The Proficient Investor

Here’s exactly why you should never trust anyone that claims to have a proven system to pick winning stocks.

http://www.msnbc.msn.com/id/23578967/

Crooks abound everywhere folks, and there’s always some sucker willing to give away their money. Anyone who says they have a sure-fire system that can pick winning stocks all the time is lying. You can make predictions and assumptions based on past performance and several other factors, but there is no sure way to win by trading stocks. If someone tells you they have information on such-and-such company and you could make a lot of money on their stock, just turn around and walk away because you’re more likely to go to jail than cash in.  That’s called insider trading and it’s illegal no matter how you look at it.

Hope your trading day was profitable. RUNU took a dive today but not much. I’m still waiting for the volume to pick up and edge over my average price.

One of my readers emailed me the other day asking if I still thought Google could reach $950 since it has fallen so hard over the past few months and I thought I would share with you my answer.

Here it is:

Hi.

I still think in the long run Google is going to hit $950 and here’s why. Google doesn’t like to split the price of their stock so you have to look at it like a $42 stock right now.  For growth stocks like this, I look at their earnings. Here’s the formula that works for stocks like this with high multiples (or high Earnings Per Share…EPS).

I use Etrade but you can use thestreet.com or yahoo finance just as easy. Go to the earnings estimates and what you are looking for are next years and this years earnings estimates.

Next year’s earnings estimates are around $25 and this year’s around $20…

So, I take next year’s earnings and subtract this year’s earnings $24.91 - $19.98 = $4.93 then divide that by this year’s earnings $4.93 / $19.98 = .2468 then multiply that result by 100 to get the percentage of growth .2468 * 100 = 24.68

So Google is looking at 25% growth roughly over the next year. Consider that institutional investors (hedgefunds and companies like bear stearns or goldman sachs will pay twice the growth in terms of PE (price to earnings ratio)). So a big firm like Goldman is willing to pay 50 PE for the stock. So we look at their current PE.

Google’s current PE is 33 so that means Google, right now is very cheap and undervalued according to these projections. Now if you want to be conservative you can multiply the growth by only 1.5 times and you get a 37 PE.

So let’s be conservative and multiply that 37 times the current earnings per share and we should get a figure that tells us where to sell the stock because at that price it’s fairly valued. 37 * 13.28 puts the stock at $492.

This is the kind of homework I do for any growth stock be it Coca Cola (KO), Goldman Sachs (GS), Wells Fargo Bank (WFC), you name it. If it’s considered a growth stock or some call it a value stock…you can do these kinds of calculations. Now this only works for projecting 1 year out…multi year projections become much more complex and I don’t really bother with them because I only look for growth 18 months out. By the way, if you didn’t calculate the 2X figure…you get a stock price of $664. That’s a nice gain from here. Google can do that easily over the next 18 months. I don’t see it going much lower from here considering the beating wall street has already given it. Even still, now is a good entry point because it’s bouncing off the 52 week low and the 10 day moving average volume looks pretty good. I’d say if you want to buy it here, buy a quarter position or maybe half. If you want to own 100 shares for example you would buy 25 or 50 and hope it drops a little so you can buy another quarter or half…then as the stock gains momentum and the price increases, you peel off those positions when they are profitable taking either half or your original quarter position to your target price. That’s how you make money and stay in the game.  We call it playing with the house’s money.

 Anyway, I know that seemed like a long explanation but I hope it helps you understand how I look at these kinds of stock.

I hope you’ve been following me on this story. Rudy Nutrition (RUNU) the crappy microcrap stock that trades on the pink sheets gained 5% in trading today on 365,000 shares volume. That’s the average for the last 10 days as well. I expect to see this move to around $2 next week or possibly higher depending on the volume and demand. With such a small float it can be unpredictable.

This is true speculation here folks. I make no guarantees you can make money trading this thing, I just know my entry points are well within making me a profit. My average price is  $1.11 so if you factor in the $19.98 round-trip cost in brokerage fees, I need to sell above $1.26 to even make the smallest ($.01) profit. Make sure when you trade these kinds of stocks that you have a price point in mind. $2.00 and I can jet with my small profit if it looks like it won’t hold.

The good thing here is the low float (available shares) as this allows for less manipulation and no shares available to short. Any buying pressure would kill the shorts here anyway.

I don’t recommend you play with your full deck on this stock but if you are comfortable sacrificing a portion of your funds to gamble a little, you could make some serious money.

Another of my big winners today was Crystallex International (KRY). They were up 18.50% on no news, so I’m not sure what’s going on there. I’ve been holding this canadian mining company for 2 years…sometimes you just have to wait things out if you can stand the pain.

disclaimer: I own shares of RUNU and KRY. 

RUNU announced today in Las Vegas they are teaming up with Canteen Franchise Group which operates more than 110 franchisee branches nation wide and is the largest national vending operating company.

Canteen will market distribute Rudy Nutrition’s healthy sports drink and “Rudy” branded products such as Rudy Revolution.

This press release should give a lift to the floundering RUNU which saw a decline from the $63 on February 7th, to the sub-dollar range it sits at now. This is pure momo speculation that I bought at $1.25 and then a second order at $.74 cents. The volume is picking up and with a float of only 29k shares and the fact the stock is below the short price bears would like to play it at, the only pressure right now is upward. It wouldn’t surprise me to see another huge spike in price but again, it’s a bit of a crapshoot. You could make a fortune trading this, or you could lose big…but at least a stock can only go to zero. I’ll be looking for a double or triple at least here but as long as momentum is upward to $5 (where the shorts can come in if they can find shares to short) I’ll be on board.

If you are speculating with a stock like this you don’t want to commit a whole lot of capital to it, just in case it goes south. Speculation requires extreme discipline. For example, I’m only playing with 135 shares here because its such a gamble. But, 135 shares at $60 (should it get that high again) is $8,100.00 which would erase all my losses for the year. That’s just wishful thinking but it could happen.

Last year I got stuck “holding the bag” on a penny stock I had after making quite a bit of money in several days.  Then in mid-february it was announced this company had sold the remaining interest in another company it held in exchange for $2 million in convertible notes. That is to say, in lieu of cash they took restricted shares of stock that can be converted into common stock at some point in the future.

What stock? I’m talking about GBVS and RUNU.

GBVS is a joke of a company, though it is a real company. They are a beverage distribution company based in Maryland. RUNU is the holding company for Rudy Beverage Co. Owned by none other than Rudy Reuttiger.

RUNU is also a joke. The float on this stock is 29k shares because of a 9000-1 split recently. The great thing is with such a small float, and the stock being under $5 it can’t be shorted. Though it isn’t moving terribly quickly, it is on the up and I’ve made a small bet on this MOMO (momentum) play. This is pure speculation and not for the faint of heart.

Stocks like this can make you a ton of money but they can also break your bank, so be warned. Should you decide to play a stock like this, realize that it can go to zero…but hey, at least that’s as low as it can go!

A quick update on the site.

It came to my attention that users were unable to comment on posts. This was due to the spam filter I have in place requiring users to register in order to make comments, however the register link was missing. That link is now available in the navigation bar as well as the brand new Forums!

Now you can discuss your favorite or least favorite stocks with everyone. You need to register to use the forum but it is open to everyone.

Happy Trading!

With the recent news that Yahoo rejected the more than fair bid from Microsoft, it’s time to examine why a failing company like Yahoo would resist such a merger.

Let’s start with Microsoft. Microsoft (MSFT) is coming off a recent 52 week low and hasn’t seen a 52 week high since October of 2007 when it hit $37.50.  You would think they would be worried about this, but then they bid $44 billion for Yahoo. And why? Because a merger of Microhoo would mean more competition with leading search provider Google, which has also seen its fair share of shakeups on Wall Street.

Microsoft is on a bounce here and from what I can tell is on the way up, but I wouldn’t buy just yet.  Several lawsuits are still plaguing the company and unless Yahoo agrees to the merger, Microsoft doesn’t have any big ticket items on the horizon for the coming months. Sales of the XBox360 have slowed considerably after it was announced the HD-DVD format was dead and new 360 consoles wouldn’t be including the player. External units are still available but nobody is making the discs anymore which means users are stuck with their limited library.

Now, lets look at Yahoo. In January of this year, Yahoo hit its 52 week low of $18.58. A strong sell-off based on poor earnings outlook and slowing ad sales had investors running for the hills. Upon the news that Microsoft had made a bid for the company, the stock shot promptly to $30 and has been hovering since.  The Microsoft bid is valued at $31 a share, a huge premium over what the stock was valued at in January.

Yahoo then declines the bid. Seriously? Here’s a failing company who can’t keep up with it’s biggest competitor, Google and they reject a bid from the 400 lb gorilla? Yahoo’s board didn’t feel they were getting the best offer out there, but the fact of the matter is nobody else has the cash to make such a purchase. Microsoft has hinted at a hostile takeover should the bid be rejected again after the recent delay and Yahoo is also rumored to be in talks with AOL/Time Warner.

So is this acquisition good for either of these companies?

Microsoft stands to gain a better foothold on search giant Google by acquiring Yahoo, but it’s unknown if there are plans by Microsoft to lay off Yahoo’s employees once the merger completes. After all, Microsoft is merely positioning themselves to better compete with a bigger foe. Unfortunately, if the merger doesn’t go through, you can bet Yahoo is going to be shorted heavily to the downside and will likely break a new 52 week low.

No positions in any company mentioned.

We all make mistakes from time to time and when we talk about mistakes in investing it’s usually because we lost money. The hardest thing to do is to recognize when it’s time to just walk away from the table. I know i’ve walked away too soon a lot of times and others, not soon enough.

Last month I bought Apple on what appeared to be a pretty important move to the downside and subsequent sideways price action but that actually turned out to be a major squeeze on buyers by sellers shorting the stock down to the current levels. As part of my core investing strategy, I saw this as an opportunity to buy some more shares on the cheap, thus averaging my overall price down. This is a common practice among even the best traders and investors. Tim Sykes does this when he shorts stocks as well. Jim Cramer doesn’t like to call it averaging even though that’s what it is. He buys chunks on the way down and then as the stock moves again in a positive direction he then peels those chunks off.

Regardless of your investment strategy, you do need to recognize when you’ve made a mistake so you can learn from it and move on. That being said, i should have had more patience with Apple and waited for the stock to stabilize at the bottom. I still think it has legs and I don’t doubt that in the next 18 months we see Apple hit $200 again at which point I will exit my second batch of shares for a tidy profit of around $60 per share.

A few of my investments are purely speculation. By speculation I mean I am making a bit of a gamble. Recently, a stock I have held for a long period of time Global Beverage Solutions, announced they recieved $2 million in convertible notes of Rudy Nutrition in exchange for the remaining control of Rudy Beverage Co of which GBVS owned 20%.

So I started looking into Rudy Nutrition (RUNU). Boy what a crappy company this is…but what insane price action. This is pennystocking at its best. Talk about shenanigans. Here’s a stock that went from a few dollars to $26k in 2004. Then earlier this month, it spiked from $2 to 60 and then back down to $2 in two days.

I don’t know what that really says other than either major manipulation of the price or a few lucky SOBs buying and selling at the right time. It’s almost impossible to time these things and making any fortune on a stock like this is pure luck.

That being said, you want to look for liquidity and volatility when playing these penny stocks. Forget about financials because on the pink sheets and OTC it doesn’t matter.

Here’s another penny stock I made money on last year from nothing but fluff and hype. Global One Investment Holdings (GOIH). Though at the time they were called Silver Screen Studios. Their operation consisted of one digital video camera, a G5 Macintosh and a warehouse with a green screen. Yep, that’s all they listed as assets and yet the stock went from a nickel to a couple bucks on PR and fluff and now it’s sub penny. I got stuck holding the bag on 50k shares because my broker stopped accepting electronic transactions for this stock…that reminds me I need to move that account to a new broker.

Anyway, if you want to learn more about penny stocks and playing outside Wall Street, check out Timothy Sykes at http://timothysykes.com and read his book An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund.

A few weeks ago I had the unfortunate experience of communicating with a trader who asked me to check out his site and give feedback on it, and when I had less than positive things to say about the colors and the design, as well as where this particular site was hosted I was lambasted by the owner as knowing nothing and he then proceeded to dis my blog saying I had “no-info” posts.

Instead of retaliating and starting some kind of flame-war, I decided to ignore the email because I knew I was right. What bothered me a bit was the accusation that posts here are “no-info”. In other words, nothing I write about here has any value or merit? I guess you form opinions and stick to them right?

I am of course going to disagree on the point of this blog having posts with no information. On the contrary. When I write here it is because I have done a lot of research about the stock or company I mention. What I don’t do, and I have said this many times is make stock picks or give tips on trading. Tips are for waiters.

Anyone can make a stock pick. Open up a copy of the Wall Street Journal, place it on the ground, drop a dart and see what it hits. Voila! You’ve just made a stock pick. Now what? Now you need to do what Jim Cramer calls “homework”.

This depends on your trading style and your investment goals of course because everyone is different. You might not like the idea of holding onto a stock for 18 months. Maybe you think even longer term than that. Think about what kind of investment you are going to make, then you can determine your buying and selling points. The thing is, there’s no magic formula for picking winning stocks, it takes time and practice. You’ll see a lot of people tell you they have a system for picking stocks and they have such-and-such percentage of wins vs losses. I say who cares? Most of these claims aren’t true anyway and if we’re talking penny stocks, it’s easy to claim a 20% gain on a thinly traded stock that goes from 5 cents to 7 cents. I don’t care about that.

The problem is that 5 cent stock can just as easily breach the sub-penny level and you end up losing big. With that in mind, if you do want to trade penny stocks you need to realize they can have big swings up or down depending on the volume and buying or selling pressure from market makers.

I’m not saying I don’t have penny stocks in my portfolio. I’ve made money from a few of them but by and large they are difficult to play and you need to pay very close attention. If you are interested in learning more about penny stock trading, I suggest Timothy Sykes DVD “pennystocking” which you can purchase from http://www.timothysykes.com.

So I could go into a lot of detail on where I think you should invest and what to invest in, but who am I to tell you where to put your money. Truth be told I’m in the doghouse with my portfolio because like many others who invested in this market I’m stuck holding my bag until we get a real upturn in the market. I’m fully vested but that’s not always a bad thing. I know why I picked the stocks I picked and I know when I am planning on selling and I’m just going to stick to my guns.

I hope that my no-info post has helped you at least consider why you are investing where you are. Again, I can’t tell you what to do with your money and I don’t think you should listen to anyone that does. They don’t know what’s best for you, only you do. So ignore any of those “hot stock tips” you see out there…if someone says they have a sure thing, they are trying to sell you something.