Last month, Wayne Himelsein, one of my managers, told us why AMD was a better investment when he bought it at $16 in June than it was at $10 in April. Boy was he right. The stock has nearly doubled since he bought it. With AMD now over $30, is it still a buy?
Ken Kam: When a stock doubles quickly, many shareholders feel like they won the lottery, but they also fear that the stock could just as quickly come back down.
Wayne Himelsein: Quite simply, it does not matter as much where the stock has come from, versus where it’s going.
If during a big move up a stock reveals even greater signs of strength, then in fact, it’s an even better buy at the higher price.
This was the case when we bought AMD at $16 in June. Since then, the stock has nearly doubled in the last three months.
Kam: Yes, you were right to buy AMD in June at what was then a multi-year high. But now that it has moved so much higher, does the same lesson hold true? Would you buy more at $30?
Himelsein: Just because a stock goes higher, does it mean it’s going even higher? Does a large gain beget another large gain? Of course not! Generally, that’s impossible.
Outside of areas of nature, like bacteria, nothing can grow exponentially. AMD nearly doubling these past 3 months was highly improbable. It just happened to occur this time, as rare things sometimes do. My strategy does not depend on stocks to double every three months. That would be silly.
I buy stocks that my analytical lens tells me have the best chance of moving up in the short-term. I expected AMD would move up, but the size of the move was unexpected. I suppose I got lucky in the way Louis Pasteur meant when he said, “chance favors the prepared mind.”
Kam: So you are not buying more. Are you holding what you have?
Himelsein: In high level terms, AMD definitely satisfied the original premise. All the reasons my model selected it, and all the “tells” my model identified, played out above expectations.
However, as I just said, just because a stock goes higher, it does not mean it will continue to move up. On that score, AMD does not appear as robust for continued growth as it did in June.
This does not mean that AMD is not a good company. In fact, it is a wonderful company, and has good growth potential with the widespread adoption of technology and hardware and chips that are required for all of it.
To me, AMD now looks like a lot of other good companies in the S&P500. But it is no longer a perfect one, ready to pop. It may even be getting ready to fall a little and give back some of its overly extended gains for a short period.
Kam: So you not holding AMD for the long-term?
Himelsein: I genuinely don’t think about “stocks for the long term.” My analytical lens is strong in the short-term and weak in the long-term. The further out we look, there are just more chances of new events unfolding or changes that we could not have seen coming.
While AMD’s prospects still look positive, I believe in investing one’s capital in the best opportunities. Given that my lens can see much better over the short term, I’m selling AMD, and moving on for now.
Kam: You mentioned that AMD may be poised for a reversal in having to give back some of its “overly extended gains”. Do you think AMD is a strong sell?
Himelsein: I honestly don’t really use terms like that or think about stocks in that way.
Even if I thought AMD just might hang out around this level for the next several months, I’d still sell because I would rather be in a stock with clearer and better prospects for a strong move up. In fact, even if I thought AMD would go a tad higher, I would still want to put my capital in something better.
You always want your capital in the absolute best place, which in terms of investing, is the stock with the most “pop” potential over the next month.
It’s almost a breath of fresh air to not worry about what will happen to AMD, because regardless, it has no obvious “tells” and there’s others that certainly do, that exhibit significantly higher potential to run.
Kam: What stock will you be buying after you sell AMD?
Himelsein: Here are four stocks that I think have clearer and better prospects of making a move up in the short-term than AMD: Align Technology, Broadridge Financial, Illumina and Take-Two Interactive.
Kam: Congratulations on AMD. Let’s do this again next weekend.
My Take: Just as the best poker players win by reading other player’s “tells,” Wayne evaluates the market’s “tells” to determine when to be aggressive and when to hang back.
Wayne’s Logica Focus Fund (LFF) has a 18+ year track record at Marketocracy. Over that period, Wayne's model averaged 13.49% a year which compares well to the S&P 500's 6.07% return for the same period.
Because LFF consists of large-cap, liquid stocks, the S&P 500 is an appropriate benchmark. For those who aim for the lowest fees, an index fund is hard to beat. But for those who aim for the highest return after all fees, LFF has been a better choice for years.
For the full Forbes.com article, please click here.