NEW YORK (TheStreet) -- Tell me if you have seen this movie before.
A common mistake by traders and investors is chasing stocks. The excitement and the worry over missing out causes a rash decision and you push the "buy" button. Now you own the stock.
In an instant you receive the "order filled" message and simultaneously the price begins to fall, as if your buying caused it to happen. For the rest of the day the price continues to fall.
"OK," you say to yourself, "I will give it one more day," to which you find holding another day results in a greater unrealized loss. Within a few days you're so frustrated that breaking even is appealing.
After a week or two, the once-bullish darling is finally approaching your breakeven point, and you stare at the monitor as if to use the "force" to lift the price higher. The stock price may get close, even within a penny or two, but sure enough, down it goes, leaving you with the feeling of "if only I lowered my offer price below that round number I would have exited with a loss of a penny or two."
Not wanting a repeat, your next step is lowering your offer price a few cents "under" the round number peak from earlier. Sure enough, the third time is the charm and all is well again in the world because you're finally rid of that last embarrassment, while simultaneously promising under your breath never to do that again (for the 10th time).
If you thought you were frustrated before, now you're in for a real treat. The stock you just exited out of for a loss of a few cents continues higher. During the same day you let your shares go, the stock closes another point or two higher. For the next four days, you watch in anguish as it becomes the Energizer bunny on speed as it keeps going and going.
For those who allow emotions to influence investment decisions, it may feel like the market is actually built for the sole purpose of ruining their financial lives.
For some reference, be sure to read my last
5 High-Yielding Companies in a Strong Bull Trend
The thing that people generally learn the hard way is that for longer-term investments, buying the dip usually makes a lot more sense. We all know stocks don't travel straight up or straight down, but what many don't know is that after three down days a stock tends to reverse for the next week.
If you buy that "hot" stock after three up days, you have put the odds against you, and this is a game about finding a positive expectation.
Spin the scenario around and buy an uptrending bullish stock after three down days and you now have put the odds in your favor and earned a positive edge. Even better than three is waiting for five days, but three is statistically close enough for most and the simplicity outweighs the benefit for most people.
Does it work every time? Of course not. We are working with edges that amount to small percentages. But in a land of "no free lunches," why not take what we can get?
Here are five bullish trend stocks worth examining and waiting for the dip. Avoid chasing, and look to enter after at least three down days. I have written about many of them as a result of following their moves closely.
Background: Eli Lilly discovers, develops, manufactures and sells products in one significant business segment --pharmaceutical products. The company directs its research efforts primarily toward the search for products to diagnose, prevent and treat human diseases.
The following link is to a great
articleby Jim Cramer about buying quality stocks during dips. If you bought Lilly the day after Cramer's article, you currently have a 10% capital gain along with a 49-cent dividend in your pocket.
Eli Lilly has blazed up the charts in the last month, reaching a new 52-week high today. While there isn't a dip today, I wanted to bring this one to your attention as one to put on your radar screen. On the next three to five day dip, another review will be in order. If it makes sense for your portfolio at that time, then it will be the right time to pull the trigger.
Eli Lilly makes an excellent example of stocks that appear poised to continue higher, but we don't want to chase it. In the following examples, you can see companies that are much closer to pulling the trigger with.
Background: J&J is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world.
J&J pays homage to investors with a dividend yield over 3.6%, increasing an average of 9% a year in the past five years. If that doesn't say it all for J&J, little else will. Of course, if the dividend is at risk of decline, we could end up as a bag holder, so let's take a look at the payout ratio.
J&J's 3.6% yield is based on a yearly dividend of $2.44 per share out of profits that are estimated to arrive at over $5 per share this year. With a payout ratio under 50%, a dividend hike is more likely than a decline.
For me, the most worrisome issue is the current proportion sold short. J&J's float has a 6.8% short interest. That's a little high for a big dividend payer. Even though short sellers are smart money, they don't always get it right, and I believe this is one of those cases.
I was watching Tuesday for an entry signal. As I write this article J&J is trading higher. By Wednesday, we may have a buying opportunity, or another one to keep on the radar for now.
I write often about Apple and its investment attractiveness. Everyone loves Apple, with good reason (well, maybe not the unfortunate ones who sold before $400).
I believe Apple is one of the most undervalued large-cap companies. It may be a bold statement given the price and a stock chart that could easily be mistaken for an Evel Knievel motorcycle ramp in front of the Grand Canyon.
The fact remains that Apple continues to perform quarter after quarter, as you can see in my last Apple article
Six Buys Near 52-Week Highs.
Apple's high per-share price holds it back and perpetuates the undervalued status. It's so silly on many levels. When you invest in a company in today's electronic markets, it makes no difference if you trade in odd-lots or not (an odd lot is a buy or sale of less than an even 100 shares).
A well-performing stock with a high per share price is even a better buy than the numbers otherwise indicate. Why so? Because it's well-known that stocks tend to move higher after splitting.
The logic is real, but it's based on irrational emotion. A company is not actually more attractive because the shares are more "affordable." However, because of the effectiveness, companies continue to use this old "Jedi mind" trick.
If Apple declares a stock split, expect a strong bullish reaction relative to the ratio, and for Apple to narrow the "true" relative value gap.
article on smartphones is a must read. (You need a Real Money Pro account to read, but Versace's analysis makes it worthwhile.)
I have a secret to admit. I don't care for Ma Bell, and it dates back before cellphones became popular. Back in the day, when phones had "strings" attached to them AT&T held a strong monopoly and it acted like it.
With that said, I have no problems buying (or shorting) AT&T. My personal feelings don't receive consideration in regards to capital allocation.
AT&T traded lower Monday and Tuesday as of the time of this writing. If Wednesday is lower we are in "the kill zone" (thanks Oliver Stone). We can also see from last week's move lower that a buy after three down days is already a winner.
The price-to-earnings multiple already discounts AT&T growth, resulting in a free ride if the company's revenue continues growing. Earnings in 2011 are lower, but if you drill down to the quarter periods you can see the hit taken appears to be a one-time reduction.
Based on $2.40 in estimated earnings this year, AT&T is expected to maintain or increase the sky-high yield of 4.8%. Even in the turmoil that wrecked the financial markets, AT&T continued to increase their dividend. In the last five years, the dividend has increased by an average of 5.3% per year.
I like GE, and the 2009 meltdown that had many investors worried if GE would make it through to the other side appears to have dissipated.
Here are two recent articles I wrote on GE you may find of value to your portfolio:
5 High-Yielding Companies in a Strong Bull Trend and
Five Buys Near 52-Week Highs.
Most investors, including myself, don't consider GE a very good candidate for a hit and run of capital gains. But GE has moved up sharply this year, rising almost 30%.
While the current dividend is not as high as during 2008, the last couple of years have rewarded investors with a 70% increase since the start of 2010. The last dividend payment in June was 17 cents (3% yield), and I expect to see 19 or 20 cents by the end of 2013.
If today is a down day, and we have multiple down days, Thursday or Friday may provide the dip you're looking for. As a bonus, you may find comfort knowing short sellers (the people I consider the smart money) don't find GE attractive as a short sell. Less than 1% of the float is short.
for my data. PE is generally adjusted based on an average number of shares.
At the time of publication the author did not hold a position in any stock mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.