Football season is finally upon us and all over America football widows are joining book clubs and men are buying clothes a size or two larger to make room for all the pizza and beer that will be consumed Friday through Monday while planted on a couch or barstool watching games.
I am pretty happy, since I work on research and projects most weekends and having a game on in the background makes for a good day. I also spend a lot of time on weekends catching up with investing and trading friends from around the country and comparing notes on current market conditions and activity.
For a committed deep value type, I have a lot more trading-oriented friends than you might expect. When I listen to them talk about their trades, I am amazed that when it comes to equities, even in their personal accounts, they all trade the same handful of stocks.
It is all the big names you hear about on the television every day. Apple (AAPL), Google (GOOGL), Amazon (AMZN), Chipotle (CMG) and other market darlings are their bread and butter trading stocks. When I ask them why, they all cite volatility and the need for liquidity. My answer to that involves the digestive system of a well-fed bull.
Most retail and one-man shops are not firing off orders for millions of shares at a time. They do need that type of instant liquidity. As famous investor John Templeton once reminded, if you do the same things everyone else is doing you will get the same results, making it very difficult to outperform the market.
While I am not suggesting that my friends could trade any of my small bank stocks, they could easily make do with more midsize names and I believe it would improve their results.
One of the better swing trading systems I ever ran across was used by an associate who traded with a slightly longer-term outlook than many of the traders I meet. The system took advantage of one of the most powerful factors that comes into play every day on Wall Street. It's not earnings, economic releases or any of the foolishness that most traders are watching. It is based on the fact that being a Wall Street analyst for a brokerage firm or research boutique is a really good job and those lucky enough to be earning low- to- mid- six figures or more in these positions are powerfully motivated not to lose their jobs.
One of the best ways to lose one of these cushy analyst positions is to constantly be too high on your earnings estimates. A negative earnings surprise can bring strong selling pressure into a stock and cause the firm's clients to suffer losses. In the analyst's world, clients that suffer too many losses are often referred to as someone else's client. As a result, when stocks are suffering a string of negative surprises analysts tend to ratchet down their estimates very quickly so as not to be caught again.
It's OK to be too low as that brings in the positive surprise buyers. A company performing better than reduced expectations is considered to be a good thing and no one gets fired for good news.
The trading system used by my associate is very simple. He would look for companies that were generally expected to have decent earnings growth over the next few years but were struggling a bit and had produced a string of negative earnings surprises, resulting in their estimates being lowered by most analysts. He then ran series of statistical measures he developed to determine likely direction and used a couple of price patterns to pick the stock he would trade. If he got the setup he wanted he would buy the stock.
Quite often an analyst had used "job protection estimating" and taken the estimates too low. A positive surprise or any sort of good company news would put a long-term bottom in for the company. He would simply hold them until they stopped going up using a trailing stop.
It worked quite well. He was not trading the same stocks as everyone else. For the most part he was not getting picked off by high-frequency traders or getting pushed around by large ETF orders during the course of the day. Once earnings and estimates began to revert to the mean, buyers would come back into the stock and he would simply go along for the ride.
Based on this system, I ran a quick list of names that have a decent longer-term outlook, but have posted a series of negative surprises. There are some interesting stocks on the list.
Names such as Inventure Foods (SNAK), Boulder Brands (BDBD), Freshpet (FRPT), Houston Wire & Cable (HWCC) and United Insurance Holdings (UIHC) are not going to make the news, but they look to be good candidates for a "save the job" trading list.