Stock Exchange: Oscar loves airlines, but Consider FAST and SLCA

Each week Felix and Oscar host a poker game. We listen in on current trading ideas in the few minutes before the game starts. They like to call this their “Stock Exchange.” I am the only human present, and the only one using fundamental analysis. Their methods are excellent, as you will learn if you join us for a few weeks. Since the time frames and risk profiles differ, so do the stock ideas.

This is the only place you can get several great technical ideas each week along with a response based upon the fundamentals. I have placed more background at the end of the article. Each week features a different expert. The names help you pick a favorite trading style. Comments, dissent, and specific stock questions are welcome!

This Week’s Ideas—Focus on Oscar

Our featured expert is Oscar. Vince (our modeling guru) designed Oscar to be an aggressive sector trader. The time horizon is about three weeks. Oscar’s trading universe is over 30 sectors. Unlike most other sector models, Oscar uses baskets of stocks chosen through a statistical analysis of actual trading. If there are important gaps, we use an ETF instead. Oscar takes more chances than the other models, but employs two elements of risk control:

  1. Using a basket eliminates single stock risk, where something surprising happens to a single company.
  2. Oscar goes to cash or bonds when market conditions are poor.

Even if you do not trade market sectors, Oscar’s top choices are a good place to begin your own research.

Here are the ideas for this week, beginning with Oscar, our featured expert.

Oscar

I still like the Energy and Utilities sectors we’ve been discussing lately, but JETS (a U.S. Global ETF) is my pick for this week. This is a sector that’s underperformed for the past 6 months, but has still shown some overall steady growth. This would be an example of the “sleeper” everyone wants to pick up for their weekly fantasy football team.

You can see the same below with American Airlines (AAL). It is one of the major holdings in JETS – and it’s not hard to see why. If you’re looking for a stock like the overall industry AAL is likely your best bet.

J: Is this another pick you got from your bookie? The football Jets are playing someone they can beat this week.

O: No! I found this one on my own. And I don’t care for the Jets, no matter who is at quarterback.

J: Richard Branson said that you can become a millionaire by starting with a billion dollars and buying an airline.

O: Who is Richard Branson? I am going by the chart.

J: At least you picked a company that has earnings, although we only have three years of history since the last bankruptcy.

O: You are so negative! I said it was a sleeper.

J: Right. Fantasy football. You are not even playing in the office fantasy pool.

O: That is child’s play. I am in a league with some of those Chicago models. Any of us could win your league.

Holmes

As people should know by now, I love to buy the dips. (See last week’s Stock Exchange for more information about Holmes). This week Fastenal, (FAST) is on my buy list. This wholesale distributer of industrial and construction supplies has suffered mightily since April, but it looks to me like it’s ready for a bounce and I’m ready pounce. I’ll be very cautious and get out below 37, but I’m looking for a rebound to 41.25 or better.

J: I think this could lose another 30% or so.

O: That is why I use stops.

Felix

I have studiously selected Basic Materials: Metals and Minerals this week. SLCA is a prime textbook example of what a chart should be. It has great momentum and should be around for a long time.

J: I also like basic materials, but you have picked another company with no earnings! I keep trying to teach you all what NMF means when you look at the P/E ratio.

F: Look at the chart.

J: Look at this chart from Chuck Carnevale. Only losses this year.

F: Look at the price momentum. The market is sending you a message.

Questions for Felix

anpere of SeekingAlpha says:

Great article, like the energy trade, I am long RXNRP and REXX, MEMP, EVEP, and LGCY, knowing will lose 100% in one of them, but will make 1000% in at least one of them, been using this style over 40 years and the math works. Appreciate thoughts? Thanks

Felix: Hi Anpere, you’ve a long list of energy stocks and my opinion is not specific to those, but of energy. I, too, have a long list of energy holdings and I hope that they are all winners! Good luck with your picks, they should coincide with mine!

Phil at “A Dash of Insight” asks:
A couple of stocks for analysis by Felix, and/or others – DIS; SPWR

Felix: I rate DIS near the bottom of the 700-stock universe.

Jeff: I think it is OK — reasonable value now and projected earnings increases.

Felix: SPWR is not in my current trading universe. They are asking me to expand the universe for questions, but have not yet agreed to raise my pay.

Jeff: I prefer either a solid record of earnings. If I am choosing to speculate, I need a very good story. I don’t see either one in SPWR.

Felix: And to my many fans: Please keep your questions coming. I could use the overtime pay! Ask about a specific stock, or perhaps an ETF. I am interested in sectors, but need a representative ETF to help.

 

Athena

I do not have a new idea this week. Most of my choices are from April and they are all doing well.

J: No new idea? What do you think we are paying you for?

A: Wisdom. Sometimes the smartest course is to do nothing. I like my current positions. The only soft one is Carter (CRI) which just did well on earnings.

J: You do not do any earnings forecasts.

A: The chart tells all…. you just need to pay attention.

 

Background on the Stock Exchange

What is this about? Since launching this series I have had good questions on three general themes. Here are the questions and some brief answers.

  1. The model characters are fun, but please tell me more about what they do.

    I include the general personality of the model at the end of each article. I will begin featuring one approach each week with more detail, and soon provide a reference page for readers.

  2. Why don’t you show a track record on performance?

    I understand that those trying to sell a newsletter or chat room often provide some sort of time-stamped real-time record. You will find that most of these people are not subject to compliance rules. The “track records” tell you nothing, since they do not have enough trades to get into the “long run.” Confidence in a model comes from knowing how it is developed and tested. I would rather ask a few questions to a developer than see a few months of real-time picks. It is easy to spot the amateurs.

     

  3. Why should I care about these model picks?

    You probably read many articles with stock ideas. Some are a single idea based upon technical analysis from a source you do not know about. At the Stock Exchange, you get four different recommendations from technical “experts” as well as some fundamental commentary as a rebuttal. I am not trying to sell anything. We are developing an institutional product. The results are good enough that I am willing to share and discuss with readers. Some of my clients are invested in these models, so I am not going to provide every trade in real time. It is supposed to be interesting and fun! Look at the ideas and do your own research.

 

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Cast of Characters

Felix is fussy, precise, and very cautious. He looks for what is working, but it also must have upside potential. He is an investor who thinks long term. Felix will not usually announce new picks, but he will answer questions, saying what he thinks about specific stocks. He will also comment on favorite themes and sectors.

Oscar is naturally optimistic and a bit excitable. He likes to go with winners, and focuses on a one-month time frame. He trades either sector ETFs, or a basket of stocks (equally weighted) that reflect a sector. Oscar will mention a favorite sector each week, and will also answer questions about sectors.

Holmes is a trader, but a cautious one. Holmes emphasizes asset protection through profit taking, stops, and trailing stops. He is careful in selecting new positions, and generally looks at an intermediate time frame. While he does not know the definition of “mean reversion” he loves rebounds! There is no set holding period, but two or three months is not unusual. Holmes will tell us one stock recommended that week. For those who sign up for his email list (no charge, privacy respected, holmes at newarc dot com) he will report exits with a one-day delay.

Athena trades more frequently than the others, but still limits risk. Her inspiration helps to find good ideas. Her excellent quant skills find attractive risk/reward opportunities. Her wisdom leads her to exit trades that are not working. Athena will provide a new idea each week.

Jeff usually has some comments about stock or market fundamentals. Unlike the other witty participants, he sounds like an old prof.

The conversation is light-hearted, but the stock analysis is serious. We own positions in each of the stocks mentioned.