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Investing Made Easy

Written by Briton Ryle
Posted May 27, 2018 at 8:00PM

Would you rather buy Bitcoin at $2,000 or $20,000? Did you like Netflix at $50? Investors sure seem to love it at $350...

Nobody wanted to buy oil stocks when oil was $35, $40, $45... but now that oil prices are hitting $70 and many oil stocks have run 50%, suddenly oil stocks are good buys again. 

I hear from individual investors just about every day. People rarely want to buy a stock when it's sold off. They'll ask me, “Why should I buy that stock? It's getting killed. This other one has been doing great!”

I understand this. When a stock price is moving higher, it's a show of confidence that the company is executing well, it's addressing a growing market, sales are booming, and so forth. If so many people (including fund managers) are willing to put their money in a stock, there must be some degree of safety, right?

And honestly, all this is mostly true. Most stocks that are rallying are doing so for good reasons. I mean, analysts have done their due diligence, and strategists have outlined the, um, strategy.

Fund managers with billions under management aren't just throwing darts. With billions at stake, you’d better believe the smartest people on the planet are putting their brains through the paces. So there are plenty of times when you can simply follow the buying and find good stocks that can make you money.

In fact, if you're a trader, that's all you want to do. Follow the buying. You don't want to buy a stock that may languish for months...

Twenty years ago, one of my first mentors in the investment biz shared a powerful secret with me. He leaned in and, with a conspiratorial tone, whispered, “Buy stocks that go up,” and then chuckled a couple times. 

At first I thought he was pulling my leg. Like, “Hey, let’s make fun of the new guy...”

But when you think about it, there’s only one thing that makes stock prices go up: buying. When people start to buy a stock, that’s when the price starts to move higher. And when the price moves, other people notice, they start to buy, and the price goes higher still...

It’s basic supply and demand. The more people there are who want to own a particular stock, the higher the price will go. And when mutual funds and institutional investors want a stock, they’re buying in with tens of millions of dollars.

Still, whatever happened to good old "buy low, sell high?"

It May Be Stupid... 

Sometimes the stock market is really smart. Other times it's about as smart as a box of hair.

But whether it's smart or dumb, it will also be devious. It's this last one — the devious market — that most investors struggle with...

Honestly, I think this sideways action we've seen on the S&P 500 is actually a pretty smart reaction to the interest rate/inflation/earnings growth questions. Yes, there are potential challenges. But there is also potential upside. Investors aren't freaking out; they are biding their time until there's more clarity. 

To me, dumb is Netflix being more valuable than Disney. I mean, come on. Sure, Netflix has a global opportunity. But trailing revenue is just shy of $13 billion. At a measly 5%, its profit margin is barely better than a retailer. And the market says this is worth $153 billion? That's dumb — and also a little devious. 

Or how about the action from Foot Locker (NYSE: FL) on Friday? The shares were up a huge 15% after it reported earnings. Year-over-year revenue was up just 1.2%, and if you factor out foreign exchange rates, sales were actually down 1.5%. Comps were down 2.8%. Gross margins declined, too. Expenses were up a little, which drove operating income down 16%. Oh boy!!! Buy, buy, buy!

Deviously dumb. Because maybe it's a breakout. It's not a short squeeze, as there's virtually no one shorting the shares. I can't imagine the shares going higher from here. I mean, Foot Locker is the poster child for the mall retailer. There's no value add, it's totally dependent on mall foot traffic, and anything you buy there will be cheaper on Amazon. Just dumb. 

But, on the other hand, Foot Locker pays a pretty nice dividend. And the $6 billion company has $745 million in net cash. Maybe I'm the dumb one. Maybe the stock is a buy...

Now I'm doubting myself. See what I mean about devious?

Who is Selling? 

Here's a question I like to ask to help decide between smart, dumb, and devious: Who is selling? 

Any time a stock rallies, someone who bought low is selling high. That's the nature of the market. 

If we check out who owns Foot Locker stock, we find that just about 25% of the stock is owned by insiders. That's just shy of 30 million shares. Institutions and funds own over 50% of the stock. Roughly half of that institutional ownership is index funds — they aren't selling. 

Then we see some institutional trading firms — AQR, D.E. Shaw, and Goldman Sachs — have about 10 million shares. My bet on who's selling is these three, plus some insiders. I would also wager that a fair amount of shorts sellers are coming in. 

This move in Foot Locker looks dumb. But a little digging makes me think it might be devious. Either way, I want nothing to do with it. Which is another reason I like the whole "buy low" thing.

I don't mean this in a "value stock" way. My experience is that most of the really cheap stocks that are called value stocks are cheap for a reason. 

I want to buy low before a big move comes. That doesn't mean buying at two-year lows, either. What it means is buying before the catalyst for the big move actually happens.

Think about Nokia (NYSE: NOK) shares. The stock has been going mostly sideways. Fundamentals aren't great. But 5G is coming, and NOK is the biggest wireless equipment maker. Plus, it makes a lot of loot from cell phone patents to help it ride out weak times like these...

Then there's the aforementioned Disney (NYSE: DIS). It's been sideways for nearly three years, even though it is killing it at the box office. Early next year, we will get Disney's streaming network. And imagine if instead of competing with Netflix, Disney actually wants to compete with movie theaters and starts launching its movies on its own channel instead of in theaters. It could fix ESPN, too. Could be huge...

Those are just two examples. There are plenty more out there.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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