One Sound Way to Nail Down Entry Points

 | Apr 03, 2014 | 12:13 PM EDT
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There's nothing like a down day for reflecting on the virtue of declining prices and what they can mean for the average investor.

We've heard a lot lately about the tax that the high-frequency traders put on the market with their run-ahead tactics as they take your stock, mark it up and then sell it back to you. I have compared these parasites with mosquitoes, which I thought was toxic enough. Thank heavens someone from the brokerage industry has taken up the torch: None other than Charles Schwab sees my mosquito insinuation and raises it by saying that high-frequency trading is a cancer on the system that is abetted by hungry and greedy stock exchanges. I applaud his entrance into the debate and I hope others follow.

I certainly don't mean to diminish the arguments against the "pickpockets," as Schwab calls them, but I want to talk about making some dollars now, not losing fractions of pennies to manipulation. I want to talk about opportunities that develop when a vacuum of buy orders materializes -- not just the ephemeral orders of high-frequency trades, but actual real giant orders, when some ephemeral news occurs that drives a stock down.

What got me started on this thought was the bizarre trading in the stock of a company I like very much: Monsanto (MON), the biologically engineered seed company. Last week, on Mad Money's Game Plan, I said that one of the most reliable trades I can think of is off the decline in Monsanto's stock after the company reports. I said the company's cautionary statements are often interpreted as sell calls -- that this makes many people bolt from the stock -- but that you have to use the company's quarterly panic to buy the weakness.

Sure enough, after Monsanto reported Wednesday morning, the stock opened down and then continued to cascade until mid-afternoon when the usual opportunists, well aware of the pattern, scooped the stock up. Monsanto then ended up rallying right into the bell and actually finished higher. Again, that is not an unusual occurrence for this misunderstood company. Today the stock caught an important upgrade from a J.P. Morgan analyst, who noted that the commodity prices have improved, which is very important if farmers are going to use more seeds from Monsanto. Plus, and I quote, "We think there is a reasonable possibility of an activist appearance."

Now, let's think about this arc. A high-quality company such as Monsanto reports a very good number, and no one disputes that. It's cautious in the face of an improving backdrop. Again, undisputed. It takes a few hours, but buyers figure this out, take advantage of the price break and get into the stock, only to be greeted with what I would regard as a predictable upgrade, given the improving backdrop. The possibility of an activist making an appearance only confirms the undervaluation of this company.

As much as I like Monsanto, that's not the point of the exercise that I am trying to show. Instead, what I am talking about is the need to have a better entry point for owning a stock that you like, and to demonstrate that the market gives you real sales -- sales that are not blunted by the cancerous tax of high-frequency trading.

Of course, the Monsanto example is extreme, as the whole cycle took less than a full day's worth of trading. But we've got a host of examples in which the exact same thing occurred, and you simply had to take advantage of the declines to do some buying when you got that opportunity.

But how do you know if it is worth doing? I've got one way that I think can truly help you identify a potentially positive situation: The CEO him or herself. Is that chief executive officer bankable, and can they be relied upon to get the train back on track? If so, you have been given a rare opportunity to get on board, one that you shouldn't expect and don't deserve.

This is not a shot in the dark. Nor is it a needle in a haystack. We are about to journey into the most treacherous part of every single year: earnings period. We will be rife with Monsantos by the hour. At times like that, with confusion reigning, you need to be ready for this turn of events. Remember, as I trace out in the chapter of Get Rich Carefully when I detail the 21 Bankable CEOs, in whom you should invest during any price break, opportunities galore are coming. You just need to think of these CEOs as NFL coaches who may have lost a game but will invariably bounce back.

Last quarter, for example, we saw some serious declines in shares of PPG (PPG) and Eaton (ETN), companies that are coached by Chuck Bunch and Sandy Cutler, respectively. PPG and Eaton's stocks were hammered mercilessly on a conservative bit of guidance by Bunch. Eaton's Cutler gave us a miss and a reset, the equivalent of a couple of games lost. Both stocks were tossed into the waste basket. Both then proceeded to roar, Monsanto-style, and the declines are now distant blips on the charts, well below current prices.

We saw the same thing occur when one of my other Bankable 21, Mark Papa, opined on the sustainability of EOG Resources' (EOG) excellent growth two quarters ago. Mark subsequently retired, and when the company reported last, it actually showed an acceleration of production -- a meaningful one -- and the stock moved from $78 to $100. It was Papa being thoughtfully conservative, and perhaps little more, something that can only be described as his hallmark during his many years of stewardship.

Now, we are in a mode of "what have you done for me lately?" And I would say that those opportunities, while emblematic of what can occur, don't help you make money now.

What's currently at a discount that shouldn't be? Consider another Bankable 21 CEO and his company's shares: Manny Chirico and PVH (PVH). We know that PVH, the amazing apparel concern, had been derailed by the purchase of Warnaco, which looked to be the son of Tommy Hilfiger. This was a remarkable acquisition that created multiple-year upside surprises. But it initially did the opposite and the stock came down precipitously when Chirico reported two quarters ago.

Then, just a week ago, the company not only delivered a better-than-expected quarter but laid out a multiyear vision that is now within the grasp of PVH. Even though the stock has had a quick 7-point run from the bottom, the market is in consolidation mode and I think that the opportunity is alive and well.

How about two others that seem to be lurking right in front of us -- Nike (NKE) and Whole Foods (WFM)?

Nike reminds me very much of PPG, which reported a magnificent quarter but proceeded to take on what seemed to be a more cautionary tone than usual. I think that Nike could be in a similar situation. The last quarter could only be described as picture-perfect, and the stock rallied from $79 to $82 in the aftermarket. But the company shaded down expectations during the conference call, and that shaved 9 points from that pinnacle after-hours moment. Nine points! Talk about extreme! It's coming back, but not so quickly that you've missed the opportunity.

Whole Foods is a bit trickier. Like Eaton, but unlike PPG, this company actually missed the quarter. But, given this long-term theme of eating healthily, I think the price break that took the stock from $56 to $50 -- quite a journey by the way from its earlier high of $64 -- seems like a mighty exaggerated move. I don't know if co-CEOs John Mackey and Walter Robb can re-accelerate earnings in just a few months' time, but how often do you get a high-quality growth name like Whole Foods trading so far below its old high without anything structurally holding it back?

Yep, I think that we can wring our hands at the fractions of pennies that can be pickpocketed from the big pension and mutual funds that are the repository of so many of retirement funds. But we can more than make up for those pennies by taking advantage of the discounts presented by rate-muffed quarters and conservative views of the future. Those opportunities trump the work of pickpockets any day of the week.



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