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Follow Up: Nine Stocks for Playing the Long Side Safely

Back in June, I did a column for theStreet.com, titled: Nine Stocks for Playing the Long Side Safely. An emailer yesterday asked for an update on the stock choices, so we whipped out the trusty XL spreadsheet (nine_stocks_safely.xls), and away we go:

The conceit of the article was based on several factors, but the most important were finding stocks with good risk/reward characteristics. These were names near good entry points, and that offered tight stop-loss protection so that losses were a reasonable percentage away.

The list we picked included:

AON  Corp. (AOC)
Input/Output (IO)
Service Corp. (SCI)
Xerox   (XRX)
Mosaic Company (MOS)
Charles Schwab (SCHW)
Schering-Plough (SGP)
Abbott Labs   (ABT)
Warner Chilcott (WCRX)

Someone asked me yesterday how those stocks have performed, and as of last night's close, the answer was pretty good:

click for full table

With the Dow Jones down 5.29% since then, and the S&P500 sliding 6.74%, a gain of 5.10% looks pretty good. Those numbers assume you bought in at the closing price the day of the recommendation (or the next morning's open), and honored all of the suggested stop losses. Nothing gapped below the stops, so you should have been able to get out at or near the stop prices.

Most of the losses were small, single digit losers -- Xerox was a big 15% loss. Mosaic (MOS) was a jumbo winner, AON was a 13.5% gainer, and *Schwab -- a stop out loss that we bought back -- was also a winner.

* The asterisk: We have a rule about stop losses -- if a stock gets stopped out for a reason we find acceptable -- we will allow ourselves to buy it back ONLY IF AND WHEN it trades back over the stop loss point.

That's exactly what happened with Charles Schwab (SCHW). Because of a secondary offering, the stock price traded down through our stop loss of $18.50 to ~$18, and then popped quickly back over it. After getting stopped out, we bought it back for our managed accounts between $18.50 - ~19.50.

The 5.1% gain assumes Schwab was stopped out. If we were to include Schwab, the returns over the same period are even better: ~7.20% (not too shabby). Either way, a 1000 basis point out-performance versus the SPX, WITH VERY LOW LEVELS OF RISK is something to shoot for again in the future.

If I can develop another theme -- more safe ways to play the long side? -- I'll try to put together another list like the June version . . .

~~~

This was prepared for a six month update, to be published next week at TheStreet.com.

This assumes you bought equal shares of each. I haven't done the math on what happens if you bought equal dollar amounts . . . but here's the XL  doc if anyone wants to bother (nine_stocks_safely.xls).

>

Source:
Nine Stocks for Playing the Long Side Safely
Barry Ritholtz
RealMoney.com, 6/8/2007 4:44 PM EDT
http://www.thestreet.com/_tscrss/markets/activetraderupdate/10361606.html

Tuesday, November 27, 2007 | 11:00 AM | Permalink | Comments (33) | TrackBack (0)
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Comments

6 were loses, and 1 made 75%, if this was a fund I would be scared, obviously the 75% stock was an aberation.
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BR: Not so obvious: Markets -- and portfolios -- are driven by a handful of big winners. When a portfolio or indice is up big (i.e., 30 or 40%), it is rarely evenly distributed.

Indeed, the entire concept behind the "Cut your losers short, and let your winners run." is this portfolio EXACTLY: Small losers, big winners.

Posted by: mal | Nov 27, 2007 11:14:31 AM