Turnaround and Turndown

Value investors love the “out” of the Too Hard Pile.

Q: “Do you think JCP is a buy after having dropped so much?”

JCP - Trailing 2 Yrs
JCP – Trailing 2 Yrs

A: “You know with JCP… I’d just have to put that one in the too hard pile!”

Q: “But isn’t this just like Dillard’s a few years ago? You remember what happened there…”

Before
Before
After
After

A: “Indeed I do. And kudos to those who profited from figuring that one out…”

…but too hard for little ol’ me.

Q: “OK… then how about NOK? How much do you think it’s worth?”

NOK - Trailing 5 Yrs
NOK – Trailing 5 Yrs

A: “Bah! I learned the hard way that valuation is a fool’s errand for NOK and basically the whole tech sector. The future cash flows I’m supposed to estimate… they come from products that haven’t even been invented yet! WAY TOO hard!”

There is of course a lot of wisdom in sticking to what you know. People smarter than me thought JCP and NOK were buys at higher prices than they trade today, based on asset replacement value, sum of parts, whatever. They were either early or wrong.

Still, isn’t there some other interesting way you can answer when some wild-eyed, 8 ft. tall maniac grabs your neck, taps the back of your head up against the barroom wall, looks you crooked in the eye, and asks you:

“What price you would buy HPQ at?”

HPQ - Trailing 3 Yrs
HPQ – Trailing 3 Yrs

Yes there is. You look that sucker right back in the eye and say what ol’ Lumi would say:

Mister, I may not know much about this crazy world we live in, but I do know two things.

(1) If something has changed for the worse at a good company, and its stock price is going to $0, it will first hit and cross below its long-term moving average.

(2) If something has changed for the better at a poor company, and it’s stock price is going to $10000, it will first hit and cross above its long-term moving average.

I encourage you to take a look at some multi-year charts of winners and losers, with a long-term simple moving average overlay, and see whether the crossing points above and below wouldn’t have been good entry and exit points.

You may have to add a little additional logic we engineers call “debouncing”. I just mean a rule like a minimum roundtrip period to avoid rapid-fire buy/sell buy/sell when the price is right at the moving average.

For new long positions, that may also include requiring that a stock that crosses above its long term actually closes there or stays there for 24-48 hours, especially if the cross happens on a large move up in a single day.

Shall we look at a few together? The 200-day simple moving average is popular, but I’m going to use a 499-day. Why? It’s just the maximum that Yahoo Finance allows me to pick.

NOK again
NOK again. Wouldn’t have touched this value trap since 2008…
HPQ again.
HPQ again. Some false starts in 2010, maybe a small profit in Q1 2011, but Legends of the Fall since, with you wisely watching from the sidelines…
Gold - in at $750/oz and out at $1600/oz four years later.  21% annualized return
Gold – where valuation works about as well as applying DCF to a sculpture. Regardless, in at $750/oz and out at $1600/oz four years later. 21% annualized return
NFLX - October 2008 to October 2011.  You arrive to the party late, and stay too long, but still triple your money
NFLX – October 2008 to October 2011. You arrive to the party late, and stay too long, but still triple your money
DDS again.  Coulda had a
DDS again. Coulda had 135% annualized return, but sitting on only 60% annualized. Let me get you a tissue.

I am not suggesting you start trolling the 499-day moving average shipping lanes and buy / sell / short whatever crosses this way and that. I am suggesting that you might want to examine such a chart if asked your opinion about a company at a possible inflection point, when valuation is as good as guessing.

This is when most of the following are happening simultaneously: the company is in the midst of a turnaround, your’re lost as to how to value its globally dispersed real estate and customer relationships, there has been a recent change in management, a disruptive competitor or technology has recently altered the previous operating environment. You get the picture.

So when that stranger grabs you by the scruff of the neck, and says:

“I hear you’ve passed a few CFA tests and think you’re smart, so answer me this. Is JCP cheap enough for ya at $15.27? And don’t give me any funny business about any “too hard” pile.”

You look that sucker right back in the eye and say what ol’ Lumi would say.

“No sir, I wouldn’t pay $15.27 for JCP today, nor $14, $13, or $12. Today, for JCP, I wouldn’t pay less than $27.88.”

JCP - Trailing 2 Yrs
JCP – Trailing 2 Yrs

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