The Stock Exchange is all about trading. Each week we do the following:
- Discuss an important issue for traders;
- highlight several technical trading methods, including current ideas;
- feature advice from top traders and writers; and,
- provide a few (minority) reactions from fundamental analysts.
We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!
Our previous Stock Exchange considered the benefits of using a blended approach to trading in order to reduce volatility and correlation with the overall stock market. If you missed it, a glance at your news feed will show that the key points remain relevant.
This Week: Nailing Restoration Hardware–Again
The stock market can be humbling. No one wins all of their trades, all of the time. The trick is to make more money on your winners than you lose on your losers, preferably a lot more. We’ve developed a group of trading models, based on different technical and quantitative factors (e.g. momentum and dip-buying) designed to systematically identify attractive opportunities. We’ve also built into the models a variety of risk controls, including position sizing, stop orders, and macro factors.
Our models often identify trading opportunities that are immediately dismissed or ridiculed by fundamental analysts. For example, 2-weeks ago, several of our models purchased Restoration Hardware (RH), and the feedback from some of the fundamental-based commentators was brutal. For example:
“RH being recommended tells me you don’t understand anything but charts. Fundamentally, RH is one of the worst stocks you can buy.”
“RH gonna crash hard.”
“Even charts show strong resistance at $95, not a place to enter now.”
However, here is a look at Restoration Hardware’s performance since our models purchased shares (i.e. the shares are up more than 20% in the last 2-weeks):And this isn’t the first-time we recommended RH. Our models also purchased shares of RH back during the week of August 21st, and here’s what happened to the stock price after that purchase:
Our big gains on RH have come at the chagrin of many short-selling fundamental analysts considering the percent of RH shares sold short was recently over 46%. Our point is that technical trading and long-term fundamental investing can be very different. For example, most of our models only hold their positions for 4 to 6 weeks, as shown in the following table.
And if you still believe technical-based trading is all witchcraft and mumbo-jumbo, you might consider reading this recent article from Dr. Brett Steenbarger:
Trading Model Performance:
Per reader feedback, we’ve recently started including a table summarizing the performance results for our trading models. The table (below) shows actual client results after commissions and fees (I watch this every day, and now readers can see it as well). We’ll share additional information, including test data, with those interested in investing. For our weekly updates, we use only real-time results.
The results in the table above include all of the positions (10 for Road Runner and Athena, 16 for Holmes, and 20 for Felix), not just the specific stock examples we discuss in the Stock Exchange every week (and sorry Oscar, you have too many individual stocks and trades to be part of this approach). We’ve included six months of data since that is the shortest real-time record we have. All of the models are expected to perform well over longer time periods. Holmes, for example, has returned over 20% in the last eighteen months.
And worth noting, our models tend to have a low correlation with the overall stock market, which can be extremely valuable for diversification and risk management purposes. Further still, when “blended” (see table above) our models deliver very compelling risk-adjusted returns.
Expert Picks From The Models:
This week’s Stock Exchange is being edited by Blue Harbinger (aka Mark Hines). Blue Harbinger is a source for independent investment ideas.
Road Runner: Earlier this week I bought, RH, Inc. As you know, I like to buy stocks that are at the bottom of a rising channel. And based on the following chart (from earlier this week), you can see why I bought Restoration Hardware:
Blue Harbinger: I know you don’t win all of your trades, Road Runner. But I’ll give you a pat on the back for this one. As we already discussed earlier in this report, RH is up more than 20% since you placed the trade. Nice job.
RR: Don’t forget, not only did I buy RH earlier this week, but I also bought it during the week of August 21st, and I nailed that trade too—I made over 40% in a matter of weeks (remember, I typically hold my positions for only about 4-weeks at a time).
BH: Nice Job, Road Runner. Just this week, RH raised guidance significantly, and according to the press release, the company is forecasting improved margins and more growth:
“Looking forward, we are forecasting margins to rise and costs to fall as we cycle our efforts to reduce inventory, and benefit from our new operating model. In fiscal 2018, we believe we have a clear line of sight toward achieving net revenue growth in the range of 8% to 9% on a comparable 52-week basis and adjusted operating margins in the range of 9% to 10% while generating free cash flow in excess of $240 million.”
The stock was up 25% on the news, but I suppose we shouldn’t be surprised considering Chairman and CEO Gary Friedman continued to buy the stock in recent months, taking his ownership up to 2.2 million shares.
Anyway, how about you, Holmes—Do you have any “non-RH” trades for us this week?
Holmes: This week I bought GGP, Inc (GGP). Are you familiar with this company?
BH: Yes, Holmes. I am. I actually did a detailed “members-only” fundamental report on GGP earlier this week: A Retail REIT Bottom? Parent May Pillage Brookfield’s Bid For GGP. But I am curious, Holmes—why do you like this stock?
Holmes: I am able to sift through data on many different securities, and GGP ranks highly in my model. Specifically, GGP’s dip this year is the sort of set up I like to see. From the chart below you can see its price now versus where it was earlier this year. GGP has attractive upside over the next six weeks.
BH: Holmes, I know you are a disciplined, data-driven model, but are you even aware that Brookfield Property Partners (BPY) made a bid to acquire GGP over the weekend, and that is why the stock price is up?
Holmes: Interesting. Tell me more.
BH: Look Holmes, GGP is a high-end shopping mall REIT, and shopping mall REITs have gotten slaughtered this year as online stores like Amazon keep winning business away from “brick and mortar” stores like the ones that lease property from GGP. Brookfield Property Partners is know for being a smart value investor with a track record of buying low and selling high. If they’re interested in GGP—that could be a sign that there is hope for some shopping malls. For your consideration, here is a look at GGP’s Fast Graph.
Holmes: Thanks for the fundamental data, but my typical holding period is about 6-weeks, so I’ll be in and out of this trade long-before the fundamental story plays out.
BH: Fine. If you’re not interested in the fundamentals then I won’t even bother to tell you about all the conflicts of interest in this deal between GGP, Brookfield Property Partners and Brookfield’s parent, Brookfield Asset Management (BAM). Nor will I tell you how I think you should “play it.”
Holmes: Okay by me. You spend your time dwelling on the fundamentals, I’ll spend my time making money. Check back with me in 6-weeks and we’ll see how this trade works out.
BH: Great. How about you Felix, what have you got this week?
Felix: This week I have run all of the S&P 500 stocks through my model, and the following table shows which ones rank the highest.
BH: That is interesting. Thank you for sharing. And remind us—what is your approach?
Felix: I am a momentum trader, but I typically hold my positions for about 66-weeks, which is longer than the other models. I exit when my price target is achieved. I also use macro factors and stops to control risks.
BH: Hmm… mometum-based? I can see that seems to makes sense with some of the names on your list, such as Boeing and Nvidia—they’ve both been unstoppable this year. I also appreciated that you too ranked RH highly 2-weeks ago. How about you, Athena—any picks this week.
Athena: I don’t have any picks this week. And when I don’t see attractive opportunities—I just don’t force anything. But I know you like my RH pick from 2-weeks ago.
BH: Okay, yes—you made a lot of money Athena—thanks. How about you Oscar?
Oscar: I have ranked a handful of attractive ETFs, as shown in the following table.
BH: interesting. Remind us Oscar—what is your strategy?
Oscar: I’m a momentum trader. I rotate in an out of sectors, and I use stops for risk management purposes. I usually end up holding my positions for about 6-weeks at a time.
BH: Honestly, I’m not sure what to make of your list, Oscar, because there are so many diverse ETFs included. On one hand you’ve got “growthy” mostly-large cap technology ETFs like QQQ and XLK, but then you’ve also got small caps (IWM) as well as utilities (XLU) and energy (XLE). If I had to pick one, I’d say I like IWM (small caps) just because I am a contrarian value investor, and small caps have lagged so much this year that they’re eventually due for a rebound. I don’t know when, but eventually it is coming. And to be honest, I like small cap value (IWN) even more, for the same reasons, but that one didn’t make your list. Very interesting nonetheless. Thank you.
Even though they involve the same securities, trading models and long-term investing are very different. Not only can the holding periods differ (e.g. weeks versus years) but the methodologies can differ (e.g. technicals versus fundamentals). What can look like a terrible idea under one framework, can be very attractive under the other. Each methodology has advantages. Importantly, the two methodologies can often be combined to build custom portfolios that are less correlated with the overall market, but still deliver attractive overall returns.
Background On The Stock Exchange:
Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check out Background on the Stock Exchange for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.
The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.
Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.