Ross Stores Reaches Nine-Month High
Posted by Eddy Elfenbein on August 27th, 2014 at 11:58 am
Ross Stores ($ROST) is finally getting some love from investors. ROST has been as high as $75.53 this morning. The shares were at $62 just six weeks ago.
Your Handy Guide to Stock Orders
Posted by Eddy Elfenbein on August 26th, 2014 at 1:25 pm
Here’s a post that’s geared towards new investors, but experienced investors may find it helpful as well. I want to discuss the different types of orders you can make when buying or selling a stock. Investors have lots of options at their disposal, and each decision has an upside and a downside. Let’s start with your basic market order.
This is the most common type of stock order. In essence, it’s a request to buy or sell a stock at the current market price—hence the name. A market order does not guarantee a particular price; it merely picks up, or dumps, the stock at the current going rate.
What does this mean in concrete terms? Well, for large-cap stocks with heavy volume, you can expect that because market orders are executed more or less instantaneously, there shouldn’t be much of a gap between the price at the moment you execute the trade and the actual price you pay. If you see on your computer screen that the current price is $30 and you execute a market buy order, you might pay $30.10, you might pay $29.50, but the price will generally be close to the one you saw when you pulled the trigger.
The danger, however, lies in trades executed after hours. If you place a market order after the 4 p.m. closing bell, you may find the stock has moved significantly by the time the market opens the next morning. You can easily end up paying a price you didn’t bargain for. A $30 stock may have gapped up to $35 due to an earnings report or a merger announcement. News stories can cause prices to soar, or tank, so be wary: you don’t want to be on the receiving end of one of the market’s irrational spikes.
Another tip: don’t be distracted by irrelevant information. The last-trade price is no guarantee of anything. Ignore it. Instead, if you’re buying, keep your eye on the ask price. If you’re selling, look at the bid price. Also important is the spread between the bid and the ask, which can be very wide indeed on thinly-traded stocks.
With these less-popular securities, you may find the following conditional orders more helpful:
A limit order is an order to buy or sell a stock at a price that you yourself stipulate. Basically, it tells your broker to execute the trade once the stock goes above or below a specified threshold. You can use it to sell a stock once it climbs to a certain peak (thus guaranteeing you a profit) or to buy a stock once it dips to a certain low (thus guaranteeing you a good purchase price).
For example, you’re interested in security XYZ, but you think it’s currently overvalued at $40. You can place a limit order to pick it up at $38. If the stock falls below that threshold, the order will automatically execute and the stock is yours. Later, having acquired the stock, you can execute a limit order to sell it at $45. This order, too, will execute automatically if the stock gaps up, thus ensuring you a tidy profit.
Limit orders have advantages and disadvantages. On the plus side, you can keep them open for a set period of time, and they’re useful for investors who don’t have the ability to monitor their portfolios 24 hours a day. On the downside, if the limit price you set is way off the mark, it’s possible the stock may never reach the threshold and the order will never execute. For that reason, many brokers charge more for limit orders: failed execution means no commission for them.
Also, remember that orders are filled on a first-come, first-serve basis. If you set that limit order at $45, you have to wait till the other orders at that price are executed. Some traders like to snip at the edges and place limits at, say, $44.99, thinking they’re getting an edge on the competition. You can never be guaranteed that your order will be filled.
Stop-market orders are very, very similar to limit orders—so similar, in fact, that many investors have trouble telling them apart. The difference is that they’re used to cut losses, as opposed to maximizing profits.
Like limit orders, stop-market orders (sometimes called stop-loss orders) cause a stock to be bought or sold automatically upon reaching a given threshold. When this happens, they turn into standard market orders and execute at the going market rate. The goal: damage control, pure and simple.
Suppose you buy a stock at $35, and it starts to tank. You can execute a stop-market order at $30 to cut your losses. This means that if the stock falls past that threshold, it’s as though you suddenly placed a sell market order. The final sell price may be $29.50, or it may be $31, but in either case, you’ll have reduced the effects of the sudden dip.
Conversely, if you’re interested in another stock trading at, say, $40 and are waiting for it to drop, but you don’t want it to get away from you, you can execute a stop-market order at $42. If the price shoots up, you might end up paying $42.50, or perhaps $39, but you’ll have achieved your end of minimizing your losses in purchasing a security that you’re especially hot to get hold of.
Stop-loss orders are useful, but be careful. A sudden rumor, or a rapid but temporary drop in the stock price, can cause you to get frozen out of a stock against your will.
Stop-limit orders are stop-market orders’ identical twins—with one difference: when the threshold price is reached, the order changes into a limit order, not a market order.
Why does this matter? Because in theory, the stop-limit order gives you much more control over the actual price at which the stock is bought or sold. When you place the order, you have to specify both a sell price and a limit price, and the combination helps to eliminate the wild-card factor that creeps in with stop-market orders. The drawback, of course, is that as with all limit orders, the trade may not get executed at all.
Consider the following situation. You’ve got your eyes on a stock currently trading at $25. It starts to show some upward momentum, so you place an order with stop and limit prices of $22 and $23, respectively. Once the stock rises above $22, the limit order kicks in. However, if the stop gaps above $23 due to a fast-moving market, the order will remain unfilled.
Trailing-stop orders are yet another variation on the stop-market theme. Here the difference lies in the fact that instead of setting an absolute threshold, you set an order to buy or sell if the stock rises by a certain percentage (or, in some cases, a specified dollar amount). Other than that, all the same rules apply as with other stop orders.
Trailing-stop orders seem to provide some folks with a sense of security. There are traders who set 20% trailing stops on every order they place. Remember, though, that like all stop orders, the brokerage fees are higher than with market orders, so you need to ask yourself if that psychological advantage is worth it.
Order Options: Day vs. GTC
When you execute a limit or stop order, you can specify one of two options: Day or GTC (good till cancelled). A day order is only valid for the rest of that trading day, while GTC indicates that the order can be carried over into the next trading day and may remain in effect until one of two things occurs: (a) the stock reaches the specified threshold; (b) the investor decides to cancel the order. Be sure to check with your broker about these options: some of them limit the number of days that the GTC option can be in effect.
Order Options: All or None
Another condition you can set on a buy or sell order is AON: the command to fill the order completely or not at all. In other words, the broker must buy all the shares at the price you specify, or cancel the order altogether.
Let’s say you place an AON order for 100 shares of stock XYZ at $9 apiece. If the broker can find 100 shares that fit the bill, well and good. If not, the order is canceled at the close of trading, and the investor must re-submit it the next day. With an AON order, the investor never receives an order that is half-filled—hence the name. In a standard limit order, by contrast, the broker might buy 60 shares at $9, watch the stock gap up, and then have to wait till it dips back down to $9 to fill the rest of the order.
Order Options: Fill or Kill
This option instructs a broker to fill an order entirely and immediately or not at all. Its purpose is to guarantee that the investor picks up a stock at the desired price, and it is usually used when buying a large quantity of stock. In practice, this type of trade doesn’t happen very often. Much more common is the good-till-canceled option discussed above.
One piece of closing advice: if you’re a long-term investor, don’t worry too much about paying a price that’s a little bit off target. There are day traders who fight over every last penny, but this is madness. The market is too fast-moving to allow for that kind of precision. Consider that a stock like Bank of America can average 10,000 shares traded every second over the course the entire 6.5-hour trading day. It’s much better, if you’re in it for the long haul, to do your homework, set your orders, and then sit back and watch your portfolio grow.
Morning News: August 26, 2014
Posted by Eddy Elfenbein on August 26th, 2014 at 4:31 am
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NY Post: AT&T Reaches Deal with Feds on DTV Merger
Posted by Eddy Elfenbein on August 25th, 2014 at 5:04 pm
Here’s some potentially good news about the AT&T/DirecTV merger. The New York Post is reporting that AT&T has reached a deal with the feds on the conditions by which they can buy DirecTV.
Agreeing to comply means the Department of Justice will likely clear the AT&T deal in October. The FCC still has not ruled on the merger.
The move will allow AT&T to add DirecTV’s 20 million satellite-TV subscribers to its 5.7 million U-Verse TV service subscribers, which currently spans 22 states.
This merger has caused concern among those who believe the convergence of the few remaining telecom and cable giants will cause a rise in prices.
The deal has raised some eyebrows among consumer activities. We still don’t know what these conditions entail. It may mean the companies will have to spin-off some assets. If the Justice Department approves the merger, then it will mostly like get approval from the FCC. Still, nothing is guaranteed.
DTV closed today at $85.47. The merger deal is for $95. So that’s an 11% premium but I have no idea what the timeframe is.
The S&P 500 Breaks 2,000
Posted by Eddy Elfenbein on August 25th, 2014 at 10:18 am
The Small-Cap Cycle Could Be Over
Posted by Eddy Elfenbein on August 25th, 2014 at 10:05 am
I want to expand on something I mentioned in Friday’s newsletter. Since March 4, small-cap stocks have been lagging the overall market. This is notable because small-caps had been leading the S&P 500 for over 15 years. It’s been an extremely impressive run.
Let’s look at some numbers. The ratio of the Russell 2000 Index to the S&P 500 reached a low on April 8, 1999. Technical analysts will note that the trough ratio was just a hair below 0.3. Since then, small-caps have shined.
In fact, the impressive behavior of small-caps alters how we ought to look at the great stock bust-up of 2000 to 2009. While it’s certainly true that the S&P 500 reached a peak in March 2000—adjusted for inflation, we still haven’t topped it—but that’s not the whole picture.
The furious rally of the late 1990s was largely driven by tech stocks and large-cap techies in particular. If we exclude a small number of very big stocks, the market’s painful nine years wasn’t quite so painful. When looking at broad market indexes we should always be mindful that a small group can distort the larger picture. Sectors like small-cap value sector have actually done quite well.
That’s why I took notice when the Russell/S&P Ratio reached its last peak on March 4 of this year, almost 15 years to the day after the cycle low. In those 15 years, the Russell 2000 has gained 202% while the S&P 500 is up by just 39%. That’s a five-to-one pounding. But since March 4, the S&P 500 is up 6% while the Russell 2000 is down by 4%. That was enough to bring the ratio down from 0.6450 to 0.5758.
So is the small-cap cycle over? Unfortunately, I can’t say just yet. I thought the cycle had run its course a few times before. Shirley, small-caps couldn’t still lead the market, but they did. Sadly, we may not know if the cycle is truly over for years. It took 30 months for the Russell/S&P Ratio to beat its peak from April 2011. All we can say for certain is that the last six months have witnessed a sharp turn toward big-caps. Historically, once a new cycle starts, it often lasts for many years.
The Dull Stock Portfolio
Posted by Eddy Elfenbein on August 25th, 2014 at 8:37 am
As long-term readers know, I’m a big fan of dull stocks. These are companies that are highly profitable, very well-run and as dull as dirt. I never understand why but these companies are rarely discussed on TV or the Internet as good investments.
Here’s a list of 52 excellent boring companies:
Company Ticker Middleby MIDD Stepan SCL Raven Industries RAVN Illinois Tool Works ITW Bemis BMS International Flavors & Fragrances IFF The Babcock & Wilcox BWC Harris HRS ACE Limited ACE Colgate-Palmolive CL Flowers Foods FLO Seaboard Corp. SEB Progressive PGR Donaldson DCI Fidelity National Financial FNF First American Financial FAF Vornado Realty Trust VNO Dean Foods DF General Mills GIS Danaher DHR Fastenal FAST Eaton Corporation ETN Safety Insurance Group SAFT W.R. Berkley WRB Loews L Cincinnati Financial CINF Selective Insurance Group SIGI Old Republic International ORI Markel Corp. MKL White Mountains Insurance Group WTM W.W. Grainger GWW United Stationers USTR Fair Isaac FICO Graco GGG FactSet Research Systems FDS WEX Inc. WEX Abbott Laboratories ABT Becton, Dickinson and Company BDX Deluxe Corp. DLX Sysco Corporation SYY Eaton Vance EV Eli Lilly and Company LLY SEI Investments SEIC Amphenol APH Expeditors International EXPD Varian Medical Systems VAR Tupperware Brands TUP Hubbell Inc. HUB-B Cummins CMI Public Storage PSA McCormick & Company MKC Daily Journal DJCO
I’m sure you’ve heard of many, but some are barely known. Hubbell is up nearly 50 fold since 1980, yet no analysts currently follow it. Stepan has increased its dividend every year for 46 consecutive years. Seaboard has a little over one million shares outstanding and a $2,900 per share price tag.
You’ll also notice several insurance stocks. I’m often impressed by how many great long-term winners have been insurance stocks.
Please note that I’m not recommending these stocks as buys. I’m saying that they’ve had long histories of being well-run.
Morning News: August 25, 2014
Posted by Eddy Elfenbein on August 25th, 2014 at 6:47 am
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Ross Stores Soars
Posted by Eddy Elfenbein on August 22nd, 2014 at 10:47 am
Great day for Ross Stores ($ROST). The shares have been up by as much as 7.3% in today’s trading. This has been a very nice turnaround for them.
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