Have your cake & eat it too: A new strategy for trading value stocks

Apologies for the choppy sentences in today’s blog. I copied it from another piece I had written, modified it for the blog–and it did not copy properly. I’m too lazy to figure out how to correct it. Bear with the sentence breaks…I believe you will get alot out of today’s blog.

My outlook on the market is for a continuation of the 2018 – present multi-month swings. Sooner or later, the market can and will break out of a sideways volatility period. I can’t tell you if that will happen in a week, a month, or a year. If you look at the chart below, you will note that we are in the third period of sideway volatility since 2009. Note how the last 2
sideways periods lasted 18+ months. We’re about 15 months into the
current choppy sideways period. So there may be more to come.    

In light of an overvalued North American market, we at ValueTrend are
trying to focus on areas that are likely to do well in a period of chop.
We’ve been buying Emerging Markets, commodities such as metals and energy, China, and even a bit of Europe. These are all contrarian ideas.

They have been beaten up, based, and appear to be receiving some new moneyflow. Stocks following the same pattern are on our list. Some are
contrarian ideas that may take a while to move, but appear undervalued on our fundamental and technical screens. Sure, we have a few growth orientated momentum stocks.  They’ve done well. But we don’t want to be as exposed to these high flyers as the market is. For this reason, most of our new ideas now come from the “value” side of the ledger, rather
than the “growth” side.

How we are trading this market  

As noted, we are searching for value stocks within an overbought market. As such, we are looking for stocks and securities that are rebounding from a
support level, or which have broken a downtrend by basing and
illustrating signs of an upward breakout. Bottom feeding strategies like
this make sense in a choppy market. But – there is a catch. Such stocks
may not turn around as quickly as anticipated. This is the risk of value
investing. Depressed and overlooked securities can be opportunistic. But that opportunity can be a double edged sword. A rebounding company or sector can be a magnificent thing to take advantage of – but signs of
continued weakness can punish the security further. As such, we tend to leg into these stocks in 2 increments. In that way, we have a smaller
commitment if the trade goes sour. And we can add to it if things are
going well.    

We also have to keep a tight watch on support levels for these fallen
angels. If a stock drops below a noted support level, we don’t spend much time waiting around for a rebound. We’re trying to stick with 3-4 day
break rule, meaning that if a stock breaks support – we sell it if it doesn’t rebound within that 3-4 day period. So here’s how it works:

1. We decide on our position size (e.g. – we want a 5% position)
2. We buy roughly half of that position (e.g.-2-3%)
3. If the stock or ETF moves favorably, we add the second portion to bring us up to the 5% weighting
4. If the stock breaks support/moves unfavorably, we sell after 3 days –
which affords the stock enough time to do an oversold bounce (if any)  

Two example of this 2-stage leg-in style include stocks such as Onex
(ONEX) and some of our commodity positions of late like the BMO metals ETF (ZMT). We bought these positions and added to them in two leg
intervals as they affirmed our original analysis. By buying in increments, we had better confidence in taking a larger position, and have profited
by that strategy.    

Two examples of stocks that were stopped out include CVS and WBA after negative financial reports. By limiting losses through a 2-stage buy-in on both of these stocks (3% original buy level each, no additional capital committed) and a tight stop-loss trading strategy, we were able to reduce the risk of further downside.  We then redeployed that capital into better ideas. Of note:
Sometimes you don’t have an immediate replacement…the “better idea” may just be adding to cash!

Does it work?  

Effectively, this buy/sell strategy affords us to keep our winners and even add to them, while it reduces our exposure to losers and cuts their losses for better use of the capital. It’s been working very well for us so far. We’ve held between 15% to 30% cash consistently through the past 12 months. Recall that the ValueTrend mantra is to “Limit your risk, Keep your money”. We want good returns while experiencing a lower level of risk and volatility than markets. Cash is one tool to help with that goal when times are uncertain.

Despite the cash, our performance in the Equity Platform has been in line with the market over the past year, and has outperformed over the longer term. Being able to perform in line or better than the market while holding almost a third in cash suggests that our stock picking and trading strategy has provided positive alpha vs the indices. We’ve had market returns with a lower risk profile. Have your cake and eat it too!

New product launch: Taking applications NOW   

I’m excited to note that we are launching a new platform… our new ValueTrend Aggressive Growth Strategy (VTAGS). The platform is now officially being offered to clients who hold a balanced portfolio within our other platforms.  Note that this platform is not designed to replace the ValueTrend Equity Platform. It is a compliment to it.  

VTAGS is generally recommended for a smaller portion of an overall investment portfolio, and only for those clients who understand the trade-offs between risk and reward in a higher growth strategy. We want to keep the platform small and contained for greater trading efficiency and liquidity. As such, we may at some point cap the platform after a maximum capital level is invested in the strategy.   

We’ll be taking applications for the VTAGS strategy effective immediately, with the anticipated investment inception date (aka the “go live” date) of June 1, 2019.

The VTAGS strategy will not be offered as a standalone product for new clients. You must hold a minimum of $500,000 in family assets with us diversified through our other platforms: If you are interested…Please contact either Craig or Keith to for a full description of the VTAGS strategy and to discuss how ValueTrend can administer your entire portfolio needs. 


  • Keith;

    Lots of good insight and ideas as always.

    I do have one question regarding your stock purchasing procedure #3;

    3. If the stock or ETF moves favorably, we add the second portion to bring us up to the 5% weighting.

    Do you have a hard and fast rule as to what constitutes a security moving ‘favorably’ after your initial buy? Is this a 5% move? a 10% move? or do you wait for the technical indicators to tell you when to commit the remainder of your investment in the stock?

    • Steve–its not a hard and fast rule that can be quantified so much as “observed”-its kind of experience, instinct, and rules combined-this comes from 30 years of trading, 25 of which have been by using technical analysis. But–here are the general “rules”…
      If the stock (or ETF) has based and is showing signs of continued strength, it will typically make higher highs and lows on the daily chart. Look at the two stocks in today’s blog–ONEX is bumping up and down, but note the higher highs and lows. So we bought our second leg on a successful test of the last low. With ZMT, we bought the first leg as it was forming the neckline (ie we bought early)_ then the second leg as it broke the neckline a week or so ago.
      In our failed sell examples – we bought on a bonce off of the noted support lines, then waited to see if they would follow with daily chart highs and lows before adding a second leg. They both went up a bit after we bought, then earnings reports (drugstores in the US got hit all together) came out and we sold on the break after a 3 day count.
      Lots of PM’s like to talk of their winners–not wanting to show you their dirty laundry. But fact is–we all have losers. Hopefully we have more wins than losers–but it is a fact of investing that we will eat some crow periodically. I’m hoping to show you how to deal with both winners and losers in a sensible way by giveing real examples, and not being too proud to show only my best picks.

  • Integrity and generosity – a nice refreshing change in a market so full of sharks and leeches 😉

    Good on ya!

  • The only person responsible for looking out for my financial self-interest and financial well being is ME. Its not the governments responsibility. Frankly the banks are just like every other business wanting to optimize profits off the consumer. Every business should be suspect. Its about financial literacy, asking lots of questions, negotiating, and understanding just how the business benefits. I recently had Vancity Credit Union strongly recommend health care coverage as a small business owner, with their partner Blue Cross. I went through the exercise asking lots of questions, and made an informed decision.

    • That’s what you have to do Lana. Unfortunately, many people, particularly older folk and financially unsophisticated people, blindly follow the advice of institutions pushing a hidden agenda. I was an Advisor many years ago with a bank firm, and we had a “grid” (they all still do) where you got paid more to push one thing (aka bank products like managed investment accounts, etc) over another. I can honestly say I never pushed their products, as I had already formed my Valuetrend approach. I was actually a black sheep in my office, kind of looked at as the “outsider”–being the only guy who traded stocks and had my own system–and avoided the banks higher commission managed accounts. I got plenty of pressure to push their products. this is something clients never know or see.

  • I ditto Bob’s comment about your integrity and generosity, and will add honesty. Wouldn’t it be nice if everyone told these stories. Actually some folk on do, like Five I research’s main guy who used to be a portfolio manager. What I find so amusing is that most of the guests on BNN always dish the mutual fund (as a broad concept) but never come clean on their own fees for their managed pooled funds. Here’s a big question, what is a fair percentage for the value of ‘advice’. ETF’s you get none, yet can still pay 75 basis points for the ETF. Add on the cost of the advisor and aren’t you close to 1.5%. Thanks Keith for your blog, appreciate your time and effort.

    • Thanks Lana
      Fair price is depended on your perceived value and what you expect. You are correct if an index ETF charges 0.75%. That is expensive. However, if an active ETF charged twice that, its probably good value if they are doing the job. For example…HAC, advised by Brooke Thackray, is well into 2% + if he beats his benchmark–but that’s fair, given that his fund is unique (he is almost like a hedge fund in some ways) and if he beats his benchmark he shares the profit with his investors.
      ValueTrend charges according to the platforms we position in our client accounts. We charge more if the platform is more costly to run. Less if it is cheap to run. For example–our main Equity Platform can have anywhere from 100% to 300% (in a high trade year) turnover. So we charge 1.75% to absorb the costs of those trades, pay the custodian, and earn some profit for our expertise. We work for that fee–we trade and make decsions at a greater clip than low turnover managers. On the other hand, our Income platform only charges 0.65%. That’s because it is 50% bonds/liquid, and the other 50% (approximate breakdowns, which does change BTW) is in dividend paying stocks that are not turned over very rapidly. So our trading costs are low–thus, we pass that low cost to the client. Finally, our VTAGS is anticipated to have high turnover AND we have to be on top of the securities in a big way, given the more sensitive trading parameters we will be using. So it will charge 2.25%–you are paying more to cover the cost of higher turnover, and more attentive work by the mangers (us).
      I’d argue that any low turnover ETF, fund or even a direct relationship with an IA who doesn’t really do a ton of trading should merit much lower costs than many do charge–as in the example of our Income platform –I am amazed to see investors hold money with mangers who believe in “buy and hold” then charge like they are more active. Even worse are the managers who do nothing but ETF’s (we do some, but they are turned over frequently which involves trading costs). In the case of a relatively low turnover buy/hold PM who buys ETF’s–then has the gall to charge over 0.75%/year…well, there’s a sucker born every minute, as they say!

  • KR, will you ever have an ETF available? After following your work for years I would back-up the truck ( ok, minivan) and buy,buy buy!!!

    • Thankyou so much for the confidence Mark. We do hope to have something like that in the next year or so. It almost happened about 2 years ago, but some other priorities came in the way and we benched the idea for a while–now we are more open to starting one again. the VTAGS is our first new venture in a while. After we settle it over the summer, I’d expect to begin searching for an ETF vendor.

  • Keith, I value the advice of my IA, that I can see my portfolio in real time, the company is easily acessible via the phone or email, and the comprehensive year end report. I am a health care professional and thats what people pay me for, for my advice and expertise. Thank you for your comments about portfolio turn-over and custodian fees as a contribution to the expenses. Now for my dumb question, how do i find out this out? Is there a stat hidden somewhere about portfolio TO, or is this a question to my IA, eg what percent or basis points are the trading costs and custodial fees of my 1.5 MER?

    • I dont know what you hold Lana–but if it is an ETF or a mutual fund(s)–you will uncover most of the info online or in their disclosure agreements. You can also contact the company and ask about turnover etc
      If its under an IA–ask them to find out.

  • Keith, my semi-educated guess of low portfolio turn over would be 0-30%, moderate turnover 30-60%, and high turnover greater than 80%. Please comment and are there other categories, like super high! Thanks kindly, Lana

    • Lana–I am not sure if there is an industry standard for turnover. I do know that most “active” managers still only turn their portfolios over in your lower ranges (20-30%) so our higher turnovers on both the regular equity platform are well above industry norms (which can be anywhere from 50% in a low turnover year to 300% in a high turnover year–which 2019 seems to be so far for us).
      Our new VTAGS strategy is anticipated to be high–cant really call what it will actually be as we havent started it yet–but probably 100% – 300% would be likely.


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