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What Drives the Market_ - Meetup

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What Drives the Market_ - Meetup Powered By Docstoc
					    Thousand Oaks
     IBD MeetUp

Buying and Selling IPOs

       Mike Scott
        Initial Public Offering
• A private company who wishes to raise
  investment capital or unlock shareholder
  value will elect to offer equity positions in
  their company with an offering of shares to
  the public
• These opportunities can be some of the
  most lucrative and the most risky
• A structured approach to buying the right
  IPOs at the right time is needed
• IPO stocks need to meet the same
  fundamental requirements as any other
  stock selection
• An IPO can be bought off of a shorter
  consolidation pattern than most other
  selections
                   CANSLIM

• Current Quarterly Earnings growth of 25% or
  more for the last 2 quarters, prefer acceleration

• Annual Earnings growth of at least 25% over the
  past 3-5 years
   – Sales growth quarter to quarter
   – Margins increasing quarter to quarter
   – Return on Equity (ROE) of at least 17%
                     CANSLIM
• New Companies with New products
                              New services
                              New business conditions
                              New management
  Companies that are dramatically changing the way we
                              Live
                              Work
                              Do Business
  New Price Highs

Studies show that new companies make their largest advance
   within 8 years from an IPO
               CANSLIM

• Supply and Demand are demonstrated by
  huge volume increases over daily average
  on up days. Demand/Supply = ADV/Float
• Leader vs. Laggard-Look for top stocks
  both fundamentally and technically in the
  very best performing sectors and industry
  groups. Look for stocks with a high relative
  strength
                  CANSLIM
• Institutional Sponsorship is demonstrated by BIG
  money. This can be seen from increasing number
  of institutions taking positions. Volume is a sign
  of institutional sponsorship. Buy higher volume
  stocks.
   – Question, how do you determine Institutional
     Sponsorship on an IPO?
• Market Direction, 75% or all issues follow the
  general trend of the market
The Importance of Earnings




                    AAPL ALXN BIDU CMI
    CDNS AGO PVX
                    CSTR KMT KORS LULU
    APC GOLD GMCR   NOG PCLN SCSS ULTA




        ROC




       HMY SU
           Preferred Stocks to Own
•   US Stocks, ADR’s okay but not from countries where rule of law or
    transparency is in doubt (Venezuela, Russia?)
•   IPOs which are underwritten by one of the following underwriters:
       – Goldman Sachs, JP Morgan, Morgan Stanley, Merrill Lynch
       – Credit Suisse for the Chinese IPOs, also Citibank.
•   Average daily dollar volume > $20-$40M
     – Minimum average daily volume 200K-400K-1M shares
     – Minimum price $15 (NYSE) $20 (NASDQ)
       – Lower priced stocks are especially suspect at the end of the cycle.
•   Top notch fundamentals
       –   Triple-digit EPS gains
       –   3 quarters of EPS acceleration
       –   3 Quarters of Sales acceleration
       –   3 Quarters of increased Intuitional Sponsorship
       –   .03 (3%) Demand-Supply Ratio (50 day Avg volume/Float)
•   Satisfactory responses to the Three Questions:
       – Is this the very best stock I could own?
       – Where is the stock in the cycle? Where is the market in its cycle?
       – What do I think the stock pattern could be? Important for early entries.
                Buying IPOs
• Most CANSLIM investment buy and sell rules
  pay no attention to the news, we pay attention to
  the market reaction to the news in price and
  volume action
• There are a myriad of details that can be wrong
  with an IPO
• For this reason we wait for market reaction to an
  IPO and buy the first buyable base of an attractive
  offering
              Preferred IPOs
• Companies with CANSLIM traits
• Offered early in a market cycle
• Demonstrate institutional sponsorship
  – Price, Volume
  – Underwritten by a quality underwriter
• Offered at the right price without flooding
  the market with shares
  – Supported at and above the IPO price
  – Show tight chart action indicating accumulation
     • Correction less than 20%
• Large companies coming public are quickly
  added to market indexes forcing
  institutional ownership
• Google was added to the Vanguard Total
  Market index 60 days after becoming public
  in August 2004
         GOOG
                          Offered @ $85
Weekly                    Never traded
                          less than $95

                          Corrected less
                          than 15% in
          Daily           three weeks

                          IPO day traded
                          >$2B
             IPO U-Turn


                          Broke out of
                          IPO base trading
                          $600M in one
                          day
            KORS
                   • Never traded
                     below IPO price
                   • Triple digit
Weekly               earnings growth
                   • Traded $1B on
                     IPO day
                   • Traded $67M on
Daily
                     breakout day
                   • Corrected only
        U-Turn
                     8% before
                     breakout
Invensense (INVN)
                    Thinly
                    traded
 Daily              issues
                    are
                    harder to
         -24.4%     handle
Spirit Airlines (SAVE)




                         Another
                         thinly
                         traded
                         stock
IPO Timing is important
        General
        Market
        Tops
        After 5-year
        bull market
Linkedin (LNKD)
                  Traded
                  $2.8B on
                  IPO day
                  just after
                  the market
                  topped

                  Currently
                  trading
                  20% of
                  float every
                  day
                 Facebook (FB)
ü   Lead underwriter Morgan Stanley
ü   Possibly the largest internet IPO, ever
ü   845 Million Users
ü   Profitable since 2009
ü   2011 Revenue $3.7B (+88%)
ü   2011 Earnings $1.0B (+64%)
ü   $3.9B cash
o   China closed market?
o   Zinga accounts for 12$ of FB revenues
o   Google+ moved into social networking space last year
o   Where are we in the overall market cycle?
o   60% market penetration in US and UK, where will their
    growth come from?
Facebook Adoption S-Curve




                     FB Needs a China
                     penetration strategy
      You are here
           Some IPOs for Study
                          *




*50-day break sell rule
            When do you sell an IPO?

                                  +382%
                                  +311%
                                  Sell Rule
                                  • Moving
                                    Average
Buy $9.73
                                    Break
                                  • Subsequent
                                    Undercut
                                    of Low
            Two Useful Sites




• http://ipoportal.edgar-online.com/ipo/home.asp
• http://www.renaissancecapital.com
Some Review
   When Do We Buy and Sell?
• After selecting a company with the best
  fundamentals we need to determine when it
  the best time to buy a stock
  – We trade in the direction of the general market
  – After clearing a sound price consolidation or
    base
  – Within 15% of a 52-week high
• We buy on fundamental, price and volume
  action, we sell on price and volume action
  only
                            Cup and Handle Base
                               Classical Pivot (buy point)   Most predominant
                               0.10 above top of handle      pattern

                                                             Midpoint of handle
                        rise                                 Should be above
                   0%                                        Midpoint of base
                 -3
              0 %
         r   2
    Prio                         7 weeks                Pivot should be within
                                                        15% of 52-week high
•       Base length at least 7 weeks long, can be one year or longer
•       Maximum correction 30% (50% severe bear market)
•       Handle at least one week, maximum 10-15% correction, 20% in bear
        market, if greater than one week, should decline along the bottoms
•       Volume should dry up at bottom of base and also in handle
•       Look for days of support and strength
•       Cup should have rounded shape along bottom
                                                        (N)
      (N) Fertilizer business driven by Ethanol trend

      (S) Demand/Supply = 5.36M/309.8M = 1.7%
(A) High 3-5 Yr  (L) Strong Group
EPS Growth, ROE Strong Stock
(C) Triple Digit
EPS Growth

                                   (I) 7 weeks up in a row
                     Cup with handle
 (I) Increasing
 Sponsorship                 (S) Increasing Volume

  (C) Sales growth
  to match EPS growth
       21 week Cup
       with Handle
Too
Deep


               RS Leading
Deep Cup

 32 Week Deep Cup and Handle
           Cup without Handle Base
                     Buy point
                     0.10 above left side

                            e
                      ris
                 0%
              -3
             %
         r 20
      io                        7 weeks
    Pr

• Tend to be early stage bases of small and mid-cap
  stocks with dramatic earnings increases
• Slightly less success than cup with handle patterns,
  50% succeed vs. 70% for C&H bases
• Most of these work in an emerging bull market
30 Week Cup without Handle
                              Double Bottom Base
                   Classical Pivot (buy point)   Midpoint must be below and
                   0.10 above midpoint           within 15% of prior high

                                e
                                                 Second low must undercut
                            ris                  prior low
                       0%
                    -3
            r2
               0   %                             Severe undercuts not good
       io
    Pr                                           Symmetry is good
                                    “W” Shape

•   Base should be at least 7 weeks long or longer
•   Maximum correction 30% (50% bear market)
•   Movements more severe than cup and handle
•   Handle may form, buy off of handle + 0.10
•   Look for days of support and strength
26 week Double Bottom                +63%

      Pivot = 107.98 + 0.10


                                         Undercut
                  Tight


                              RS leads
Flawed Double Bottom Base
EBAY Double Bottom?
                 EBAY Later
                   Successful 10 week
Flawed 10 week     Double Bottom
Double Bottom


                                        Classic Pivot
                     Flat Base

           Classical Pivot (buy point)
           0.10 high point of base       Area of
   Prior                                 consolidation
   Base                                  around which a
                                         rectangle can
                     5 weeks             easily be drawn

• Secondary base, usually forms after a prior base
• Sideways movement with maximum of 15%
  correction
• Volume should dry up at least slightly
Six Week
Flat Base
                Ascending Base

           Classical Pivot (buy point)
           0.10 above third step         Almost always formed
                                         by short term general
   Prior                                 market sell off
   Base
                         3 pull backs
                    9-16 weeks

• Secondary base that usually forms after a double
  bottom or cup with handle base
• Three pullbacks of 10%-20% in price
• Successively higher lows and higher highs
• Generally 9 to 16 weeks in duration
QCOM Ascending Base
TIE Ascending Base

				
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posted:8/19/2013
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