Michail Shadkin is on TheStreet.com today...Congrats!
The Daily Interview: Tips on Trading in the Twilight Zone
By Yi Ping Ho
Staff Reporter
8/8/01 7:52 AM ET
thestreet.com
For many investors, having to navigate late-breaking news and to-the-minute trades can make trading after hours mind-boggling.
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Nevertheless, there are those who have been successful at it. One of them is Michail Shadkin, head trader at TraderPulse.com, a subscription-based Web site catering to personal investors. His personal portfolio of 25 stocks, which he posts and updates on his site, has gained about 46.8% in the year to date, sharply trumping the major market averages, which are all in the minus zone.
Shadkin was the winner of Ameritrade's $1 million stock-picking contest in 2000, turning a hypothetical $50,000 into $328,000 in just one month. TheStreet.com caught up with Shadkin just hours before Cisco's (CSCO:Nasdaq - news - commentary) earnings release last night for some insights into his after-hours strategy. Extended-hours trading, Shadkin says, isn't for the ill-informed investor. Look beyond the headline earnings figure, he says, and above all, be familiar with the stocks you trade.
TSC: How would you describe your trading strategy?
Shadkin: Right now, I'm very balanced between shorts and longs, though I'm slightly favoring the short side. My strategy is very simple. I buy the champs -- what I think are value stocks -- and I short the chumps. They are stocks with very poor fundamentals, that are losing money and that I feel have a very poor business plan. They are those with a very high probability of being bankruptcy candidates.
TSC: What's in your portfolio right now?
Shadkin: There are 25 stocks in my portfolio right now. They're pretty diversified, both longs and shorts, and sectorwise they're mostly in tech, with many stocks being in the telecom sector.
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I'm currently long WorldCom (WCOM:Nasdaq - news - commentary) and Disney (DIS:NYSE - news - commentary), which are both positions I took within the last two days. For WorldCom, I see a lot of value there as they only have a price-to-earnings ratio of about 12, and I'm pretty comfortable that they're making money and not going anywhere. It's not really a tremendous long-term position but I'm prepared to hold it long term if need be. I also have a long position in Intuit (INTU:Nasdaq - news - commentary), eFunds (EFDS:Nasdaq - news - commentary) and Corvis (CORV:Nasdaq - news - commentary), where I'm buying around $3.50 and selling between $4 and $4.50.
I've got more positions on the short side. I'm short NTL (NLI:NYSE ADR - news - commentary), a British cable company that's extremely strapped for cash, and a possible zero candidate in a year or so. It's now a $10 stock. I'm also short Choice One Communications (CNON:Nasdaq - news - commentary). They just had earnings last week and are a company that's also on the verge of some serious problems. I have a long-term short position on Leap Wireless (LWIN:Nasdaq - news - commentary). I was short from $30 a share and now they're at $24.50. I'm holding for six to nine months, and target about $9 a share.
TSC: How often do you play the after-hours market, and tell us about your strategy there.
Shadkin: I play the market at least three trading days in a week, and especially during earnings season. A lot of times I either buy, cover or short stocks the day of their earnings [report] based on numerous analysts' comments. Analysts don't make such bold statements unless they've got some insider info, or they've been talking to somebody on the inside. I've found that 90% of the time the analysts tend to be right, at least for the one- or two-day period [around earnings], on which way the stock is going to move.
Let's say we have a well-known stock and in the middle of the day an analyst from a large firm comes out with very positive comments the day of earnings. I'll tend to go long that stock into earnings that night. Say the stock closed at $20. That evening, just before its earnings are announced, I'll place several different limit sell orders at $21, $21.25 or $21.50 to spread them out a little bit.
Many investors who aren't very experienced in after-hours trading will only trade on the headline number as soon as the earnings are announced. If the headline shows the company beats [estimates] by 2 or 3 cents, there'll be the first initial wave of wild buying. A lot of times you can get filled very easily. But then the stock completely falls right after the conference call, or maybe later on when investors take in the rest of the earnings release.
I almost never buy in after-hours trading, as I think it's a pretty poor idea. I think what you need to do is to only sell in after-hours trading. You either short or sell your positions, and let other people who are less knowledgeable do the buying.
TSC: Cisco's (CSCO:Nasdaq - news - commentary) the big earnings driver tonight [Tuesday night]. How are you planning to play the news?
Shadkin: I've bought Cisco at $18.95 and I'm looking to sell in the after hours at $19.50 to $19.75. Hopefully, there'll be the first initial wave of buying on a decent headline number. My guess is if Cisco beats the earnings estimate by 1 or 2 cents, they'll make some cautionary comments in their conference call later and lead the stock back down a little.
If they have a big spike, I might even sell and short into the conference call. But for now I'm long on the stock and will sell right after the initial release of earnings. And if they say anything positive at all, I may start buying other tech leaders in hopes of a rally [on Wednesday]. Or if they're extremely negative, I might short some other tech leaders. I'll play it by ear, but I'll probably break it into two different orders, half at $19.50 and half at $19.75.
TSC: How has extended-hours trading changed stock investing?
Shadkin: There are bigger moves in stocks in the after hours, and especially when bad news hits. There seem to be very large moves on the downside very quickly, [partly] because there's not much liquidity. Trading on the next day is totally different; some analyst might make a reiteration, or the people who were selling missed something in the earnings release.
In general, people acting in the after-hours market really don't immediately understand the consequences of their actions. They more or less go with their emotions or the headline earnings number because they really don't have the time to do research in the after hours. When a company comes out with an earnings release, you're basically making a decision without really having the time to read it to see if you should hold, sell or buy more.
TSC: Given the danger of such knee-jerk reactions, what's your advice for the average investor trading in the after hours?
Shadkin: If you are going to be trading any stocks at all in the after hours, they've got to be stocks you are very familiar with. If some stock comes out with great news or bad news, you really shouldn't be trading that stock unless you know the company well, unless you've looked at its fundamentals and unless you're comfortable trading the stock based on your prior knowledge of the company.
I almost never trade stocks I'm not familiar with in the after hours. It's not a good idea, as you don't know what you're getting yourself into until later on when the stock has already gone against you. That's probably the most important thing -- just be familiar with the stocks you want to trade.
TSC: What's your take on the market right now?
Shadkin: If you look at triple Qs, or the Nasdaq 100 (QQQ:Amex - news - commentary), they're trading at 80 times price to earnings, which historically is outrageous. People think that because the market has come down from 5000 to 2000, it's a gigantic move and that we've made a bottom. I disagree with that. Valuations are still extremely high on a historical basis, especially on the Nasdaq but as well as the Dow.
I feel that only the tech economy is in a recession, and not the [U.S.] economy. And I don't see that the situation's going to get better any time soon at all. I personally think we're going to be retesting the lows. I see a downward trend coming in the next three months, but see some kind of a rally at the year's end. After that, I think we're going back to the lows. Valuations are very rich and need to come down significantly, to the neighborhood of an average of 20 to 30 price to earnings on the Nasdaq, and somewhere around 17 on the Dow.
TSC: Is this a good environment for short players then?
Shadkin: Yes, but shorting is not for everyone. Shorting is a game that over the last year has seen a lot of new people join in. And many don't understand the game. You have to be very careful when it comes to shorting, as shorts can be squeezed quite easily from any pops in the market. You have to make sure you don't short too many stocks or have too large a position upfront. Instead, you short stocks that are in very poor financial condition and maybe slowly add to your position. ... But you certainly do not take large initial positions in each individual stock.
TSC: Is shorting a difficult strategy in after-hours trading?
Shadkin: Not at all. What's nice is that you don't need any downticks to short. So let's say I like a stock that's trading at $7.50. I don't need the stock to make an uptick. I can take that bid down by selling into that bid. As long as there's some kind of liquidity, there'll be no problem shorting at all.
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