Last week, Wayne Himelsein, one of my managers, told us he sold AMD (in which he nearly doubled his money), to buy Align Technology, Broadridge Financial, Illumina, or Take-Two Interactive. AMD fell 13%, so selling was a good call. Now after completing his research, Wayne says Take-Two is the one to buy.
Ken Kam: All four stocks you said you were evaluating to buy were down this week. AMD did worse than any of them, so it was in fact a good idea to sell. But could you not have directed us to a winner?
Wayne Himelsein: If you only knew what I would give to be that accurate all the time! But, that’s close to impossible.
The market had some rough days last week, Even when you are in the best stocks, you have to recognized that any stock is quite literally 75% the market, or what’s called “systemic” exposure.
The stock itself, or 25% of your bet, is “idiosyncratic” exposure.
This means that when the market falls, we will have 75% downward pressure on our thoughtfully selected stocks. The best we can hope to do when the market sells off is to outperform on a relative basis by losing less.
Kam: Of the stocks you were evaluating last week, which one is the market revealing the strongest “tell”?
Himelsein: Take-Two Interactive fell 9% last week, a bit more than the S&P, but it did so with elegance and poise!
It reminds me of a famous quote that says in effect “don’t lose your head when your neck is on the line.”
The reason firefighters or police officers take jobs that most of us can’t is because they can actually think straight in a disaster. The rest of us panic. Similarly, Take-Two Interactive didn’t stress the way other stocks did during the market sell-off.
Kam: What exactly do you mean by “didn’t stress” or moved down with “poise”?
Himelsein: If we look at TTWO last week, we see almost a staircase of down days, where each day, as the market fell, it just stepped down to the next level, evenly and smoothly.
There were no double step jumps, or leaping off the top of the staircase to land on the floor below in a single trading day, there was just “I’ll see you downstairs” and off it went.
I like this behaviour because it shows composure in a time of stress, which tells me that sellers are not panicking, just taking a little bit off the table as the market falls. Who knows what motivated the sellers, but it was definitely not a rush for the gates.
For many other stocks there most certainly was a rush for the gates. “Get me the hell out” shouts the sellers, and you see the acceleration of downard price. Not here, not with TTWO.
Kam: That’s very interesting, any other key “tells” that give you further comfort?
Himelsein: Yes, there’s also where it stopped. As much as it carefully made its way down the stairs this week, it stopped at the first floor, and did not see any reason to go down into parking structures 1, 2, or 3! (there was even a P4 for numerous stocks).
It calmly, and confidently, halted at its 50 day moving average, which it has nicely stayed above since reporting nice quarterly earnings in late July. It had a considerable gap, of almost 10% on that earnings day, putting it handsomely above its 50 day moving average, and has not dipped below it since then. This indicates follow through, or supportive price behavior, on the heels of its fundamentals. On a high level view, I like seeing this type of double confirmation.
Kam: Last week you talked about different “lenses”, looking from close up, as well as from afar -- is there anything you see big picture that reduces or increases your confidence?
Himelsein: I am a major advocate of a multi-lens view. Just as I mentioned the two-sided confirmation above, I also look for confirmation at different lenses, where there is both short term and long term tells that speak to me.
When I look at the full year view, I see a stock that basically moved sideways for almost 9 months, starting in Nov of 2017, and through early Aug of 2018, where everything changed after the big earnings move (as described above).
In fact, the new high it made in early August was after the earnings, signaling that 9 months of waiting had just been proven to be better than hoped.
I like seeing that, especially after the multi-year uptrend that TTWO had been in before the 9 months of flatline. Its as if all the buyers and sellers who were part of this great stock for many years took a sabbatical. They didn’t quite know what would be the case for about 9 months, and so effectively vacationed.
Further, when the stock had a small decline in March of 2018, it came all the way back in late April and early May, as if the buyers and sellers came back to the hustle and bustle for a month, realized nothing new was afloat, and went back on vacation. The stock just did not want to be disturbed; neither up nor down.
And then, after better than expected earnings and an accompanying single day gap up of about 10%, everyone was back in the city and ready to rumble. And rumble they did, making three higher highs over the next three months, including the very recent one just last week on October 1st. In sum, the buyers are back in full force and ready to go.
My Take: Even if you’ve already made a lot of money in a stock and think it can still move higher, it must still be evaluated against other stocks that have the potential to run up further or faster.
The stock you own, and made money on, does not know what you paid for it, or how long you’ve researched it. It takes objectivity and discipline to keep looking for better places to invest capital when the stocks you are already in have made money you money.
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 13.48% a year which compares well to the S&P 500's 6.01% 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.