Monthly Archives: October 2012

Microsoft – Small Price Moves can have Big Meaning!

Change is occurring all around us.  Yes, the US is suffering a hangover of the financial collapse, which occurred 5 years ago which only time can seem to heel.  At the same time structural change is occurring in many sectors of the economy making uncertainty the only certainty for participants and observers alike.  I will leave it to others to profess where we are heading in this fast paced world, myself I have fun trying to reconcile what I see in my mathematical world of model price charts and extrapolate this world to the world of possible reality.  The latest observation I’m making is the negative transit of EBV+5 occurring in Microsoft.

Here is the current Model Price chart as of Friday, with MSFT’s September balance sheet.

Microsoft with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of MSFT subsequent to this post will be maintained on Facebook, here.

Also, here is the long term Model Price chart on MSFT.

Microsoft with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

My point here is that Microsoft, which has been a public company since 1986 and has traded above EBV+5 for 26 years looks to be breaking or transited down through EBV+5.  Too me this event is amazing and historic.  I’m not saying Microsoft is going to go away anytime soon.  I’m saying in our Model Price work, EBV+5 has important relevance and what it says about the company.  The monopoly or dominance for Microsoft is truly over in “the market’s eyes”.  And if I’m right, that this is truly a negative transit, than EBV+5 support becomes resistance.

Let me review an example of this with the long-term chart of Intel Corporation (INTC)

Intel with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

At the beginning of 2006 you can see Intel broke down through EBV+5.  Late in 2007 Intel tried to rally up to EBV+5, however EBV+5 becomes resistance and Intel couldn’t transit above EBV+5.

Back to Microsoft

What we are seeing in the marketplace with Microsoft is nothing short of dynamic.  Four years ago, Windows devices, personal computers accounted for 95% of the internet-connected devices.  In 2011, this was down to less then 50% and projected to be less than 20% in 2014.  Software development on Windows platform has all but stopped.  Developers now focus on the web and mobile with Apple operating system (iOS) and open source (Android).  One sees Microsoft playing catch up with mobile devices of its own and of course the just released tablet, Surface.  Reviews of these products is rather mixed.  The elephant in the room with Microsoft is what happens to enterprise technology spending by major corporations.  As corporations shift to giving employees smart phones and tablets instead of notebooks and personal computers obviously sending less money to Microsoft in the future.

Again, let me emphasize Microsoft is not going away.  Microsoft will make tons of money and pay out billions in dividends, however the equity markets are about valuation.  Microsoft will probably trade in the future at a valuation that will be less than anytime in its’ 26 year history.

The last four weeks Microsoft has traded lower in a very innocent fashion, probably not alarming anyone in the marketplace.  This is what I love about our model price charts – little price moves can mean big things.   As this blog post suggests, history is being made here with Microsoft and this latest price move.  Is anybody listening?

P.S. I have written about Microsoft in the past.(here)  Back on February 16, I suggested that holding Microsoft for a period of a year in which the stock price followed EBV+5 would imply a return to investors, with dividend, of 24.4%.  As Microsoft’s balance sheet grows so does EBV+5.  For instance, EBV+5 one year out or October 2013 is projected to be $39.75 (earnings less stated dividends added to the net worth of the company).  So investors can make money being invested in Microsoft, I am not suggesting otherwise, as the stock price can move up to EBV+5 at any future date.  What I am suggesting in this blog is a more discerning point about EBV+5, valuation and what this says about the company and its’ future in the eyes of the market.

Netflix Reports 3rd Quarter Earnings – The Good News!

As predicted in my initial blog on Netflix (NFLX), back on January 30th, 2012, quarterly reporting for this company is becoming a wild ride for their faithful stakeholders.  Obviously the major headline is subscriber growth or lack of it compared to expectations.  The initial market reaction to NFLX’s announcement sent the stock tumbling 15% in after hours trading.  I have written three blogs on Netflix not only analyzing in detail the financial statements of the company but also making predictions on the company’s share price.  My hope in writing these blogs and others is to make everyone a better investor.  If you have lost money in this position since January, then my hope is these blogs on NFLX will help you look at companies differently and start to explain why your sitting on losses or reduced gains.

The Good News

OK, Netflix ended down 12% on the day, and you see good news!  Are you kidding me!

Let me explain.

Here is our Model Price chart, as of the end of trading October 24, 2012.  This chart includes NFLX’s 3rd quarter balance sheet.

Netflix with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of NFLX subsequent to this post will be maintained on Facebook, here.

Since the price collapse back on July 25, 2012, nothing has really changed fundamentally in the stock.  Since this date NFLX has bobbed in the zone between EBV+6 and EBV+5.  Yes, even though NFLX fell 12% today, it didn’t transit down through EBV+5.  Remember these parallel lines look simplistic enough however they are fundamental – see Key Concepts.  These EBV lines come directly from the balance sheet and are structural or rules based.  Notice how NFLX has come close to EBV+5 and used this fundamental structural line as support.  Granted NFLX has been volatile, however no transits have occurred, upward or downward since the release of 2nd quarter earnings.

What if Netflix transits down through EBV+5?

Good question.

Then fundamentally things will change a lot for this company.  The best way to describe what is going on currently with NFLX, “the market” is supporting NFLX and what it is doing, I’m guessing here, business model wise.  See, some of our EBV levels are more significant then others.  EBV+5 is one of those important levels.  If NFLX transits down through EBV+5 or as I have indicated $54.65, “the market” will be taking away latent capital; capital the company can use to expand their business or do whatever management seems fit.  The way we look at companies trading over EBV+5 is “the market” believes in you and your story.  Transiting down through EBV+5, means “the market” is saying your mortal.  A mortal company that is earnings based not valuation based.  Currently “the market” doesn’t care about earnings on NFLX because of where the company trades.  If there is a negative transit of EBV+5, this will be a different company in “the market’s” eyes.  If investors’ considered earnings in terms of valuation then our calculated model price, how we define fair value, is 66% lower then the close of $60.12 which occurred today.

Conclusion

Investors and other stakeholders have had a wild ride with NFLX over the last year or so.  However there is another important test for everyone concerned if NFLX were to transit through EBV+5 or $54.65.  “The market” will be the only one to know whether NFLX belongs above EBV+5 or not and “the market” can make this determination at anytime.  When “the market” speaks will you be listening?

My other posts on Netflix, sequentially

Netflix – Three BIG questions (and answers) about Netflix.

NFLX – Two Big Problems for the Bulls on NFLX!

Netflix (NFLX) Reports 2nd Quarter Earnings – What Now?

Procter & Gamble – Drip, drip!

The pressure continues to grow on Mr. Robert McDonald, Chief Executive and Chairman of Proctor & Gamble – as I thought it would.  The Wall Street Journal today reported that a 13 page letter written by Mr. Gary Martin, former president of family care at P&G, was given to lead independent director, Boeing Co. CEO Jim McNerney, on April 12 of this year.  Mr. Martin detailed a number of concerns about Mr. McDonald’s leadership and called on the board to strip the CEO of his chairman title.

All eyes (and ears) will be on deck, as P&G will report first quarter earnings on Wednesday.  Mr. McDonald is walking a tightrope, without a net as the proverbial handwriting on the wall gets ever more clearer.  As I predicted in my first blog on P&G, the company will have to undergo a major cost cutting exercise as well as shirking their Theoretical Earnings/balance sheet.  This will take time.  Unfortunately time is running out for Mr. McDonald.

Previous blogs on P&G

Procter & Gamble (PG) – Bill Ackman goes after P&G, What Does ModelPrice Guy see?

Procter & Gamble – Front Page Story in the WSJ turns up the Heat on CEO

25th Anniversary – The Crash of 1987

Yes, I was there – Front row seat.

I was working at the head office of Wood Gundy, top floor of Royal Trust Tower.  In one day, Monday, October 19th the Dow Jones Industrial Index (better known as “the Dow”) fell 508 points or 22.61%. The TSE 300, (Canadian Index) fell 22.5%.

Here is the daily line chart of the Dow from mid-June 1987 to January 1988.

The comical part of the day, I can remember vividly, sales assistants and fellow stockbrokers loudly asking anyone whether we were down 250 or 400 points on the Dow as they whispered the result to concerned clients.  Our quote machines at the time were CMQ machines, which only had 2 digits left of the decimal point for any change in the index during the day.  Talk about technology not keeping up with financial markets!

For what’s it worth here are my lessons learned, 25 years ago.

1.  From the bottom of this day, the Dow is up almost 700% over the last 25 years.  Like other crashes which I experienced since the ’87 crash, there was talk of the coming depression.  There was talk of America having seen its best days.  I remember subsequent to the ’87 crash Japan was going to eat America’s lunch.  The Yen was going to replace the US dollar as the reserve currency of the world.  America still stands and seems to be better off not only financially in spite of these crashes but stronger in character as a result.

2.  Always buy quality companies.  Companies that reside in the S&P 100 and the S&P/TSX 60 should make up the bulk of your portfolio with reasonable valuations.  Investors who get wiped out are ones who invest in low quality companies with high valuations.  Story stocks usually go to zero.

3.  Before the Crash of ’87, everyone, and I mean everyone was on margin.  Why?  The first two-thirds of 1987 equity markets, both Wall Street and Bay Street were on fire!  From the beginning of the year to mid-August, the Dow rallied 43% – Greed was in full swing.  The combination of story stocks and leverage was a sad recipe for anyone involved. Anyone who lived through the crash learned leverage and the stock market was a two edged sword and should be respected and if used, used judiciously.  Blue chip stocks were no protection to anyone who used maximum leverage.

Yes, these are rather simplistic lessons.  The best lessons in life or career learning often are.   I was 28 years old at the time, almost two years in the business before the Crash of ’87, and certainly one day I will never forget.

JP Morgan – “Coming out of the Blue!” (Again)

I wrote this blog the first time JP Morgan transited up through EBV-3 back on March 9, 2012.  Obviously JPM transited down through EBV-3, which nullified this blog post or observation.  (Remember I don’t recommend stocks in my blogs, just making observations).

JPM – JP Morgan – “Coming out of the Blue!”

Well here we are again with JPM transiting up through EBV-3.  Here is our short-term chart (weekly bars) from our Facebook application.

JP Morgan with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of JPM subsequent to this post will be maintained on Facebook, here.

Yes, the charts of JPM and Goldman Sachs (GS) seem identical, except for our Model Price calculation points to more value in JPM than in GS.  What I said back in March on JPM is still relevant today.  This is good news not only for the US economy but also for these two huge financial companies that have approximately $3.5 trillion dollars in assets.

Obviously as I have written before, if JPM and GS transit back down through EBV-3 all the good news which I have written about will have no relevance or if your investing in these names, a negative transit would be your stop.  Then we will wait again for a positive transit.  Yes, this can be frustrating however risk is reduced significantly for investors investing in these names.

Last Night’s Presidential Date – Highlighting Energy

Last night’s town hall presidential debate was informative for the long term or secular investor.  Both men, Obama and Romney highlighted energy independence for the US by end of this decade.  I wrote a blog on this back in June, highlighting what a huge potential this would be for the US dollar and US dollar assets.

I think it’s worthy of another look.

US Energy Self-sufficiency – Big Game Changer for Investors

Goldman Sachs – Breaking out of the Blue! (Again)

Today, October 15, 2012, Goldman Sachs traded above EBV-3 or as we say, “Breaking out of the Blue”.  This occurs when an equity, which was trading below EBV-3, transits up through EBV-3.  Goldman will report its’ third quarter earnings tomorrow morning, however market participants seem to know that good news will be reported.

Here is the model price chart as of tonight’s computer run.

Goldman Sachs with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of GS subsequent to this post will be maintained on Facebook, here.

Also what I like about Goldman’s trading is the breakout pull back, which has occurred over the last six weeks.  Experience tells me this trading pattern has a high probability of success.  Yes, the market seems to test on the first transit whether the stock actually belongs in the zone.  So the stock transits, pulls back, and transits a second time, confirming the stock actually belongs in the new zone.

Also, I have reproduced the long-term model price chart on Facebook.  What I like about this chart is the 1-2-3 formation Goldman Sachs seems to be producing over the last year.  I am NOT a Technical Analyst, which I disclose many times in the media, however the one and only formation I do respect are 1-2-3 high’s signaling important market tops and conversely 1-2-3 low’s signaling market bottoms.  As I have highlighted, Goldman is about to complete a 1-2-3 bottom on monthly price bars over the last year.

Goldman Sachs with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

This has happened before.

Goldman tried to transit up through EBV-3 on February 5, 2012, which I blogged about here.  I noted in this blog that if Goldman transited back down through EBV-3, the trading strategy would be ineffective or EBV-3 should be your stop loss.  Well Goldman did exactly this in April of this year.  Why?  Not sure.  But earlier this year the financials as a group looked like they were transiting up on improving fundamentals.  Obviously, fundamentally something happened which caused Goldman and JP Morgan to transit back down through EBV-3.  (The ”London Whale” perhaps.)

Fundamentally, if Goldman transits up through EBV-3, the market is recognizing the stated assets on Goldman’s balance sheet is accruing value.  That asset prices, stated loans, and whatever assets Goldman has on its estimated $1 trillion dollar balance sheet is going up!

Why should you care?

Two reasons

1.  The US has been in a bear market for the last 5 years.  The financials led us in; the financials need to lead us out.  There are clues or data points this bear market has run its course, Goldman represents a big piece of the puzzle.

2.  Transits up through EBV-3 can quickly send a stock to EBV, or our definition of stated book value, when market participants believe the stated values on the company’s balance sheet.  Which for investors can be very profitable.  Please note just as my first blog pointed out, any transits down through EBV-3 would be negative for Goldman and my stop or sell point.

October – Monthly S&P 500 Market Strategy Update

I’m having fun with third quarter earnings however I had several requests to do an October update of the US markets.  I do this by looking at our Model Price chart on the S&P 500 Index.  Remember we aggregate all the companies in the S&P 500 Index into one chart, so we can see where the market is trading relative to its EBV lines.  Also, I have written throughout the year on my thoughts of what would happen and I have linked these blogs at the end of this blog so quoting from previous blogs won’t get too onerous.

Here is the current Model Price chart on the S&P 500.

S&P 500 Index with weekly price bars, EBV Lines (colored lines)

This chart includes the close of the S&P 500 on October 12, 2012 of 1428.59 and all available financial information for each company in the index.  Our calculated Economic Book Value (EBV) line or EBV+3 (red line) is 1510.  So as of Friday’s close, this represents a potential upside of 5.7%.  Also note the EBV+2 level, which we calculate at 1093 or -23.5% potential downside.  The other item of note on our chart, which I have included, is EBV+3 one year from Friday’s close or October 12, 2013 or 1671.  This represents a potential upside of 17%, taking Friday’s close of 1428 and comparing this level to the top of EBV+3 one year from Friday’s close.  How can we do this? Simple we add earnings estimates less dividends to the net worth of each company in the index and calculate this level.  Obviously company specific corporate actions could have a small impact on our projected number, however what we are looking for is some sense of potential upside and downside when evaluating the market just as we evaluate a stock for a trade or investment.

Traffic Light – Yellow (Caution)

No change in my traffic light analogy.

Links to my blogs on Market Strategy Update:

September (Intra Month Special) – S&P 500 Market Strategy Update

September – Monthly S&P 500 Market Strategy Update

August – Monthly S&P 500 Market Strategy Update

July – S&P 500 – Market Strategy Update

June – S&P 500 – Market Strategy Update (Update 2)

April – S&P 500 – Model Price Market Strategy Update

Model Price Outlines Three Scenarios for the S&P 500 Index

What is going on with the world of finance, and how do you fix it!(Update 2)

Whether the wind is at your back, or face matters a great deal in life, metaphorically speaking.  Over the last 5 years, certainly the winds of finance have been in the world’s collective face.  In my blog post on July 17, 2012 I have written of a secular trend of what is occurring in the US and other countries, in terms of our “Solvency Curve”.

I have reproduced our Solvency Curve of the United States from the Flow of Funds data produced by the Federal Reserve Board.

I also highlighted in my blog, it’s the dynamic of what is happening along this curve that is worthy of consideration.  The left hand of the “Solvency Curve” is the US Federal Government, with a “Solvency Ratio” of 0.135.  The US federal government sits on the threshold of what we call the 3rd Order of Solvency.  Yes, this sounds ominous however I do point out the Treasury Department is managing this ratio, rather intended or not, since I highly doubt they are following our work.  Nevertheless, irrespective of the Treasury’s manipulation the US Federal debt continues to increase at a substantial rate.

As the US Federal government continues to dig a deeper hole on the left side of our “Solvency Curve”, the other segments of the economy continue to slide down the right side of the curve.  As Dan Steinhart, of Casey Research points out US nonfinancial corporations are sitting on more cash than at any point since World War 2.  Dan includes this chart as part of his analysis.

This Stockpile of Cash is the Raw Material for the Next Bull Market

Dan’s work highlights that nonfinancial corporations hold $1.4 trillion of cash.  In absolute terms, that’s the most ever.  In relative terms, it’s the most since World War II.  Dan’s chart highlights where this cash currently resides.

So hopefully you can picture what is occurring in the US economy, the Federal government sliding down the left hand side of our “Solvency Curve” and the other categories of the economy, namely individuals, nonfinancial corporations, financial corporations and state and local governments sliding down the right side of the curve.  This is the financial head wind I alluded to in my opening sentence of this blog.  As the right side of our curve continues to stockpile cash and/or pay down debt or deleverage, economic activity will be weak.

Enter the “Fiscal Cliff”

After the national US election, you will hear a lot about the “Fiscal Cliff”.  Yes, the “Fiscal Cliff” sounds scary, but is it really?  Simplistically stated if the U.S. President and Congress do nothing, under current law, the “Fiscal Cliff” refers to a large predicted reduction in the budget deficit.  Does this sound scary to you?  Not to me!  In other words, going over this “Fiscal Cliff” means the left side of our “Solvency Curve” – US Federal government – slows down from going insolvent or stays in the position that they are already in or constant.  If the “Fiscal Cliff” were enacted the deficit for 2013 is projected to be reduced by roughly half, with the cumulative deficit over the next ten years to be lowered by as much as $7.1 trillion.  This would be welcome relief to the current annual $1 trillion deficit the US seems to be on currently.  As the US federal government stabilizes and signals fiscal prudence on the left side of our “Solvency Curve”, entities on the right side of the curve will feel more confidence on their overall financial health.  Why would I say this?  Ultimately the right side of our “Solvency Curve” has to pay for the left side in increased taxes and or reduced services.  Currently this is a question mark because of the red ink for the federal government as far as the eye can see.

The New Bull Market

Dan Steinhart, of Casey Research concludes his presentation by stating, Corporations aren’t going to sit on their cash forever.  Eventually conditions will be such that they’ll either want to or have to invest in new projects.  Companies are ready to invest and grow.  They just need an economic and political environment conducive to doing so.

Well stated.

The key is the reversal, on a secular basis, of the participants along our “Solvency Curve”. All participants must start moving up along the curve denoting more efficient balance sheets producing dynamic economic activity over the next 5 to 10 years.  The economic pieces are in place for this secular change to occur, the US needs the political will to let it happen.

In my first update of my original blog, Martin Wolf of the Financial Times does ask the central question.  Which I reproduce here,

The question is, of course, how the government should respond to its sudden shift into massive deficits.  That depends on how the economy best adjusts to balance-sheet adjustments in the private sector.  If the government is to move back into balance, by cutting spending and raising taxes, how would the private sector respond to being forced  [sic] back into balance?  Would it spend more, because of a sudden surge in confidence about fiscal prospects?  Or would it cut back more, so driving the economy into depression, thereby at least partially defeating the effort to improve the fiscal position?

After the US federal election in November the president, whoever this maybe, will have an important economic choice as stated by Mr. Wolf.  The math of solvency and the economic future rests full square on which path the US follows.  Continue to slide down our “Solvency Curve” or reverse course and have the “Solvency Ratios” start moving up the curve.  Let’s hope it’s the latter.

Read two prior posts on this subject

What is going on with the world of finance, and how do you fix it?

What is going on with the world of finance, and how do you fix it? (Update 1)

“99% of the people buy right, but only 5% sell right”

This quote came from a grizzled old trading veteran who has long since passed.  In the early 1990’s I travelled to Austin, Texas on three different occasions to sit by this trader’s side and soaked in the wisdom of his 50 plus years of trading.  There are wonderful old quotes, sayings or stories in the investment business that have a bit of truism in them.

My old friend loved to tell me a story of the “Oracle of Montgomery”, as in Alabama.  The Oracle was the most successful trader in the region and was sought out by many for his trading knowledge.  One day a young man sought out the Oracle in the men’s washroom at a local hotel and asked him his secret of success.  The Oracle looked at the young man sternly and agreed to divulge his trading secrets.  The Oracle laid out price charts on the washroom floor, that were daily price charts of wheat, corn, and other commodities.  He took a gold chain from around his neck, which had attached a crystal orb.  The Oracle held the chain in his right hand and passed it over each chart.  He told the young man if the orb moved counter-clockwise over any of the laid out charts on the floor this would be his buy signal.  The young man looked intently as the Oracle’s hand went from chart to chart.  Having finished, the Oracle began packing up his stuff and placed the chain around his neck.  As he was leaving and almost through the bathroom door, he looked back at the young man and said, oh yes, if my trading position declines 5% I’m out of the position – no ifs, ands or buts.

There is so much wisdom in this parable that I didn’t mind my trader friend telling me this story three times with equal enthusiasm and energy.

So if a sell strategy is so important, why aren’t more investors focused on this?  The simple answer, from my personal experience and watching the experience of many other investors is selling an investment for gain or loss requires discipline.  Discipline is very hard for the majority of the population in any endeavor let alone investing or trading stocks.  The other aspect of selling involves a part of your brain we know little about.  It’s part of your brain pejoratively called “the lizard brain” or the amygdala.  This part of our brain was great for our ancestors to survive on the Serengeti however ill equipped for handling financial markets.  The flight-fright, adrenaline-dopamine response of the amygdala can have ruinous financial results of anyone participating in the financial markets.

Do you want a sell strategy?  Use our EBV lines!

A Review of our EBV Lines

Model price charts calculate Economic Book Values (EBV) zones or channels through mathematical analysis of the balance sheet to quantify support and resistance levels.  The advantage EBV lines has over other quantitative models is that it is not dependent upon empirical relationships, relationships which inevitably break down as the economic and financial environment changes.  Rather, it is built upon structural equations, equations that do not change over time or across companies.  These equations are part of a theory of how economic activity is related to the structure of an entity and how the economic process creates value.

Model price charts present this analysis in a graphical format, which integrates our quantitative research with the stock price.  The intent of this visual presentation is to assist in the analysis of securities without burdening the investor with numerical overload.  In this format, investors can quickly and efficiently assess their securities or screen for new ideas in a timely manner.

To briefly summarize this product, Model Price calculates fundamental trading channels which individual companies trade within.  Stock price movements are constrained by these channels, hitting resistance at the top to the zone and support at the bottom.  It is no wonder that the concept of “reversion to mean” is popular as it is a natural consequence of prices reacting to their channel limits.  The problem with blindly applying such concepts as reversion to mean is that the mean can change and what had worked historically no longer does.  In our framework, a company can change channels, rising to a higher channel on improving fundamentals, or falling to a lower channel on deteriorating fundamentals.  In fact, when a company does breech these channel limits, it is a powerful market indicator.

Two Case Studies

I have picked two long-term charts of two separate companies for you to review.  These two companies have had extraordinary market moves, however they were constantly giving sell signals to those who were willing to listen.

Research In Motion (RIMM)

Here is the long-term Model Price chart on RIMM.  RIMM went from $150 a share in mid 2008 down to a low of $6.22 a share just in the last few weeks.  I’m sure there are investors who have been holding RIMM since mid 2008, and have suffered losses as a result.  Did investors need to suffer such losses?

Research In Motion with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

On this long-term chart I have indicated sell signals, by a negative transit through an EBV zone or channel.  RIMM went from EBV+9 to under EBV-3, with each transit telling investors that something was wrong fundamentally with the valuation of RIMM.  I count 14 different sell signals given to investors.  Remember these transits are about the fundamentals NOT technical analysis, which sometimes our model price charts are confused with.

The second item I like to point out is our model price line.  Remember our model price line, is using analysts’ earnings estimates as an input to determine our model price or our definition of fair market value.  Notice RIMM as the stock was climbing from EBV+6 to EBV+9, between 2006 to mid 2008, far in excess of our model price calculation.  Probably indicating mean estimates were too conservative as the stock was climbing.  Also notice conversely, as RIMM was transiting down through our EBV zones, especially since the first quarter of 2011 as analysts’ seemed late in lowering their earnings estimates compared to the stock price.  We see this phenomenon quite often, as analysts’ do seem to follow each other as a group.  In these situations EBV transits are more meaningful then model price.

Crocs Inc. (CROX)

CROX was a high flyer until the end of 2007, before it started its’ long descend.  Here is the long-term model price chart.

Crocs Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

As I have pointed out there are 12 different sell signals on CROX, which occurred in 2008.  Also notice our model price calculation, perhaps too conservative in terms of median analysts estimates on the away up, and over optimistic on the way down.

The reason why I select CROX is look what happened once CROX went below EBV-3.  Notice how the EBV lines down trend in 2008, this signifies management wrote of something from its’ balance sheet.  Once the write-offs occurred CROX transited back up through EBV-3, which we call “Coming out of the Blue”.  The investment returns from EBV-3 to EBV+5 are almost 600% or a “6 bagger”.  Not bad.  This is why I highlight stocks coming out of the blue or a positive transit through EBV-3.

Use EBV lines as your sell strategy

If you have observed this business for any length of time, you will notice everybody talks or recommends buying strategies.  Nobody talks about sell strategies.  Or as the Oracle of Montgomery will tell you the buy strategy doesn’t matter, it’s the sell strategy that matters.  Selling is hard.  Unfortunately from my experience investors, traders do not employ a sell strategy, or worse hang on to the position in hopes of a turnaround or disinclined to realize a loss.  EBV lines are fundamental, in that they are derived from the company’s balance sheet, and as we overlay the company’s price series, information is being communicated to those who are listening and major losses can be avoided.