Advisor Overheard

$WCG is running this morning, and I was tweeting about the confluence of technical and fundamental flags that were in place for a reversal this past week. These included (with the stock trading around $50):

1. Breaking the downtrend that started in April 2012.
2. Trading at a 5 year trough price to earnings multiple
3. Trading at a 5 year average price to book multiple
4. A healthy current ratio
5. Generally low analyst earnings expectations with trailing earnings at 8x and forward earnings at 10x (versus the 5 year average of about 15x).

Now in the low 60s, the stock is up over 20%, and despite feeling good about a nice and quick profit, I have to review the position. I like to think of half of my positions as fundamental and the other half as technical. The best opportunities come when both fundamental and technical attractiveness occur at the same time (like finding a girl with smarts and beauty, or when Rahzel sings and beatboxes at the same time). This takes patience. In this case, the fundamental half is telling me to take profits while the technical side is telling me to ride the trend. Let me break this down:

Fundamental Half: While a higher earnings multiple is definitely possible (especially with earnings coming up on August 3rd), $WCG already trades at a premium to average price to book and sales (see links above). In fact, if we just look at our average PE of 15 – that puts the stock at $101, and an average PB of 1.9 – that puts the stock at $51, then it’s no surprise that the average Wall Street estimate is around $76 (an average of these two targets). I blend price to sales, profit margins and a quant tool in as well, putting my target at $63. Fundamentally we have mean reverted (for now). Sell.

Technical Half: $WCG has broken its downtrend on multiple time frames at a previous support/resistance level, it has a positive sloping 200 day average, it is above the 20 and flattening 50 day, it has a positive MACD zero line cross, there is good breakout volume today and a big gap up says we should revisit the prior highs in the low 70s. The 20 Day average can now be a managed stop loss if not tighter to preserve profits. Technicals say Hold.

This is just one (well 2) way(s) to think about a stock and manage a position. The market has been tough and my individual trades have not been as rewarding as my core asset allocation (see my other posts and tweets if interested). It is sure nice to catch a winner once in a while though.