Money
& Investing 
Attention, Bargain Hunters: Do Your Christmas Shopping in October --
a Look at Baidu, Netease and Green Mountain
If you're a guy, you tend to, perhaps like me, do your Christmas shopping a few days before Christmas. However, my wife, like some women, has her eyes open all year round looking for bargains. She buys them, stashes them and uses them just when she needs to.
That same approach -- bargain hunting -- to a certain extent, can be used in buying stocks.
Interestingly, one of the most bearish seasonal months of the year is October. Why it is bearish is another story. The basic fact is that it is. So, for investors looking to pick up quality stocks -- and I repeat, quality stocks -- October could be a good time to go bargain hunting.
Seasonally, the stock market tends to rally in November, December and early January. So, one could do very well buying in October and selling around the first or second week of the new year.
So, what would be a good approach if one decides to "bargain hunt"?
Well, the phrase "bargain hunt" means to buy some thing -- in this case, stocks -- that is of good quality and at a price that is below its norm. To be a bargain hunter, one needs to buy when others are not. So, a stock investor would have to avoid "running with crowd" and chasing a stock's price higher. When other investors are getting depressed, you should be getting elated.
Here is a good five-step approach for bargain hunting for stocks:
- Investor Psychology - Get into the mindset -- you're a bargain hunter
- Stock Market Direction - Get ready to buy after a market decline
- Stock Selection - Have a list of leading stocks with a strong profit outlook
- Timing - Buy on a turn up in price after a pull back; use technical indicators
- Exit Strategy - Set exit points to protect on the down side and to take profits
A bargain hunter is not the same as a bottom-fisher. A bottom-fisher will look for stocks that may be fundamentally damaged or laggards or that have an extremely low price-earnings ratio based on their historical P / E.
The bargain hunter we are talking about is one who is looking for a top-quality stock in a strong industry group. The idea is not to buy dirt-cheap stocks but simply to buy ones that are momentarily on sale.
Generally, a good time to look to buy bargains is during a bull market, not a bear market. If you go long in a bull market and make a mistake, the market may pull you out with a rally. If you go long and bargain hunt during a bear market, you could get punished severely if you make a mistake.
When selecting stocks to bargain hunt for, make a list of some of the stocks in an up trend that:
- Performed well in prior months
- Have a strong profit outlook
- Are in a leading industry group
- Have a new product or service that is, one would hope, catching on with customers
Remember: You want quality. In a bull market, top-performing stocks may sell at what seems to be a high price but they will often split several times and then run up again.
Some issues that might be on your Bargain Watch List are Chinese Internet plays, Baidu, Inc. (BIDU) and Netease.com, Inc. (NTES). Baidu's net should be up 38 percent this year and 45 percent next year. Netease's profits should climb 24 percent this year and 32 percent next year.
Some other issues might be Green Mountain Coffee Roasters, Inc. (GMCR), Alexion Pharmaceuticals, Inc. (ALXN), Apollo Group, Inc. (APOL), Pegasystems, Inc. (PEGA) and Perfect Word Co. (PWRD).
Green Mountain's net should surge 55 percent in fiscal 2010, ending September 30. Alexion's net should jump 97 percent this year, Apollo's net should rise 47 percent for the year ending August 2009, Pegasystems should jump to 171 percent this year and Perfect Word's rise is expected at 59 percent.
Timing! Aha. This is the key for the bargain hunter. A good way to seek an entry point on a pullback for a top-notch stock is to use a technical indicator such as the CCI, or the Stochastic Oscillator or Relative Strength Index. There are, of course, other technical tools.
You should spend time back testing various indicators, become familiar with the nuances and then use them as your key bargain hunting timing tools. Also, the timing can be set for various cycles: Short-term, intermediate-term or long-term.
Many of the previously mentioned stocks are not quite in position to be bought as a bargain play based on a daily chart or even a weekly chart. It is sometimes good to time the buy as the weekly chart and the daily give almost simultaneous buy signals.
That occurred with Baidu earlier this year. In late January of 2009, BIDU's weekly CCI (9) indicator turned up with a buy signal when the stock was 128. The daily CCI for BIDU turned up on January 22, a few days earlier. The daily often leads the weekly.
Also, a key finesse with the CCI is to look for a divergence in the indicator against the price of the stock. The weekly CCI made a higher low than the prior low and then made a higher high than the prior high. The stock's price did not do that. So, there was a bullish divergence in the indicator. The CCI said “buy!”
It worked. BIDU's stock then had a strong move up to 408, a gain of 280 points, or 219 percent, over the next eight months.
Finally, you must have an exit plan. Not all trades will work. So, even though you are bargain hunting, you can give a stock only so much on the down side before you must exit. You definitely do not want to get trapped in any trade.
If a bargain trade works well, one could set a point at, say, a gain of 20 to 25 percent to take a partial profit and let the rest run. Remember: In a bull market, the big money is made in the sitting.Mr. Fasciocco is the publisher of Ticker Tape Digest at www.tickertapedigest.com. He is a contributing writer for several publications. Mr. Fasciocco can be reached at leo@tickertapedigest.com.
