Real Money Charts (April 21, 2008)
Here are the charts from Monday’s Real Money article: PCLN, POT, HOG, USO, C and CROX.
PCLN has been on a tear for quite a while. I’ve inserted a 30 week moving average on the chart to show where the best buying opportunities have been. Unfortunately for sidelined bulls, tags of the 30-weel moving average just haven’t come along very often. If another gift comes along, I’d be a buyer — at around $110. But if the stock breaks above $130, that’s another buy signal.
I’ve been getting a lot of emails about POT lately, with a few folks mentioning that it has a PEG ratio of more than 2, which apparently makes it overvalued. OK, guys, I watch Mad Money too. I saw last week’s show where Jim talked about PEG ratios and how high PEG ratios would be shunned by value-oriented money managers. Let me take you back in time to a day when IBM had a one-word slogan: “Think.”
If trading was a simple as finding stocks with +2 PEG ratios and selling them, we’d all be rich and living on our own tropical island. There is more to successful investing than learning what a PEG ratio is.
The PEG ratio is the Price-Earnings Ratio divided by the Growth Rate. Here’s the simple math: The higher P/E ratio, the more “expensive” the stock. Divide a higher P/E ratio by a lower growth rate (an expensive, slow growing stock) and you have a large number. Divide a low P/E ratio by a higher growth rate (a cheap, high growing stock) and you get a small number. So if the P/E ratio is twice as high as the growth rate, you’ve got a PEG ratio of 2. If the P/E ratio is half the growth rate, then you’ve got a PEG ratio of 0.5 — cheap!
One question: What if the estimated growth rate is wrong? What if the consensus is too conservative? Who do we get these growth rates from? Analysts. You know — those same guys who gave us the Google estimates that turned out to be embarrassingly wrong? Wall Street institutional brokers are notoriously conservative (except for their bond departments, most of whom made a fortune selling Enron-like flatulence and calling it French perfume). So does anyone really have a handle on the growth rate of Potash? Potash is the world’s largest producer of…potash (hence the name). Potash has been around for about 600 years, but never has business been this good.
Is this a bubble? Who cares? Just watch the chart. I agree that a 45% run in the stock since the March low begs for a correction — that’s obvious, and you don’t need to know the difference between a PEG and a PIG to see that. If the stock pulls back just below $190, I’d take some off the table. And if the stock pulls all the way to $170 (the last breakout level), then buy it back. If it falls below $170, then look on the bright side — the PEG ratio will be more reasonable.
Let’s look at the other side of the coin: Harley Davidson. While it’s got a PEG ratio of 1, I wouldn’t buy it because this is the ultimate “disposable income” stock. The bikes are large, loud, obnoxious, and generally ridden by guys trying to compensate for insecurities likely due to the mini-bike parked in their denim garage. In a weak economy, those same guys will probably just buy a used Harley from a real estate flipper who can’t flip anymore and needs the cash. But with that said, remember that the market always anticipates the future. So if HOG completes its base-building process at $35 and then starts moving higher, that’s a great sign for the rest of the economy.
Don’t let this chart confuse you. I’m merely showing the relationship between natural gas (UNG), oil (USO) and the U.S. Dollar ($USD). You can see that oil and natural gas tend to move inversely to the Dollar — because they are denominated in Dollars. A cheaper Dollar means that it takes more of ’em to buy oil or gas. But there is more to the story than a weak Dollar. Notice how the Dollar has been basing for the last month or so…yet both oil and gas have been moving higher. That’s a supply issue — not enough supply to meet current demand. It’s also inflationary, which makes it less likely that the Fed will lower rates. And if the Fed stops dropping rates, the Dollar will be in greater demand and then we’ll really see whether this inverse relationship holds up.
Citigroup has been in a world of hurt, taking a 50% haircut just since early November. But the stock has finally worked its way back above the declining 50-day moving average and it’s done it on heavy volume, too. That’s a good sign. It also puts the bulls back in charge. But it takes more than one breakout day to reverse the downtrend. Now, the bulls have to hold the price level. I’d keep a stop just below the April low. If the stock falls that low, Friday’s breakout could turn out to be nothing more than a fakeout.
If Thursday’s little rally above $10 is all the bulls can muster, this is a stock you don’t want to own…even at these levels. If you bought the dip, then try keeping a stop just below last week’s low. If there isn’t sufficient demand to hold that level, you’re holding a stock that nobody wants.
Be careful out there.
Real Money