Editor's note: The Aggressive Stock-Picking Training Program is a series of six weekly assignments. To start with Week 1, click here. Each assignment is based on one of James Altucher's strategies in his book, Trade Like a Hedge Fund. To get a copy of the book, click here.
This assignment was written by Stockpickr member Ira Krakow.
Last week's assignment focused on how to trade
stocks that are rising on unusual volume. To recap, unusual
volume is one type of unusual stock activity that can hint at a large, sudden price increase. However, it's hardly the only one.
Many times, large outside
shareholders may load up on a stock in anticipation of a big event, such as a
acquisition or a major new order. Another harbinger of unusual activity is when a company announces a
With a buyback, if the shares are actually bought, that activity should help increase the stock price, because the number of shares available to the public will decrease. But this doesn't always occur immediately, and sometimes it does not occur at all. A company can announce a buyback program but not actually execute the buyback for a number of months, or years (see
"Ask TheStreet: Buybacks").
For companies that have announced a stock buyback in the previous week, look at Stockpickr's
Top Stock Buybacks. And for possible recent outsider activity (by "activist" investors), check out Stockpickr's
Latest Activist Situations, which is a portfolio based on the mandatory "13D" filings that indicate that an outside investor has taken a major (greater than 5%) stake in the company. A big investor move like this could result in a shakeup in company management, and ultimately a boost for the stock price.
A recent activist situation took place with
Freeport-McMoRan Copper and Gold
. This month,
Atticus Capital LP (see
"Trade Like Hot Hedge Fund Atticus Capital" and
"Atticus Proves Not All Hedge Funds Will Go Belly Up") disclosed that it raised its stake in Freeport-McMoRan to over 7% (the stock has steadily gone up since the disclosure). Even with FCX's year-to-date rise of around 30%, an increased stake by Atticus is a strong sign that the stock price can go a lot higher.
But before you invest your hard-earned money using this trading strategy, here is your assignment: Pick the best stock trade on the basis of unusual activity.
Review the stocks on Stockpickr's
Top Stock Buybacks List and two stocks from the
Latest Activist Situations List. Read the "Reason for picking" box for each stock to see why it made the list, and pick two names from each list that you are interested in.
, create a portfolio of your four initial stocks, called "Unusual Activity Analysis:
Your Stockpickr Username".
Make sure to turn the "Portfolio Tracking" feature on, so you can monitor stock prices over time.
(To create a portfolio on Stockpickr, you'll need to first log in. If you're currently not a Stockpickr member, you can register at
.) Turn the Porfolio Tracking feature on, so you can monitor stock prices over time.
For each of the four stocks that you selected in Step 2, review the latest company news and analyses by searching for the most current articles and videos on
(use the "Search Articles" or "Get a Quote" boxes) and other financial news sources.
So what should you look for? You want to find out why the company is buying back its stock or why the activist investors are increasing their stake.
fundamental look at all four companies, paying special attention to their
balance sheets and whether their respective business cycles are on the way up or down (hint: up is better). As you gather this information, write your observations in the "Reason for picking" boxes in your Stockpickr portfolio.
On the basis of your analysis in Step 5, choose one buyback stock and one activist situation stock as the best opportunities to buy (or sell) at the open of the next trading day. Note the current
closing price in the "Reason for picking" area, as well as your trade recommendation.
Before the open of the next trading day, pick four stocks from the
most current buybacks stories on
(search "buybacks," samples:
"Top 10 Stocks With Big Insider Buying, Buybacks" and
"Wednesday's Buybacks: Compuware for $200 Million") and add them to your "Unusual Activity Analysis:
Your Stockpickr Username" portfolio. Then do the same homework for these new stocks as you did in Steps 3 and 4.
You will now have six stocks to monitor.
When the stock market opens the next day, note the
opening prices for all six stocks in their related "Reason for picking" boxes.
Test your results on paper (see
back test). However with this assignment, you should look more long-term than in previous assignments.
Since stock buybacks and activist shareholder buying don't usually occur in one day, but gradually over a course of months, check back at the end of one week, one month, three months, six months or (if necessary) one year. If you see that the price is starting to break out of its
trading range (say, trading above its 200-day
moving average) and heading up, it may be time to buy.
Search Stockpickr for other portfolios that include the words "buyback" or "activist." You may find both professional and do-it-yourself portfolios. Read the "Reason for picking" boxes in both portfolio types and compare your reasons with those of other investors.
Also, see if your stock-picks appear in the following Stockpickr portfolios. If your stocks appear in several portfolios, this can help inform your trade decision.
- Activist investor portfolios, such as Atticus Capital and Third Point, LLC. Funds like these are well run and have a track record of investing in undervalued companies.
- University portfolios, such as Harvard Management and Yale University . Universities like these are large investors and they can take large, activist positions in the companies in which they invest. Search the Stockpickr professional portfolios to see what's in your alma mater's portfolio and how it has performed.
- Stocks With Unusual Options Activity: If there are sizable put or call options outstanding for a stock, then that could be a signal for a breakout in its price, either up or down. (This is yet another type of unusual activity.)
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