What to Do When Your Timing Stinks

Here's how to scout out a good deal or two, and tips for what stocks to sell.
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When I, as a kid, made a bad throw that was about to cost me a handful of marbles, I'd scream "Do over! Do over!" at the top of my lungs. Most of the time, if I yelled loudly and often enough, the other kids would let me take back my move.

My broker isn't buying it, though. No matter how loudly I yell "Do over!" nobody is giving me a chance to undo the buys I made in the first two-thirds of March. And, boy, would I like to have those back again. I'd still like to be sitting on the 20% cash position I had built up and thinking about what bargains to buy now. Instead, as of the close on April 4, I'm looking at a river of red ink from those buys:

Texas Instruments

(TXN) - Get Report

down 11%;

JDS Uniphase

(JDSU)

down 15%;

PMC-Sierra

(PMCS)

down 22%;

Network Appliance

(NTAP) - Get Report

down 31%;

Cable & Wireless

(CWP)

down 32% and my personal favorite,

Mercury Interactive

(MERQ)

, down 48%. And to put that last buy in all its horrifying context, that's a 48% decline since March 10.

Let's face it, my timing stank. And I want to do something about it.

Now, I still firmly believe in these stocks -- the fundamental stories are great -- and I know all about how time works for an investor who holds for the long term. And I remain convinced that 12 months from now, I'll be looking at very attractive gains even from what look today like poor purchase prices. So I don't want to sell these stocks.

But it's still galling to sit here passively and wait for time to fix my mistake. I want to take action. My impulse is to buy or sell or, well, just

do

something! I want to pick up some of the bargains that I see at the moment, so I can make up some of the money I lost by the unfortunate timing of those buys. But how? As a result of my "timing problem," I don't have any cash in the Jubak's Picks portfolio, so I can't simply dip into cash to pick up a bargain here or there. I'm in the worst possible position for an investor: Prices have plummeted and could do so again, and I don't have any spare cash to put to work. Sort of limits the options, doesn't it?

Well, here, fresh from a week in Investment Hell, are my personal conclusions about what to do when, thanks to lousy timing, you find yourself stuck between the classic rock and hard place. (And if I'm right about the way this market will recover from the recent crash, I think you'll get a few more chances in coming weeks to put some of these lessons to work for yourself.)

Hold on There, Buddy

Most important, I'd say: "Do no harm." That means no selling of good stocks, which might themselves be a bargain at today's prices, just to pick up other bargains. And no switching investment strategies in the middle of a market crisis. If you've been a long-term growth investor for all your investing life, a 500-point down day isn't a good time to learn how to be a daytrader. Doing nothing in this situation is better than compounding the initial timing mistake by doing something stupid.

That doesn't mean, however, that your portfolio has to stay so static it might as well be etched in stone, nor does it mean that all selling is a crime against nature. As I said in my last column,

Three Ways to Survive Stock Shock, I think you ought to be selling stocks that are showing hints of fundamental problems. In a volatile market like this, stocks in sectors under pressure from changing fundamentals, and stocks that individually are showing signs of falling short of expectations, especially if it's for the second or third time, should be sold. I don't think Tuesday's huge fall and recovery has put an end to volatility in this market. Market psychology is extremely fragile here, and investors won't require much evidence before they take a stock out and shoot it.

Nor are decaying fundamentals the only reason to sell right now. What began as a correction in

Nasdaq

stocks, and that for a while on Tuesday turned into an official bear market, has done real psychological damage among many stockholders. Not all the investors who owned stocks that dropped 50 or 100 points managed to sell their shares. Many just couldn't bring themselves to pull the trigger, or couldn't pull the trigger quickly enough and instead decided to wait for a bounce. For stocks like these and their unwilling owners, every rally now becomes an attractive exit point. That will make recovery by these stocks anything but quick.

What's the Damage?

Measuring the degree of technical damage suffered by a stock is not an exact science. Checking the 50-day and 200-day moving averages on a price chart will help. Each of these levels represents the price at which a sizable portion of the investors who now hold the stock bought it. On the way down, each of these levels provides support for the stock, since many investors show profits above each level and will be reluctant to sell in most markets. On the way up, however, each of these levels turns into resistance, since now the investors who bought at that price and still hold, see an opportunity to sell and break even.

So, for example, Mercury Interactive, which fell as low as 62 1/4 on April 3, shows major resistance at 88, its 50-day moving average. It should be relatively easy for the stock to recover to that level. But I'd expect that it could stall there, maybe even retreat a bit, for at least a few days. On the other hand, Mercury didn't fall below its 200-day moving average, so that level, near 50, remains support for the stock and hasn't turned into resistance.

Most of the stocks in the Jubak's Picks portfolio fall into a broad group that shares this basic pattern. PMC-Sierra, JDS Uniphase and

SDL

(SDLI)

, for example, have held above their 200-day averages with ease. Some of them, PMC-Sierra, for example, barely breached their 50-day average before moving back above it on April 5. These stocks don't seem to have suffered major technical damage in recent days. (The strongest of this group,

Cisco Systems

(CSCO) - Get Report

, barely moved below its 10-day moving average.)

A small group of five stocks,

Citrix Systems

(CTXS) - Get Report

,

Wind River Systems

(WIND)

,

Puma Technology

(PUMA)

, Cable & Wireless and

America Online

(AOL)

, raises more concern. These issues all approached the 200-day moving average, but didn't fall below it. Any further decline would raise a red flag for me since it could mean that the stocks are trapped at a very low level for a long time.

The two stocks that worry me most on a technical basis are

Commerce One

(CMRC)

, which kissed its 200-day moving average on March 31, and

Global Crossing

(GBLX)

, which is currently trading well below its 200-day moving average of 41 and change. Judging from the charts alone, these two stocks are going to face a lot of resistance in their comebacks.

More Than Charts

I wouldn't use charts like these in isolation, however. Fundamental events such as a big earnings surprise or a huge miss can turn a pattern around, especially when the pattern is so short-term and shaky. A falling price for Global Crossing may actually prompt a takeover by an international telecom company, something that has been an off-again/on-again rumor for months. For me, even a chart as ugly as that of Commerce One only flags the stock for more detailed fundamental study. (In my next column, I'll be taking a look at the business-to-business commerce sector, trying to calculate some valuations for stocks like Commerce One,

Ariba

(ARBA)

,

i2 Technologies

(ITWO)

and

Manugistics Group

(MANU) - Get Report

.

So far, I've looked for absolute fundamental or technical decay that would signal a sell. In a volatile market rife, I hope, with bargains, you should also be looking for relative sell signals. In theory, a portfolio should always hold the 10 or 20 (or 24, in my case) best stocks available. How do we decide which stocks are the best? We calculate a potential return for each over our holding period, and then adjust that return for risk.

A market event like the recent technology rout scrambles all those calculated potential returns. Stocks that before didn't show enough potential to make the cut may well deserve a place on the list now that they've fallen 30% or 40%. The potential return for stocks that have been rock solid during the selloff may have remained exactly the same, but may have fallen relatively behind the potential of one of those battered bargains.

For example, I haven't changed my projected return for

Schlumberger

(SLB) - Get Report

at all. I still believe the stock will hit 84 by September. And there's certainly nothing wrong with the 14% gain, implied in its recent price near 74, especially considering the low risk.

But that potential 14% return pales beside the potential 61% return you'd get from

CheckFree Holdings

(CKFR)

, or the 82% from

Broadvision

(BVSN) - Get Report

or the 83% from

GlobeSpan

(GSPN)

, if those stocks can return to their 52-week highs by next September. That's a big "if" I grant you, and not one that I'm willing to simply assume, either.

Staying Methodical

But I'm pretty sure that after this technology debacle I'll find a beaten-down technology stock that can beat Schlumberger's potential 14% return by September. Of course, I'm not absolutely positive that Schlumberger is my holding with the lowest potential, nor that I shouldn't be looking to sell two or three stocks instead of just one. I'd like to raise cash quickly, so I can jump at a bargain or two. But remembering my own "do no harm" advice, I'm not going to rush into any sale.

Instead, I'm going to take a very methodical approach to raising cash and buying bargains. I think this market will give me the time to do this as it licks the major wounds inflicted in the last week. And I think this kind of top-to-bottom portfolio and market review is a good exercise to perform before the summer season, the traditional time of the technology slump.

Today, as part of this column, I've calculated new target prices for each Jubak's Picks so I can see which stocks have the least potential in my opinion. You'll find those new targets on the linked Jubak's Picks page.

In Tuesday's column, I'm going to take a look at the B2B e-commerce sector. Should I really dump Commerce One on any rally, or was that an overreaction in the heat of a crash? Are there any bargains in the sector as a whole, or should investors just write off the entire sector for a while?

And in next Friday's column, I'll cast my net still wider and shift through the universe of the Future 50 to name the 10 stocks in that long-term portfolio most worth buying now.

That should give me something to think about besides my lack of cash, while I figure out where to raise some, and how to spend it.

Jim Jubak is senior markets editor for MSN MoneyCentral. At the time of publication, he owned or controlled shares in the following equities mentioned in this column: America Online, Cisco Systems, Citrix Systems, Commerce One, E*Trade Group, Global Crossing, JDS Uniphase, Mercury Interactive, Network Appliance, PMC-Sierra, Puma Technology, SDL, Texas Instruments, and Wind River Systems. Holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Jubak welcomes your feedback at

mctsc@microsoft.com.

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