Ask me anything answers: Part 1

As always, its great to see so many questions come through for these semi-regular “Ask me Anything” blogs. AMA for short. Lots of variety this time – so I expect that my “answers” will be posted over 3 blogs, of which this is the first. As  always, I try to stick with the questions that might appeal to the broadest audience… I also tried to combine questions if the general topic was suitable for combining. So, lets get at it!

Green utilities

George asks about “green-ish” utilities. He mentions NPI, BEP and AQN. We hold AQN in our Equity Platform. as well as in our Income Platform. What is my 10-year (aka long termed) outlook for this type of stock?

George correctly notes that utilities are interest rate sensitive. That’s because most utilities, especially those investing in the new “green” technology (solar, wind, etc) are leveraged via the loans necessary to invest in this type of project. I have no idea what one of those huge windmills seen throughout central northern Ontario costs, but you have to think that the payback period on its energy production is pretty long term. Even with subsidies. So – rising rates on these loans are bad for profitability in the utilities industry.

From a long termed perspective, I think most utilities (green, or not) are fine for dividend seeking investors. However, to George’s point, you are probably in for some drawdown in the next couple of years if/as/when rates begin to rise. Earnings growth in this sector is pretty subdued, although its certainly there. As such, if we assume that rates don’t rise too much, we will witnessed the same pattern that has happened in this sector many times before: a period of volatility or drawdown, followed by an eventual move back up.

The chart below is that of BEP. All three of the stocks George mentions are pretty similar in pattern. NPI has the least appealing chart (a defined downtrend with no support being held at this moment) whereas AQN (disclosure: we hold this stock) has the most encouraging chart. BEP lies somewhere in the middle. All three are down of late (probably due to a correction of the overbought status and a fear of rising rates), all three pay nice dividends. Note that BEP, like the others, is struggling with an old neckline support area–somewhere near $47. Hopefully the stock will find support here and trade sideways for a while. When that stock and the others hit their peaks, they had all violated my “> 10% over the 200 day/40 week SMA” rule. So the sector deserved to pull back. We picked up AQN on the pullback and anticipate the sector may consolidate and pay its dividends over the summer.

 

 

 

 

Airline Stocks

Miguel asks about airline stocks. He notes that Buffet has come and gone into the sector without much luck. He mentions the $13B loss by AC, and the no-fly status to the Caribbean & its impact on TRZ. I wrote about the airlines several times since the March 2020 COVID crash -including a blog in early February. I’d encourage Miguel to read my full writeup on the sector here as a background.   But I can bring you up to speed on my view since that blog here.

OK, for starters, Miguel asks for my 5 year outlook on the sector. I don’t have a 5 year outlook on most volatile sectors (of which this is one). So- that aside, I can offer a trading perspective on the sector. We hold three airline stocks in our Aggressive Platform – and NO exposure to these stocks in our more conservative Equity Platform. That might offer some perspective right off the start. Read our disclaimer on the Aggressive Platform and you will recognize just how risky and short natured this trade is.

I will use only one chart to illustrate the sector – that of American Airlines – which is the largest airline by volume. AAL is one of the 3 stocks we hold in our Aggressive Platform. The stock was bought near the $20 neckline, which is where the recent retracemnt has brought it back to. Were you to examine most of the airline stocks, you will observe a similar pattern. My take is that the neckline must hold. If it breaks, its no longer a valid candidate for us. If, however, the neckline holds, it- and the rest of the group-  has some upside. Clearly, this is a risk-trade. Caveat emptor, as they say.

 

How to sell

Henk asks about forming a selling strategy. He writes that he recalls me recommending using stop losses, but he has been whipsawed out on such methodology before (no doubt only to watch the stock rise thereafter), and wants to avoid that unpleasant situation in the future. I want to clarify my methodology when using that strategy while looking at the above American Airlines chart.

If you examine the AAL chart above, you will note the base formation breakout and neckline sits at $20 or so, as discussed in the notes to the prior question. My sell strategy on AAL stock trade – that we currently hold in our Aggressive Growth Platform – is to sell the stock if it breaks the $20 neckline materially. That must be verified by that break lasting for at least a week.

The 3 & 3 rule: A material break of support, to me, is in excess of 3%. See my book Sideways. So that’s about $0.60, or $19.40 for the stock price. Truthfully, I use round numbers, so I will wait for a sub-$19 break before being concerned. Your mental stop is based on support. Not on what you paid. Nobody trades on the price that you paid. The traders pay attention to support levels and moving averages. They don’t care much about Henk, or Keith, or Sally’s price. Now, this is important: I DO NOT ADVOCATE THE USE OF PHYSICAL STOP LOSS ORDERS. I have written on this subject before. Henk, you simply MUST read this blog, entitled “Why I hate stop loss orders” – it is going to answer many of your questions regarding a selling strategy. Anyhow – if the stock breaches $19, and if the stock stays below that level for a week – but no more than 3 weeks- I sell (which risks it going lower, but them’s the breaks, as they say).

So there you have it Henk.  Read that blog above that I linked to. Put a mental, not physical, stop loss in your brain at  3% or more below the last point of significant support. Wait 3 days, to a week, and no more than 3 weeks. Then sell if it has not recovered. And by the way – you can still get whipsawed. But this strategy, which I have been successfully using for nearly 3 decades, reduces your chances of crying in your soup over a snap upwards after a brief breach in support.

I’ll be back with AMA part 2

Don’t fret if your question wasn’t addressed today. I’ll be picking my way through them, as noted in the introduction to this blog, over the next 2-3 blogs.

quote-teal

2 Comments

  • Hi Keith,
    Regarding the How to sell subject, I try to apply this practice but a lot of things can happen in a week… Many times I see the price dropping to the next support in a matter of days. For example, looking at the AAL chart above, when the $20 support breaks, it would quickly go down to $14 within days… What would you do then? Follow the rule, cut your loss and sell? Or since we are hitting another support zone you would give it more days/weeks and wait for a rally to 20$?
    Thanks

    Reply
    • Francisco – its an assumption that if (for example) when AAL drops $20 it will plummet quickly to $14–sure it can happen but its unlikely. I use a bit of intuition when trading. If I feel its a fast-mover, I will only wait the 3 days then sell. If its a typical stock, what happens is that it breaks, then a few days later retests the neckline (close to it anyway) then fails again – and falls harder. So–if I don’t feel the news is devastating – I wait. If the news is horrible, I sell in 3 days.

      Reply

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