- Patience is a critical part of investing…
- Can any stocks survive a major market crash?
- Here are my thoughts on taking profits…
Dear Reader,
Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology.
Today, I’ll do my best to answer them.
If you have a question you’d like answered next week, be sure you submit it right here.
Yesterday, it was exciting to finally see the Food and Drug Administration (FDA) Advisory Panel meet to vote on whether to recommend authorizing the Pfizer/BioNTech vaccine for use against COVID-19.
The vote wasn’t unanimous, however – 17 for, four against, and one abstention.
If we’ve learned anything this year, it’s that there is no consensus in the medical community concerning many issues around COVID-19. And there are strongly opposing opinions from experts with nearly identical backgrounds.
The discussion around the vaccine’s authorization is no different. There is still great concern about the vaccine’s long-term safety and effectiveness. There simply hasn’t been enough time or testing done to have a clear view on this critical point.
That said, the FDA authorization will likely be given by the time this issue reaches all of us. And given that the vaccine has already been distributed across the U.S., I expect that vaccination shots will begin immediately thereafter to the high-risk segments of the population.
That puts us all one step closer to a return to something more normal.
And one more time, I want to thank readers who participated in Wednesday’s biotech presentation. This year, biotechnology has been moving faster than ever. It’s been exciting to see the incredible developments taking place in this space.
And like I shared with viewers, this is providing new opportunities for investments in this field. In fact, I’ve been watching one small-cap biotechnology stock that is on the verge of curing a debilitating genetic disease. Its upcoming results could push the stock up as high as 1,000% in a day.
I don’t want any of my subscribers to miss this opportunity. To watch the replay of my presentation and learn how to find out all the details, please go right here.
I hope you all have a fantastic weekend…
Now let’s turn to our mailbag questions…
How to handle stocks above their buy prices…
Let’s begin with a question on buy-up-to prices:
Hi, I’ve been working on my portfolio, only buying stocks within the “buy-up-to” range. Some stocks are not dropping into range but are still low in price or a little above the buy-up-to. Would you recommend that I still wait or buy while it’s still a low price?
I’ve been keeping an eye out, waiting on prices to drop, and it did happen with [one recommendation] this week… Should I still be patient? Thank you!
– Michele M.
Hi, Michele, and thanks for writing in. It sounds like you’re doing the smart thing by building a basket of our portfolio stocks.
I can’t give personalized investment advice, but here’s my broad response to your question.
While I give general guidance on the buy-up-to prices, the guidance is carefully considered based on reasonable valuations. I always try to stack the deck in the favor of my subscribers so that they can maximize their capital gains.
Nothing is worse than buying into a company at a grossly overvalued price. It never ends well. Investing at a reasonable valuation means the difference between a great return and a potentially painful loss.
That’s why when stocks have risen above the buy-up-to price, my official recommendation is always patience. I do recognize that it can be difficult advice. But keep in mind that most stocks have natural volatility that will often bring them back within range. New investors will want to wait for one of these dips to build a position.
Of course, I do know that some investors will build a position in recommendations if the stock drops close to the buy-up-to price. But that is a decision that each individual investor must make.
In my research, we hold ourselves accountable for the performance of each portfolio, and we do our best to have a conservative and fair approach to calculating returns on positions.
We don’t think it is fair to claim a “win” if most of our subscribers didn’t have the chance to invest at a certain price. This is why we do set an official buy-up-to price. That way, we can track the returns of each and every position and make that information known to all of our subscribers.
As another note, I do continue to review the buy prices in our portfolio over time. When I see a portfolio company performing strongly, executing well on its strategy with increased potential in the future, I will occasionally decide to raise the buy-up-to price to enable new subscribers to build a position.
In fact, in our issue of The Near Future Report that went out this past Monday, we raised the buy-up-to prices on four of our companies. Paid-up subscribers can find that issue here. And if anyone wants to join us, go right here to find out how to subscribe.
How to survive a market crash…
Next, a reader wants to know more about stop losses and a coming market pullback:
Thank you for all the information you share with us. You are very generous, and it is fascinating.
We are constantly hearing that we will experience a stock market crash. The stocks in your million-dollar portfolio are doing well. You state that for the time being, you recommend that we hold these positions with no stop loss.
Can any stocks survive a major crash?
– Joan F.
Hi, Joan. Thanks for writing in. I’m glad to hear you’re having success with our million-dollar portfolio companies.
To answer your question, the market action we saw earlier this year serves as a good illustration. As you know, the fear-induced selling we saw in early March represented one of the fastest stock market crashes in recent history. The uncertainty around COVID-19 caused everybody to rush for the exit at once.
But I saw that as an extreme overreaction. In fact, it represented an incredible entry point for some of the greatest technology investments on the planet.
My recommended course of action was to sit tight, hold all positions, and remove all stop losses for our portfolio companies. Not only that, but I also continued to recommend new positions during the crisis.
This was a very unpopular decision among some of my colleagues. They asked me to reconsider. But I knew it was the right move. There were simply too many great technology companies trading at ridiculously low valuations.
And I knew two key things: This was a temporary situation that would pass, and it was the large institutional money and hedge funds that were taking the market down. We would have been selling into their panic, only to have them turn around and buy the market right back up to where it was trading.
That’s like putting our money right into their pockets.
Here’s how I described it to my managing editor at the time…
And as we know, this was the right decision. The rebound we’ve seen in our portfolio companies – especially our biotech, 5G, and cloud computing stocks – has been incredible.
I asked one of my analysts to run the numbers to find out how much investors made by following this guidance. He found that – assuming a $5,000 investment per position – in the months following the crash, our model portfolio for The Near Future Report had made $25,906 by removing stops.
Our “secret” is that we are invested heavily in companies powering trends that are moving forward regardless of the pandemic conditions. By design, these companies have flourished.
With the COVID-19 lockdown, data traffic spiked dramatically. This was a boon for our 5G and cloud computing companies. And the increased attention to the biotechnology sector led to a flood of investment in our biotech holdings.
And our portfolio companies stand to profit from trends like remote work, online commerce, and increased cloud computing demand.
As it stands, I am confident we’re positioned in some of the strongest technology trends that will continue to move forward regardless of what kind of volatility or market action we see in the coming months.
I do believe that there will be a “splintering” in the market, where ridiculously overvalued stocks will come back down too early. Some may drop as much as 92%. (Readers can learn more about these “toxic” stocks right here.)
But we’re not going to be investing in stocks at ridiculous valuations. We’re going to watch them very closely, be patient, and wait for them to crash… Then we’ll be the ones to calmly step in and build positions in those companies.
As per my earlier comments, the availability of vaccines for COVID-19 is very bullish. It is getting harder and harder to argue for another four-to-six-week lockdown, which would be a disaster for the stock market.
My team of analysts and I watch the market like hawks. We will always send out alerts if we need to close out positions or reposition our portfolio to avoid an expected downturn in the market.
Or perhaps we’ll be given another opportunity like the March flash-crash, which allowed us to make even greater profits…
Guiding principles of profit-taking…
Let’s conclude with a question about taking profits:
Hi Jeff,
Happy Thanksgiving and thank you for your hard work, insights, and pedagogical patience. I wanted to get your thoughts on how you approach taking some of the profits off the table for risk management purposes.
Do you have a formula or guiding principles on when and how much profit to take off the circuit of investment? Like, for example, every x% profit made, y% is kept and the rest is reinvested? It obviously depends on each person’s situation, but I wanted to get your thoughts from a pure risk management perspective.
– Chiheb B.
Hi, Chiheb, and thanks for your kind words. You’ve touched on a topic on many people’s minds, especially as we prepare to close out the year. When do we decide to take profits on our portfolio companies?
As you noted, when an investor sells is a personal decision depending on their specific circumstances. I’m not able to give individual investment advice, but I can provide some general comments.
In my research publications, I build model portfolios and provide guidance for when to buy and sell individual positions. It is precisely that: guidance. It’s the only way that we can fairly build and track a model portfolio for all readers.
In general, with every recommendation that I make, I estimate what the investment return potential and rough time frame are. When we reach the valuation that I forecast originally (especially if we do so sooner than expected), I might recommend selling a position. Or I might recommend holding if there have been some new developments.
In making that decision, it’s important to reconsider the original investment thesis: Did something change with the company? Did it release a new product or service that will add to the growth that I originally forecasted? Or does the company have an expected lull in future product releases?
Occasionally, I might recommend taking some profits off the table when a stock has really run up quickly. We had a perfect example of this in The Near Future Report back in July. We sold half our position in DocuSign (DOCU) for a 239% profit.
As I said in the sell alert then, there was nothing wrong with the company. In fact, it has been thriving due to the COVID-19 pandemic. People and companies have needed its electronic contract services more than ever before.
However, due to its dramatic run up in stock price, it was prudent to take some of our profits off the table. DocuSign had become one of our most expensive stocks in terms of valuation. At that time, it was trading at an astronomical enterprise value-to-sales (EV/sales) ratio of 36.
For perspective, that means the company’s valuation was equivalent to 36 years of sales – not 36 years of profits. A valuation at this level is simply not sustainable over long periods of time.
Speaking generally, it is a smart investing strategy to take profits off the table when a stock reaches unsustainable valuations like this.
And in the case of DocuSign, by selling half our position, we can now use “house money” to take advantage of any continued rise in the stock from here on out while still pocketing profits. And that’s just what we’ve seen. DocuSign is currently up over 300% in our model portfolio.
Understanding a stock’s valuation, not its nominal share price, is the best way to understand when to buy and sell an individual position.
2020 has been an unusual year, however. I’ve never seen this much large, institutional money flow into the market, especially large-cap stocks. That’s why I have recommended holding on to so many positions.
In the current environment, these companies will continue to thrive and have the potential to go higher. The context of the current economic and fiscal policy also plays into how I determine our portfolio strategy. That’s in addition to the more obvious dynamics like sector growth, investment into a sector, market growth, and overall company product strategy.
Overall, this level of reasoning is what I rely on when making official recommendations to sell.
That’s all we have time for this week. If you have a question for a future mailbag, you can send it to me right here.
Have a good weekend.
Jeff Brown
Editor, The Bleeding Edge
Like what you’re reading? Send your thoughts to [email protected].