Monthly Archives: August 2014

Badger Daylighting – Catching Lighting in a Bottle

Yes, it has a funny name but big gains were made from investing in this company over the last year and a half.

We are a society that hunts for and admires winners. And when a stock climbs in a parabolic fashion we have no problem recognizing what a winner looks like.

We live in an information culture and there’s so much information that you have to feel inadequate at least some of the time. Badger, I have to admit, came from left field for me. I never heard of the company until mid way through 2013. Cable television shows, financial media – both print and the Internet – are all pushing to get your attention and making sure you and everybody else know who the winners are.

And I love looking for and actively seek out big stock winners like Badger. They attract what I call “heat” or “buzz”. Like a moth attracted to a night light investors/traders want to know everything there is to know about a winning stock – the management, the product and growth prospects in this very slow national economy. And of course the word brilliant is used a lot. One will hear the business press use the words ‘brilliant management’, ‘the best product ever to hit the market’, and of course ‘unlimited growth potential’.

But valuation is a two edged sword. The higher the stock rises the more the company has to do to maintain everyone’s expectations. And in the end an impossible task to fulfill or a self-fulfilling prophecy.

From my experience investors can’t resist such temptations. We all want to belong. We want to be part of the action. In our capitalist society you can belong by purchasing the winning company’s shares with our hard earned cash. And if you don’t have enough money the investment industry will lend it to you – happily. Leverage? Yes sir…step right up!

And of course a surging stock price confirms what you already know. It’s seems circular and self-reinforcing.

And once we’re an owner you are part of the story. You’re smart because you’re part of a group of people who are smart. The business press and a surging stock price confirm this to yourself and others you have told at the proverbial Saturday night cocktail party where your closest friends or relatives are impressed by your business acumen.

You’re a winner by default because you’re an owner.

And I could go on. You put the stock in your iPhone portfolio tracker. You become mesmerized by the flicking stock price, tick by tick. You see every research report, listen to the quarterly conference call, and check ‘StockTwits’ once an hour to see every tweet.

And lastly, you start personalizing your gains. Think of a bigger house, family vacation or that new sports car you always wanted.

And your stock starts to go down!

But when do you sell?

Yikes, nobody wants to talk about selling because selling is hard. Like leaving the poker table with your pockets full. It never happens.

And when the stock starts to go down, you can’t sell. You know the story too well. You spent how many hours doing what you consider research. You know everything there is to know about the stock, about the industry and management but the stock continues to slide and the losses continue to escalate. (You calculate your losses from the 52-week high NOT from your purchase price because you could have sold at the high, couldn’t you? That money was yours to take but you didn’t, did you?)

And of course, the dreaded realization “When this stock price recovers and I can get my money back I will sell the position.”

I digress.

Badger Daylighting has had one hell of a ride. Let’s take a look at the long-term model price chart of BAD.

Badger Daylighting with monthly price bars, EBV Lines (colored lines) and model price ( purple dashed line)

Badger Daylighting with monthly price bars, EBV Lines (colored lines) and model price ( purple dashed line)

 

Observables from the above chart

 

  1. Interesting to note that Badger bottomed at EBV+2 back at the market lows in March 2009. Over the last 5 years the stock has risen from EBV+2 to over EBV+7. Giving both investors and management one hell of a ride and tremendous gains.

 

  1. Badger tried and failed to positively transit from EBV+4 at points ‘A’ and ‘B’ annotated on the model price chart above. Note that are calculation of model price supported such a transit.

 

  1. Finally at the end of 2012, Badger had a positive transit of EBV+4 and according to MPT [Model Price Theory] a buy signal.

 

  1. As Badger stock price rockets upward there are multiple positive transits after the first positive transit noted in observation number 3. The stock transited through EBVs 5,6 and 7 giving investors holding the stock confidence of future gains and good entry points for traders/investors who wanted to initiate a position in the company.

 

  1. Our calculation of model price, or our definition of fair market value, is supporting the upward movement in the stock price up to a point – it begins to flatten out at EBV+6.

 

  1. Our calculation of model price may stop at EBV+6 but Badger’s stock price continues higher as momentum traders’ pile in hoping for more and fast gains.

 

Transitioning to our short-term Model Price Chart below

Badger Daylighting with weekly price bars, EBV Lines (colored lines) and model price (purple dashed line)

Badger Daylighting with weekly price bars, EBV Lines (colored lines) and model price (purple dashed line)

 

Observables

 

  1. As you can observe Badger had a positive transit of EBV+7 in the first week of April 2014. And after spending 6 weeks above EBV+7 the stock had a negative transit in the middle of May. This is the first negative transit for Badger since 2008-09 and according to MPT [Model Price Theory] a sell signal.

 

  1. Badger tried and failed to rally back and over EBV+7 in June. This is a classic retest where investors/traders think Badger is cheap on a pull back only to find the stock goes lower in the future.

 

  1. The second sell signal for Badger comes this past week with another negative transit of EBV+6. And obviously Badger starts trading lower than our calculated model price. This, at least, is one positive but usually in these broken momentum stock stories substantial value has to be created in order for new money flows to come in and buy the name.

 

Conclusion

How many times have I seen stocks like Badger over my career? Hundreds of times would probably understate my experience.

But through the prism of Model Price Theory [MPT] you can be resistant to such stock moves. Oh sure, you can trade/play/invest in these stocks, as I have over the years. But you know these situations will probably end badly for most people. Yes, you get a feeling of schadenfreude because the happiness everyone feels with today’s winners will be just as painful for many people down the road as the stock turns lower.

Am I predicting disaster for Badger?

No!

I’m just following and observing a negative transit – actually 2 negative transits but who’s counting! Like when the tides recede one can’t tell what is going on by looking at the shoreline close up. One needs a broader perspective and hopefully a fixed marker to gauge what is happening to the water level for clarity.

Our EBV levels give you this fundamental certainty and from my experience the best sell signals in finance.

I’m on Market Call!

On Friday, August 15th, 2014, I will be on Market Call on BNN (Canadian Business Show) 1:00 pm – 2:00 pm (eastern standard) with Mark Bunting.

 

Take this opportunity, open our Model Price Facebook application and follow along while I’m on the show answering viewer’s questions about individual stocks.

 

Would you say anything different based on your interpretation of Model Price Theory and chart? You can make your comments via Facebook.

 

Should be fun!

August 2014 – Monthly S&P 500 Market Strategy Update

Ukraine seems to be getting worse with pro-Russian rebels downing Malaysia Airlines flight MH17 over Eastern Ukraine. Israel decides to send in troops to Gaza after rockets have been fired from Gaza into Israeli broader settlements. The meanest and the most feared terrorist group in the world today, ISIS, seems to be accumulating and consolidating land and power in central Iraq prompting President Obama to send military observers back into Iraq.

Yes, it was a busy July for world affairs (and US Secretary of State) but the U.S. equities markets barely noticed.

But then Argentina defaulted on their sovereign debt during the last week of July sending the U.S. markets for a much-publicized down day, erasing the annual accumulated gains for the Dow Jones Industrials and shaved half the yearly gains in the S&P 500.

At least the U.S. financial markets noticed something!

As usual let’s have a look at the model price chart of the S&P 500 Index.

 

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

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

 

As a reminder we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P 500 Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.

As you can observe the US market, as defined by the S&P 500, is still in the middle of the zone bookmarked by EBV+3 and EBV+4. If the market rallied to EBV+4 (2176) this would represent a gain of some 12%. If the market corrected back to EBV+3 (1740) investors would be suffering losses of 10%.

For people new to Model Price Theory [MPT] the index value or price can move within an EBV zone with no real consequence. However when a transit occurs – index value or price crosses one of our parallel lines – of an EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectfully.

Can the S&P 500 move down to EBV+3?

Absolutely!

Would it mean anything?

Nope!

Can the S&P500 make new annual highs?

Absolutely!

Yup, the higher the S&P 500 Index value or price is from our calculated EBV+3 (red line) the more risk, and conversely less reward, investors are taking on their U.S. investments.

The world can be a complicated place. The global news media along with the Internet use a loudspeaker on any and all news. The din can be deafening and disorientating. But our model price charts have a calming affect if often used. It sooths me and puts everything in perspective.

Have I found anything in the financial information world to do the same thing?

Nope!

But I’ve only got 30 years in the investment and finance business; maybe I haven’t found it yet?