A Look Back: 5 Stocks For The Long Term

Hello again! The DOW is pushing towards 10K and October is less than a week away. The volatility seems to have been under control as of late, especially when compared to a year ago; when 2%-4% swings in a day were the norm and investors were bailing out left and right. Anyway, don't be surprised if the DOW does top 10K that you will see the institutions trim their positions in anticipation of October's options Friday (October 16th). If the market is still high by then, you'll see a spike in trade volume as call options will be exercised and a lot of shares will be trading hands. For example, if a investor purchases a contract (100 shares) for Exxon (XOM) at $65 per share and by the middle of the month of October, XOM is at $75 per share, the investor can exercise that option and take control of the 100 shares of XOM at a cost of $65 per share and can either hold the stock or sell it into the open market for $75 (or whatever the market price is at the time of sale) and have a taxable gain of $1,000. If prices are high across the board, you could see a flood of stock being sold into the open market and when that happens prices can nosedive (supply & demand). If the market is high, the pros simply increase their cash hoard and wait for the herd to act and then can scoop up relatively cheap priced stocks in the aftermath.

Ok, enough of that. Earlier this year, I authored a five part series describing what I felt were five stocks for the long-term and why (Feb. 27th-Mar. 26th). Since it has been six months since I finished the series, I thought it is a good time to check back in to see how those five beauties are performing. Let's have a look......

Stock #1: Cherokee (CHKE)

Feb. 27 Close Price: $13.94
Sep. 24 Close Price: $22.39
Percent Change: +60.62%

Looking at the numbers, it looks like the pick was a great one. However, remember that CHKE is a small company with a market cap of just shy of $200M. Also, this is short-term and things can change very quickly with a company this small. The good thing is that during the turmoil of this past winter, CHKE avoided taking on debt (current debt is $0) and has not missed a dividend payment. I still feel this stock is being ignored and still has a way to go, before it is fairly priced. With the current dividend yield of 8.8%, it is worth the wait.

Stock #2: Ticket Master (TKTM)

Mar. 2 Close Price: $4.30
Sep. 24 Close Price: $11.56
Percent Change: + 168.84%

Again, as will CHKE, TKTM is a small company with a market cap of about $650M. I'll be the first to admit this company was priced extremely low (about 50% of book value), when I wrote about this company back on March 2nd. I'll admit that I felt this company could not go any higher than $9 in the first 12 months and I subsequently sold my entire holding of it in August at just shy of $8, because I felt the company's financials and the price of the market made the company outside of my risk tolerance. It was a mistake to sell the whole position. I should have reduced my position by anywhere by 50% to 75% of my original position. Even though I picked up a 60% gain over a five month period (129% annualized gain), I missed out on the unusual spike in the price. My intention was that I felt the price was going to drop along with the rest of the market and then I would be able to pick it up again when it came back to $6. Anyway, you can't be 100% right 100% of the time. I'll take partially right any day of the week.

Stock #3 Terra-Nitrogen (TNH)

Mar. 9 Close Price: $119.49
Sep. 24 Close Price: $104.15
Percent Change: (12.84%)

The percent change is very deceiving with this company. The stock is extremely volatile. In the six months since writing about this stock, it has ranged from about $95-$140. In my portfolio, I've been reducing and increasing my position as the stock tops $130 and then goes below $100. Again, this company is relatively small, with it being on the boarder between a small and mid-cap company ($1.95B market cap). The current dividend yield of 8.88% makes it stock worth holding onto and with a P/E ratio of just under 10, it is very cheap considering it is an alternative energy company that will see its stock go much higher when the prices of natural gas recover. Keep an eye on this company and don't be too hasty to sell. This is definitely a company that you should definitely buy in slowly and exit slowly.

Stock #4 Exxon Mobile (XOM)
Mar. 20 Close Price: $66.09
Sep. 24 Close Price: $68.93
Percent Change: +4.30%

We've now are going from small companies to the largest (market cap) company on the planet. Despite the increase in alternative energy research, oil will still rule for the next quarter century and XOM will lead the way. As with extremely large companies, it is harder to grow more than a few percentage points per year, however, with oil still priced very cheap, it is a good time to get in. You can easily afford to get in slowly on this company and with the current dividend yield of 2.40%, you get a little bang for your buck. XOM has plenty of money to invest in new oil drilling and also has the ability to not only pay the dividend consistently, but also to increase it in order to attrack more investors. This is a company that is as solid as they come.

Caterpillar (CAT)
Mar. 26 Close Price: $30.78
Sep. 24 Close Price: $51.85
Percent Change: +68.45%

CAT is another large cap company ($32.5B market cap). Despite only about 10% of their revenues that can be tied to the housing market, the company took a beating when the housing bubble burst. What has really affected the company in terms of revenue is the credit crunch. The main function of this company is to sell and lease construction equipment. When the credit crunch started, companies and municipalities stopped expanding and starting or suspending projects. This caused the reveue of CAT to dry up quickly. By that time, the stock had taken a huge nose dive, because of the average investors misunderstanding of the companies main source of earnings. The company is still undervalued and that should reflect in the stock price when the housing market recovers, since the same folks that sold under the misconception, will buy back in under the same misconception. Regarless, the credit market will begin to loosen when the housing market starts to recover and the banks can unload some of those REO properties and get that expense off the books. Right now, I think CAT could go past 80 in the next 24 months. We'll have to wait and see.

Here is the overall results

Starting Stock Prices: $234.60
Sep. 24 Stock Prices: $258.88
Percent Change: +10.35%
Annualized Return: +20.70%
Overal Grade: B+

I give myself a B+ so far. The major blemish was on TKTM by selling my entire position rather than reducing my position. Some of this was offset by playing on the voltatility of TNH and treating it as a trade rather than an investment. You can still be long on this stock, but taking advantage of the spikes and dips in a stock such as this can pad your gains. If I went back to research my trades on this stock, my returns would be significantly higher, however, playing this game with stocks you aren't completely familiar with is a plan that will eventually fail. I do not recommend trying to trade a stock on dips and spikes over the long term. If you do decide to try this for a short period of time, be aware of the ex-dividend date in order to take full advantage of the dividend payout. Until next time.........

October's Coming....Hold On To Your Hats!

Ah, my favorite month is approaching. October might be the craziest month of the twelve in terms of investing. I should probably do a study to see if the suicide rate is highest in October. Why is it that October is so nutty for the market? No idea, it could be Halloween or it could be the start of the holiday shopping season. Last October, we saw the Dow drop about 1500 points, although it was just after Lehman went belly up. I'm not saying the market will have a huge pull back during October, but we typically see the biggest swings on a daily basis during that month. I'm going to throw a date out there for you.....October 16th. Why that day? It is the third Friday of the month, so that means that option contracts come due on that day, so the volatility tends to be large, particularly if the market has performed well, because if the market has done well, then people tend to exercise their call contracts and you see a bunch of stock dumped into the market and then picked up at reduced prices.

Anyway, what does this mean for the us? Me in particular feels the Dow is about 800-1000 points overvalued. And what do we do when we feel the market is overvalued? That's right, reduce your positions, sell your losers and stock up the cash so you are ready for the pull back. I have three sample portfolios that I started between Feb. 2008 and Nov. 2008. Each portfolio is valued at 1.5-1.8 million (each started at 1 million and dividends are not factored in). I'm currently carrying about 50-60 percent cash in each porfolio. That indicates how bearish I'm am currently. I'm very bullish, however, with alternative energy companies, oil and emerging country (mainly China and India) markets. Stay cool and devise a plan that eliminates the emotion of investing. Stick to the plan and you'll save yourself a lot of pain.