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| Author: Mike Celeste | | Editor: Tony Ponzo | | September Circulation: 8204 |
Stat Sheet Week Ending September 30th 2006
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| Changes | Weekly | August | Year to Date |
| Indexes | Points | Percent | Points | Percent | Points | Percent |
| Dow | +171.0 | +1.5% | +298.0 | +2.6% | +961.0 | +9.0% |
| S&P | +21.0 | +1.6% | +32.0 | +2.5% | +93.0 | +7.5% |
| NAS | +39.0 | +1.8% | +74.0 | +3.4% | +53.0 | +2.4% |
| Splitmaster Strategies |
| Basic | ...................... | +0.5% | | +13.7% |
| Big Dipper | ...................... | 0.0% | | +19.8% |
| Option Calls | ...................... | 0.0% | | +123.0% |
| Option Puts | ...................... | 0.0% | | +65.0% |
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Highlight of this past week--- Big Dipper --stocks are up nicely going into October. PCU up $4 and DRQ up $4.60 from the Big Dipper buy price.
In this Issue---
SplitMaster Basic System---
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Because our Basic splitters that are currently active are energy related, we have seen them fluctuate with the price of oil and commodities. It appears that these splitters are working hard to make a comeback. The value is definitely there and it was encouraging to see the rising prices.
Big Dipper System---
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The fact that our 2 Big Dippers are energy related has worked to our benefit. With oil taking a dive before reversing to the upside, we were able to take advantage by using this system. Both of the picks are doing well and have very good value. One of them was returning a 9% dividend besides--a double value, it would seem. We had mentioned a while ago that some of the team might want to give more attention to the Big Dipper during the 3rd quarter because of the nature of the markets during the quarter. This strategy has worked out well at this point. They have come to life and we strengthen our belief in the Big Dipper.
Options---
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While we were very conservative in our option selections, some of the team did buy options on the Big Dipper picks. This turned out to be a good move, altho we must remember that we have not reached sell date, and we do not want to count our profits until they are real profits. Congrats to you that combined the BD with options.
Spread Test---
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There was not a lot of action in spreads this week. It's just a matter of it being the end of the quarter. Now that the new quarter starts on Monday, we should start to see things pick up substantially by mid October. This week we had one play - JBL. This one had all the components of being a big winner. Unfortunately, we got blind-sided by the announcement. Instead of announcing their total results for the quarter, they only announced their revenues. The reason they gave was an investigation they are having concerning questionable employee stock options. They will not announce their profit picture until November. We think that held the stock back from really taking off to the upside and giving us a big profit on our play. The results --- we had a play that was break even at best meaning some testers broke even and some lost a bit. We here at SplitMaster posted a $135 loss based on our actual trades.
But here again, the loss was limited to a very small amount and that is one of the beauties of this play. Take a look at our past results page for the spreads at Past Spreads You will see that since we started the test we have had 7 plays. Five wins and two losses with the losses being well under $150.
There is another aspect of this strategy that we discussed before that I want to bring up again because it applies to this JBL play. Since the stock moved up less than $2 and then stalled, and since the PUT became worth only 25 to 35 cents there was not much more to lose by just holding the PUT. So the idea is, why not hold the PUT to see if the stock reverses the next day giving more for the option and a possible overall profit. Well, if the trader held the PUT they could have sold it for 60 cents the next day making the play profitable. One would not want to do this if the PUT was worth 1.00 or so because then there is too much to lose. But with JBL, it would have been a beautiful move and the next time this situation comes up, you can bet we here at SplitMaster will take advantage of this creative move. This play can be very creative in a number of ways and that is one reason we like it. There is more than one way to to skin a cat, as the saying goes.
Keep your eye on this strategy - Tony P.
Chart Indicator---
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We saw the Nas rise for the first 4 days of this past week, before taking a breather and declining a bit on Friday. This decline was expected as profit taking usually takes place after the market has been up at least 3 straight days. The CI was at the upper end of its range before being in overbought territory, at about 60 points between the Nas daily high and our chart's break-even line. This overbought position, as we have discussed before, is still more in the study area compared to our studies on the oversold position, but it has been working out well when we feel the market is at a temporary high.
Stock Split Comments---
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We sense a switch in the direction the winds are blowing. The winds of stock splits, that is. There hasn't been a stock split announcement that fit our criteria in quite a while, and thus we haven't had many plays. That could well be changed as we go into the 4th quarter, a very good quarter for the markets and stocks splits in the past. With the markets rising and good earnings being reported (up to now, anyway), we feel the stock split announcements should be following close behind. It could be a concern, in fact, that they will hit quickly and be a real handful to control by setting aside the proper amount for each investment. However, that is something we look forward to. Let's just see more split announcements. I can't remember when they were this slow when the markets are doing well. We have been talking about getting to the 4th quarter, and here it comes, starting this next week. Fall weather is setting in, the nights are getting colder, and the blood seems to be flowing quicker, with good anticipation for the upcoming opportunities in the markets. It just feels good, somehow, and we are actually pretty excited here at SplitMaster.
The Economy---
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Longer term readers of this newsletter know that we feel that earnings eventually set the value of stocks, and that stock splits follow good earnings. Emotion is still the driving force and too many times emotion gets the upper hand and that's when the pendulum swings to its widest, being oversold or overbought. There was a very interesting report that Pat saw come over the internet and we thought it might be interesting to bring it to your attention. It comes from the well-known Morningstar firm and while we often question the accuracy of most "analysts" we do feel that Morningstar does do a very good job. Here are some quotes from this report written by Ryan Batchelor, CPA. His study is related to the Dow, but we feel that there are many other good stocks that are in the same position---and this is another factor that stimulates us. If this is a fever going thru our veins, we like this kind of fever. OK, on with his portions of his report.
" At Morningstar we don't spend much time assessing the overall market. Instead, we devote our efforts to evaluating the individual businesses we cover and determining what they're worth on a per-share basis, a figure we call our fair value estimate. However, a great side benefit of our stock-focused research is that we can combine the fair value estimates of all the stocks we cover to get a sense of whether the stock market is over- or undervalued. You can see what we think of the market's current value by checking out our nifty Market Valuation Graph on Morningstar.com. Another way we can look at the overall market is by combining our fair value estimates for the components of a specific index--like the Dow Jones Industrial Average--and comparing that value to the index's current levels.
Back around Christmas of last year, we estimated the fair value of the Dow Jones Industrial Average to be 11,694 when it was trading at 10,837. Estimating the value of the Dow was a relatively simple process, given that we cover every one of the 30 blue-chip companies within it. (Premium Members can click here for current quotes on all of the Dow stocks, and click through to see our most recent Analyst Reports and fair value estimates.) To value the Dow, I simply gathered the fair value estimates for each company, added them together--the Dow is a price-weighted index--and divided by the Dow's current divisor (a factor that adjusts for items that could mess up the index such as a stock split or spin-off).
Now that nine months have passed, I've decided to take another look at what the Dow is worth and how the companies in it have fared.
What the Dow's Worth
As of the close of business on Sept. 20, we estimated the Dow's fair value to be 12,623, about 8.7% higher than its actual closing price of 11,613 on that day. In other words, we think the Dow as a whole is roughly 9% undervalued today. It's worth noting that the market closing price on this date was within 100 points of the Dow's all-time high set in early May of this year.
It's also interesting to note that even though the market value of the index has increased by more than 7% in the past nine months, our fair value estimate has actually increased even faster. This means that we believe the companies within the Dow have become more valuable than the market has given them credit for over this time frame. Since Dec. 19, we've raised our individual fair value estimates for exactly half of the stocks in the Dow, while our fair value estimates declined for only two companies.
Final Thoughts
The median stock in the Dow.........-is undervalued by about 8% (for you eagle eyes out there, yes, this is slightly different than the 9% undervaluation we quoted earlier--it's simply the difference between the average and the median to keep apples and apples comparisons)"
Today's Thought---
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A bit of humor from one of our all time favorite comedians: "Time flies like an arrow. Fruit flies like a banana." Groucho Marx
Mike
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