Tenbagger Trading Rules
Maximizing Returns

Book Continuation From Yesterday…….While analyzing individual stocks in previous chapters we have looked at a number of variables that would allows us to first identify potential Tenbaggers, analyze their potential and then possibly take a position.  Yet, as we study the companies above we soon come to a realization that it is just as important to know when to get out or trade out of such stocks as it is when to initiate an original position. Doing so at the right time would not only prevent unnecessary losses, but in many cases it would allow us to double or triple the overall return on an underlying position (capital gains taxes are not considered in this analysis).

For instance, while Apple’s stock price had appreciated 3,700% over the last 11 years, the stock itself went through three significant corrections during the same period of time. A 60% drop in 2005, another 60% drop during the financial crisis of 2007-2009 and a 45% drop in 2012-2013. What’s more, another large drop is just around the corner.

If we were able to …..

A. Rotate in and out of these stocks at the right time and
B. Even go short

….our returns for such underlying Tenbaggers would skyrocket. For example, if we were able to avoid the three massive corrections in Apple’s stock price, our 3,700% return would quickly turn into a 16,220% return (approximately). A 162 bagger over the same period of time. Not bad. Yet, if we were fortunate enough not only to avoid the collapses but to short into them, we would be able to push our returns even higher. In the case of Apple our returns would skyrocket from 3,700% to 27,100%. Do this a few times and begin to realize just how important this approach is.

That is why it becomes incredibly important to lay out the necessary framework of getting in and out of our Tenbaggers at the right time. In this chapter we will look at each individual Tenbagger we have decided to invest in (Keurig, Apple and Chipotle) in order to ascertain at what points we should have gotten out and at what points we should have re-established our positions in the underlying securities. We will also determine if it would have made sense to go short at certain times to boost our overall returns. Finally, we will establish a clear set of trading rules that we should be able to apply to our future Tenbaggers.

Trading In and Out of Keurig Green Mountain (GMCR)

To summarize, Keurig Green Mountain’s stock price had appreciated 49,600% between 1999 and today. Yet, if we were fortunate enough to take a long position in the late 1999 or early 2000 it would not have been an easy ride up. That would be due to a fact that Keurig suffered through a number of serious corrections during the same holding period.  To be exact, the stock had suffered through a 60% drop between 2001 and 2002, 50% drop in 2008 and a gut wrenching 84% collapse between 2011 and 2012.

To Be Continued On Monday……

Tenbagger Trading Rules  Google

Continuation from yesterday……TECHNICAL ANALYSIS

Since the fundamental analysis has failed to yield any sort of a buy signal for Bally’s stock in 1999-2000 we must now concentrate on the technical side of the equation.

As the chart above shows, between 1993 and 2000 the company’s stock collapsed from $34 a share to less than $0.50 a share.  What’s more, this substantial down move had occurred during one of the strongest bull markets in history.

Unfortunately, outside of dropping 99%, Bally’s stock gave us very few clear technical clues that it would either top out in 1993 or bottom out in 2000. Outside of a clearly defined downtrend between October of 1993 and 1999-2000, we have very little to go by. As was mentioned earlier, by 2000 Bally’s fundamental and stock price performance has gotten so bad that it received a number of delisting warnings/notices from the Nasdaq. In other words, any analyst looking at this stock and the company’s fundamental performance at the time would have assumed that the Bally’s stock would be delisted. Ending up in the pits of OTC trading.

Yet, despite the setbacks Bally’s stock price bottomed at $0.42 in May of 2000 and then went on to appreciate to $34 by April of 2004. An 8,000% gain in less than 4 years.  Unfortunately, the stock itself gave us very few technical clues that it was about to stage a massive multiyear rally. In fact, it wasn’t until March of 2001 that we would have gotten our first real technical confirmation that the Bally’s stock price might be going through something more than a simple bounce. By that time the stock was already selling at $3 a share.  While an entry at that point would have still resulted in a 10-20 bag run over a 5-13 year period of time, such performance would have been far below our anticipated threshold.

In conclusion, technical analysis alone would have failed in giving us a clear buy signal anywhere close to our anticipated entry point of $0.50-1.00 a share in the second half of 2000. There were NO clear technical signs that Bally’s stock price was about to stage an 8,000% rally or a rally of any kind. Perhaps we will have better luck with our timing and mathematical analysis.

TIMING & MATHEMATICAL ANALYSIS: 

To Be Continued Tomorrow……

No Love From Bally’s Google

Continuation from yesterday……As we begin to analyze the company in the 1990’s we immediately realize just how out of shape and dysfunctional the company was at the time. On many different levels.  For instance, the company was involved in so many different businesses or lines of business that it would have been virtually impossible for anyone to truly understand their operations.  From developing slot machines and gaming systems to operating river boat casinos, from international partnerships to running their own slot machine route operations. And the list goes on.  In short, it would have been impossible to fully comprehend, let alone analyze the company from the fundamental perspective alone.

Part of the problem stemmed from the company’s mismanagement in the past and number of acquisitions/takeovers the company went through in the 1990’s. So much so that by 2000 Bally’s stock was on the brink of being delisted from Nasdaq. Hence the low price. Yet, by the end of 2002 the company was earning record revenues and profits and was even able to move from the Nasdaq to the New York Stock Exchange.

What had caused such an improvement in operations?

A turnaround of sorts. The company began to consolidate its business lines and divest non-core assets. Selling a number of properties and businesses in the process, raising additional cash and paying off debt. Further, the company refocused on technology and slot machine, introducing a number of popular products throughout 2000’s. Today, Bally Technologies has a much simpler structure and business. Deriving all of their revenue from just three lines of business, gaming equipment (34%), gaming operations (41%) and systems (25%).

If we analyze the company during the 1999-2000 period, unfortunately, we would have been unable  to predict that the company would A. Begin its turnaround efforts  B. Start consolidating and selling off assets  and C. Be successful.  In fact, after pouring over company’s records and financial statements during that time I have yet to find one management discussion alluding to the fact the company will attempt a turnaround.

In other words, it would have been impossible to predict the company’s turnaround from the fundamental perspective alone for the following reasons.

• The company’s structure was too complicated.
• Financial mismanagement and a heavy debt load
• The company was on the verge of a financial collapse.
• No discussion of any turnaround attempt by the company’s management.
• No discussion of consolidation and asset divestiture.

The question becomes, would investors be able to forecast such changes on their own?

Absolutely NOT.

The fundamental developments above could not have been anticipated nor predicted. Particularly when the management of the company did not talk about them in advance.  And while we could have assumed the company would have instituted additional turnaround steps, we would have no way of knowing if they would actually work and to what an extent they would go. Forcing us to make an investment decision on hope alone. An unacceptable way to approach any sort of an investment decision.  Perhaps technical analysis can offer us a better answer.

To Be Continued Tomorrow……

What A Real Gamble Looks Like  Google