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Strategies & Market Trends : Three Amigos Stock Thread -- Ignore unavailable to you. Want to Upgrade?

To: Sergio H who wrote (25494)	7/4/2001 11:45:40 PM
From: JoeinIowa	Read Replies (1) \| Respond to of 29382

Hope everyone had a good holiday. My new van with 300 miles on it was attacked by golf ball sized hail and now looks like a white golf ball. As they say timing is everything. Interesting article on cycle investing. Makes sense. I've always liked toy companies. Joe Think Cycles, and Buy Variance By Arne Alsin Special to TheStreet.com Originally posted at 12:10 PM ET 7/2/01 on RealMoney.com I've said it before and I'll say it again: To beat the market, you have to have an edge. The market is incredibly competitive, and lots of smart people are devoted to trying to beat it. You are not going to beat the market because you "think" or "feel" particular stocks are going to outperform. Related Stories Revisiting the Top-10 Turnarounds Worry's a Waste of Time Whirlpool's Win Cycle Why have my December picks (now up 36%) and other recent recommendations beaten the market so soundly? All of the information I used to formulate my picks was freely available. With wide and rapid dissemination of information, access to information clearly won't give you an edge. The differentiator, I think, is not the information itself, but how the information is processed. I process information through the use of mental constructs. You don't need a lot of mental constructs, and they don't need to be complicated. For me, two that have really helped are to think cycles and to embrace variance. Many on Wall Street approach the market in an opposite fashion: They think in linear terms, and they abhor variance. Think Cycles I have often railed against Wall Street and its tendency to project current conditions linearly into the future. If a company is doing well, growing 20% annually over a two- or three-year period, Wall Street analysts will project the same type of growth far into the future. But that's antithetical to the facts. The vast majority of companies can't sustain that kind of growth for several years in a row. I can't find a company that grew at 20% or more for 15 consecutive years since World War II. Still, investors willingly pay a premium for companies that grow at that rate for a few years in a row. Instead of paying 20 times earnings for a 20% grower, they say a higher price is justified, maybe even 30 or 40 times earnings, given the consistency of growth. The irony is that investors often pay a premium price when they should demand a discount, as such growth is always unsustainable. Investors fall into the same linear-thinking trap with companies that are struggling. They fear that problems will continue, so the stock's value is heavily discounted. All 20 of my stock recommendations fall into this category. For example, I have recommended the airline group, including Northwest Airlines (NWAC:Nasdaq - news - commentary) and Delta (DAL:NYSE - news - commentary). Union squabbles, high energy costs and a bad economy have sideswiped the sector, resulting in the toughest operating conditions in many years. The stocks are heavily discounted, as if these problems are going to last for many years. If you think cycles, as I do, airline stocks are attractive now, when times are unusually difficult. When I recommended toymaker Hasbro (HAS:NYSE - news - commentary) in December at $10.06, the stock was getting trashed because of a severe decline in Pokemon sales. Hasbro couldn't replace the sales fast enough to stave off disappointing sales comparisons. As every parent knows, the toy cycle goes from one hot product to the next, but there is no abatement in demand! Hasbro has many potentially hot products coming out in the next 12 months -- including products tied to Jurassic Park III, Pixar's new Monsters movie, a Harry Potter license, a Star Wars movie next May, to name just a few. The stock was lately trading Monday morning at $14.18. I continue to expect Hasbro stock will reach $20 by next year. Embrace Variance When one of your stocks drops a few points, do you panic? Do you agonize whether something must be wrong? That something you don't know is causing the stock to drop? Stock price variance is not bad. It's good. The average New York Stock Exchange stock fluctuates 50% per year, far more than the underlying business value. That level of price variance represents tremendous opportunity for the astute investor. Yes, there is often, though not always, a reason for a stock's decline. One of my favorite turnaround picks, Office Depot (ODP:NYSE - news - commentary), dropped more than 20% in April when the company announced it would miss estimates because a strong dollar will shave a penny or two off current-quarter earnings. Take a look at news, as I did with Office Depot, and decide if it represents a permanent or a temporary problem. If it's a temporary problem, relax. If you're confident in your assessment of value, do what I did with Office Depot: Back up the truck and buy more.