Q: Can you elborate on what you mean by “The Big Stock Principle”? Since I’ve only been a subscriber during the ’08 Bear market, I don’t have a feel for your goals with this principle. Beyond finding the big stock(s) of each uptrend, will you explain how you pyramid in them with follow-up buys, margin, portfolio management, etc.? Will you be talking about price objective, conviction, and staying with the big stock(s) as long as possible? Are you of the same mind set as O’Neil on this or have you come up with things that work for you?
G: I am looking for highly profitable companies, as expressed by their return on equity and profit margins, showing large increases in quarterly and annual earnings and sales. ROE should be in excess of 15-16%, and the higher the better. GOOG, for example, when it began its run in August 2004 had an ROE in excess of 87%. I like to see quarterly earnings and sales growth of at least 20%, but preferably much higher than that, say 100% or more. The biggest factor in my stock selection is understanding a company’s position as an innovator. I’m looking for companies that are at the cutting edge of what is going on in the economy with a critical product or service that is selling like gangbusters. This is what I call the “Big Stock” factor, and when a company is a leader in its industry with products and services that are at the forefront of what is driving growth in the economy and in its particular sector at any given time then institutional investors (e.g., mutual funds, pension funds, etc.) will have to own that stock. It is their buying power that drives a long-term price move, because they will tend to have a 3-5 year horizon when they buy a stock. Strong buying by quality institutional investors with an outstanding track record is a key characteristic I look for in any stock I’m interested in, because that is where the big money is made. AOL in 1998-1999, QCOM in 1999-2000, AAPL in 2004-2007, GOOG in 2004-2007, RIMM in 2003-2007, these are what I call “big stocks,” in the sense that they are institutional “must own” stocks.
Q: How do you evaluate the % of float that is short intrest?
G: The higher the % of the float that is sold short, the more likely is the possibility of a short squeeze and rally to the upside if the shorts are forced to cover. If I see a great stock with great fundamentals showing relatively high short interest of 8 days or more then I see that as an added plus.
Q: With all of the institutional trading that goes through “alternative” new breed exchanges, does this volume go under-reported and/or alter your methodology in any way?
G: I have been concerned about the activity in so-called “dark pools” where trading takes place and the volume is not recorded in the price/volume data for the stock. So far, it has not forced me to alter my methodology, but it is certainly something to think about when you see a stock break out with little volume, and then the next day or two volume starts to come in. In cases like this I wonder if perhaps there wasn’t some initial buying in a dark pool that hid some of the buying on the breakout, and so forth. It certainly gets one’s mind a-whirring, that’s for sure! ;)
Q: I’m a new subscriber to the reports and I have a question regarding “actionable ideas”. IBM has been pointed out in the last two reports as a stock to keep an eye on. Should IBM become actionable, as a subscriber will I, 1) learn of it in the reports or 2) receive an e-mail notification notifying me of the “idea” or 3) receive an e-mail directing me to a new report containing the price points, etc. I’m just trying to understand how the ideas are disseminated to the subscribers and to understand how buys/sells are communicated in between Wednesday’s and Sunday’s reports. Could you please help me to understand the process? Thank you.
G: The way I make “recommendations” is to discuss an idea I like and under what conditions I would move to buy the stock. So readers should make note of my comments regarding a particular idea and then be ready to take action when the conditions I have outlined occur. I prefer this method since I believe sending an email forces readers to become overly dependent on being fed a fish, rather than learning to fish themselves. The intent behind the entire website is to introduce ideas and the thinking behind those ideas, including the conditions under which a stock should be purchased, and allow readers to incorporate some of their own judgment into the process. I consider my website more of a guiding service and not a “buy here, sell here, buy here, sell here” service that essentially leads subscribers around by the nose.
I feel that I am helping subscribers most by imparting an understanding of how and why an idea becomes actionable, and then to allow them to take these guidelines and impart their own judgment, timing, and thought to it. In this way I feel subscribers are empowered over time. I understand that over time a subscriber might become increasingly empowered as they learn from my thinking and eventually have no need for the website and cancel their subscription, but I feel that if this is the case then I have done my job.
Q: I use Daily Graph Online, Stock Graphs, Custom Screen Wizard, and Industry Groups. Can you suggest what you might consider to be one or two of the best custom scan settings I could use on a daily basis? My thoughts are that relative strength and accum/dist would be two of the more important settings.
G: I would use a screen every day that picked up stocks with a combined EPS + RS rating of 160 or higher, Accumulation/Distribution Rating of B or higher, Composite Rating of 75 or higher, and up on volume for the day of at least 25% above average daily volume, also read as 125% of average daily volume. This is a very good daily and intraday screen to run to pick up stocks with strong fundamentals that are moving on the day.
Q: You say that you do not listen to analysts, but do you take into account earnings? Or depending on the earnings and the stock’s reaction will you only be out if the stock hits your stop? If you see a pod forming or another troublesome pattern and the stock is up big and reports bad earnings will you jump the gun so to speak to take a short position? I ask because some say that stocks start breaking down technically prior to the fundamentals.
G: I prefer to see the stock show some initial weakness, and then I’ll go after it. Also, if I am short a stock and it rallies on earnings it has to hit my stop for me to exit. Usually, however, if I have a profit on a stock as it is going into an earnings announcement, I will bag my profit and wait to see how the stock acts on earnings before deciding whether or not to short again.
Q: This morning I was watching two stocks for short sale entries. When they started going down I was worried that they were getting away from me so I set a limit order on each one. I was executed on both because they turned around and went up. How do you handle this type of scenario where you would like to see them rally up to start with into the 50-day moving average?
G: I wait for the stocks to get to my short-sale point. If they start going down before that, I don’t chase them. They must get to my short-sale point, otherwise I sit tight. Usually, if you are patient, they will come to you. If they don’t, you simply watch and wait for another chance to go after them. Watch your emotions! Take your time and be methodical, not emotional.
Q: In a recent report, you wrote “And stocks that break out and then fall back beneath their breakout point should be sold immediately.” Is that a strict rule of yours or was it just relative to the questionable general market at that time? I thought that a stock could be sold no lower than 7% to 8% below its buy point; therefore if it is bought near its breakout, the stock could fall somewhat below its breakout and be ok to hold.
G: In a market that I believe is in the latter stage of a bull cycle, I will normally sell a stock entirely if it violates its original buy point on the chart. In a normal bull phase, I will usually sell 1/2 my original position if a stock fails at the breakout point, holding the other 1/2 to see if it hits the 6-7% stop-loss I normally would use. If the stock breaks out again, I simply buy back the other 1/2 since I’m not worried about a few points of wiggling, I’m more concerned with buying for a big move.
You can stick to strict, percentage-based sell-stop rules if you want to, and that’s okay, but as a skilled investor with many years of experience, I have additional rules that I employ which I believe optimize the process for me.
Q: What fundamental analysis is done in support of Gilmo recommendations?
G: I use a collection of 18 proprietary fundamental screens to narrow down the entire universe of US equities to a watchlist universe of about 150 stocks that meet my fundamental criteria and which show favorable technicals and institutional accumulation. From there, a bit of elbow grease is applied in narrowing my primary selections down to a group of about 20-30 stocks. I don’t necessarily look for current earnings growth, as I have found strong forward estimates to be an equally effective driver of price performance, as in the case of US Steel (X) back in March 2007, and some of the coal stocks of 2007 like Fording Coal (FDG), for example.
Q: What criteria do you employ in your screens looking for short-sale candidates?
G: I keep a list of stocks that have had big price breaks within the last 6-7 months, and which were former leaders. Every day I run a Down on Volume screen and go through it, picking out former leaders that were hit very hard on heavy volume. Those go into a watch list, which I then review every day once the market goes into what I feel is a bear trend. You can use IBD to do this by going through each of the stocks that are down on volume. For example, you would look at the “NYSE + NASDAQ Stocks On the Move” list and look at all the stocks listed in the bottom half of the list, below the triple horizontal lines. There’s no real secret, it’s just a matter of maintaining a watch list of such stocks. Every day just check the charts against the down on volume list in IBD, and select those that look like they fit the bill.
I watch my list every day to see how right shoulders or other set-ups develop to pick my spots. No magic to it, just a little bit of elbow grease and the ability to recognize a potential short-sale set-up on the chart.