaction costs.

    ~~~

    BR:: True, but that wasn’t the challenge; it was find stocks to play the long side safely.

  6. michael schumacher commented on Nov 27

    It appears that you are still in MOS????

    What’s the exit strategy since it’s well over the target……?

    BTW I’m not dissing you in the above however you take away MOS and it begins to look a little like Cramer…

    Ciao
    MS
    ~~~

    BR Trailing stop loss in managed accounts.

  7. GRG commented on Nov 27

    What’s all this talk about? Abu Dabi just bought a huge stake in Citi – all is now well with the world. Nothing to see here.

  8. techy2468 commented on Nov 27

    i am very new to investing.

    but when i think about putting my money, i want to balance my long position with short position.

    it does not make sense to be only long in this bear market.

    anyone knows how the big money managers maintain their portfolio?

    anyone knows about a source where i can read about big money managers gameplans?

  9. JohnnyB commented on Nov 27

    Wally, better recheck your figures. the 5% gain is since June, obviously not a full year or an annualized return.

  10. wally commented on Nov 27

    JohnnyB,
    You are right: bad comparison.

  11. VJ commented on Nov 27

    Jeffrey Saut, Chief Investment Strategist at Raymond James on the Nightly Business Report.

    GHARIB: So is the economy headed for a recession?

    SAUT: It really depends on what your definition of a recession is. I can make a fairly cogent argument that the employment population growth is about 1 percent a year and therefore if GDP growth falls below that 1 percent employment population growth, that you’re not up-taking all the people that are available for employment and therefore you’re in a recession. That is not most people’s definition of a recession. If that is your definition of a recession, then, yeah, I think we’re going into a recession.

    NBR TRANSCRIPT

    In other words….
    .

  12. Bonghiteric commented on Nov 27

    techy2468,

    I don’t know how the big boys do it. A couple dedicated shore ETF’s have been working for me SH, DOG, QQQ, SKF, to name a few.

  13. Charlie Barker commented on Nov 27

    I find it ironic that all the headlines say that the markets popped because Citi found a sugar sheik, but Citi is only up like 30 cents.

  14. Barry Ritholtz commented on Nov 27

    Hey Charlie Barker:

    As noted this morning, Citi is only the spark: The Markets are deeply oversold, with several indicators suggesting a bounce was overdue anyway.

    In a piece titled “The Lonely Bull’s Case,” my friend Guy Ortmann wrote yesterday that AAII poll, Equity Put/Call ratio, SPX Trailing P/E, IBES Valuation Model and the 21 day Overbought/Oversold Oscillator are all at levels that suggest a buying opportunity.

    I only disagree about the duration — Guy thinks it will have legs, and I think the pop will be a selling opportunity . . .

  15. Al Czervik commented on Nov 27

    Barry,
    Decent job but, with all due respect, too complicated for my taste if one was looking for “safety”. If you just put all the money in Swiss Francs in June you’d be up around 11-13% (depending on day of purchase).

    Long Swiss Francs

  16. Guy M. Lerner commented on Nov 27

    I would agree with the comments above regarding how the gains were achieved in the 9 stocks, and would suggest that the one winner was as much to do with luck than anything else; not sure I would put much faith in a strategy that relies upon the outlier event to make my hay.

    This GUY also thinks that a rally is at hand and likely to last 4 to 5 weeks and maybe produce marginal highs in the NAS but not in the S&P500 or Dow; with the transports and financials in their own bear markets it is hard to see how any lift can be anything but a selling opportunity.

  17. DavidB commented on Nov 27

    How much of this up, down and all around was the bog boys cleaning out their closets for the end of the year? Or does that start next month?

  18. Charlie Barker commented on Nov 27

    Barry, I guess I was overbought with irony. Thanks for the elaboration.

    I’m pretty cynical and consider “oversold” a Wall Street term designed to suck in the greater fool.

    Does Guy have his own blog, or you get his releases?

    If the market is grasping at sparks like this I think I will stay not long.

  19. SINGER commented on Nov 27

    im playing the safe side LONGLY

  20. michael schumacher commented on Nov 27

    Ok BR this would have helped a bit on the front end…

    “This date wasn’t chosen by me — TSCM asked for a six month update . . .”

    that’s a bit different then “a reader emailed me” don’t you think?

    So you don’t think that you’re my bitch and all that…..

    Ciao
    MS

    ~~~

    BR: Done !

  21. Short Man commented on Nov 27

    I wonder how the rating agency review of the bond insurers is going? Ambac and MBIA are down precipitously today (10% so far) despite the “rally” in financials.

  22. AC commented on Nov 27

    Yo Barry, I think you trying to pull a fast one on us…How can you factor in a 75% gain on MOS when the price target on the stock got hit @41.

    I am assuming you would be out of that stock and obviously the gain on that trade and the overall performance would be much different. W/out doing the math, I am guessing you would have done worse than the S&P; No?

  23. Brian B. commented on Nov 27

    Wow,

    Barry is a big boy and can stick up for himself… but you guys are ruthless… how much does this blog cost? Oh, thats right its free… and anyone else with a list from 6 months ago? I kinda agree with the post about a nice CD instead… thats where I have my deferred comp account… its been there since Oct Dow approx 14,000…. 5.5% and no worries… You guys want up to date info… try the Dennis Gartman letter… good info but $400.00/ mo… thanks for this blog BR, its alot of work!!!

  24. Norman commented on Nov 27

    BR: Let us not be disingenuous here. When you came out with that list you said you owned all of those stocks except for MOS!!!!!!

    ~~~

    BR:: Disclosures change daily. Besides, TSCM asked me: How did those 9 picks do?

  25. GreenMachine commented on Nov 27

    Here’s another list of nine to ponder (11-28-07):
    APD
    SSL
    BPT
    EDR
    CCJ
    SQM
    PMD
    ELOS
    HERO
    No Stops…..back in 6 months!

  26. Barry Ritholtz commented on Nov 27

    Listen folks: I do not have the time to correct some of the junk here. Its faster and easier to unpublish comments that misrepresent the positions (which is what I did).

    Meanwhile:

    1. As I have said since the beginning of recorded time, all of the stops are on a closing — NOT intra-day — basis.

    2. Upside targets are just that — I don’t sell when they hit ’em, and ALWAYS use a trailing stop.

    3. We can buy back stocks if they pop over their stop loss, as was done in Schwab, but not others.

    4. I took the worst entries — not the best of the buying range.

    5. If a trading and an investing stop were given, I used the investing stop loss (i.e., AON). This was a 6 month period — not 6 days.

    6. We do not manage assets mechanically, but for the sake of the follow up, I discussed the overall screen and what it yielded.

    7. Unsure? Then read the disclosures for what I consider to be acceptable posting behavior.

    ~~~

    Thanks for the kind words, Brian B. They are appreciated.

    Some of the folks who comment are simply too tiresome to deal with, and really, I would rather pour my energy into something more productive.

    So its “ping!” unpublish! “ping!” ban IP address. “ping!” send a polite “Go away email.”

    The alternative is to pull what Scott Adams did: Going Forward

  27. whipsaw commented on Nov 27

    It seems to me that the real question is how well you would have done buying BR’s picks against just buying SPY? Presumably you would have some rules about stop losses and targets with SPY as well and you would need to evaluate how those applied during the same period to see which choice was better.

    If you don’t want to count remounts (and I’m not sure why they should not count), then my guess is that you would have been stopped out of SPY by early August if not before and never hit any target, so you’d be limited to a rather large loss which would not be offset by subsequent CD or tbill interest on the remaining funds. Even with his losses, BR’s picks would outperform overall.

    If you do count remounts in any comparison, then you’d need to have declared some rules for those in advance, but that could be done and would present a more useful comparison of how your cash could have been deployed.

    The only thing that comparing picks directly against an index has going for it is that it is simple. Comparison against actually buying an ETF based on the index and using comparable position management rules would appear to be far a more realistic exercise.

    One thing that I do not understand is why anyone would assume that hitting a target meant selling? I might bank half, but would stay in with a tight trailing stop on the rest or perhaps not bother with any of that and just buy puts to protect the gains to date on the original position if puts had become cheap enough.

    View it as you will, but I thought BR’s picks did pretty well vs. what probably would have happened if you had just thrown the same money into SPY using any kind of realistic management rules.

    ==whipsaw==

  28. Tony Blair commented on Nov 27

    >> (why do so many people think I am their bitch?)

    I’ve been asking myself the same question. How do I get them to stop?

  29. Gary Ben-Ezra commented on Nov 27

    Barry First time/Long Time. Love the blog just a formality correction. Your spreadsheet does calculate returns for an equal dollar weight portfolio not an equal share weight portfolio.

  30. brandon commented on Nov 27

    Love the blog, while I too was AT FIRST not very impressed by the stock picks as only 3 were up–3 of the down picks outperformed the S&P500. So still a decent run considering.

  31. Barry Ritholtz commented on Nov 28

    Apparently, it was a tragic mistake for me to pick a group of stocks that had one or two outsized winners in it.

    I apologize for this, and it won’t happen again . . .

  32. Winston Munn commented on Nov 28

    Right on, Barry,

    Don’t you know you are supposed to pick only outsized winners and ignore the losers – then give that advice away for free on your blog?

    If we all can’t triple our money in six months from free Ritholtz picks, we might as well be watching Cramer – Booyah!

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