It's a "Moneyball" market for tech stocks right now.
That's how Michael Robinson – our resident tech expert and the editor of the Radical Technology Profits advisory service – launched into our private briefing earlier this month.
Needless to say, I was intrigued.
"Moneyball," for those of you who aren't familiar with the term, was the name Oakland A's GM Billy Beane gave to his sabermetric-based efforts to rebuild a contending baseball team – without the benefit of a contending-baseball-team budget.
Beane's experience was captured in the Michael Lewis best-seller "Moneyball." And the book was made into a 2011 movie of the same name that starred Brad Pitt.
As the story goes, Beane realized that the overall "market" he had to work within had been badly distorted by big-spending teams like the New York Yankees (the team had just snarfed his All Star first baseman, Jason Giambi, with a seven-year deal worth $120 million).
To remain competitive, Beane knew he needed to change his thinking. Instead of looking for sluggers with gaudy homerun and RBI numbers, he set his sights on players with high on-base percentages.
In other words, Beane figured his team would score just as often – and probably more – by going after higher-percentage walks, singles and doubles than they would playing for the proverbial "big inning" … and hoping for the grand-slam homer.
Michael's "Moneyball" analogy is pretty clever. He understands that the stock market is distorted just like the baseball market, albeit by different factors.
Settling for Singles and Doubles
With the stock market, those distortions are caused by abnormally low interest rates (the "real" rate of return here in the U.S. market is negative), as well as never-before-seen levels of global government debt. Those distortions have imbued investors with a hair-trigger mindset.
"Bill, what I'm seeing is that this has become very much a "Moneyball' market – particularly for tech stocks," Michael told me during our chat. "I can't tell you how many times that I've seen this of late: Stocks with great charts can crash in a single day, while stocks with lousy charts will run way up in that same short timeframe."
Against this backdrop, Michael says that investors need to think like Oakland's Beane.
Don't hold out for the grand-slam returns. Settle for singles and doubles. If you reap a big gain in an abbreviated holding period, don't get greedy: Give serious thought to taking the any gift that the market has just given you by cashing out some or all of that profit.
"When you're in a situation when you have a 20% or 25% return – especially when that profit comes in a very short time period – make sure you lock in some of all of that profit by taking money off the table," Michael explained. "Just remember: With the way the market is behaving right now, those profits can disappear in no time at all."
Private Briefing subscribers saw this happen with Web.com Group Inc. (Nasdaq: WWWW), which Michael recommended the company back on June 5 at $15.68 a share. In the next 30 days, it ran up as high as $19.72 – for a 26% return – before selling off and trading 10% below the recommendation price in late July.
The market has suddenly recognized Web.com's innate value: The stock has rallied and is now 14% above where Michael recommended it.
Back in late April, the highly shorted shares of Cirrus dropped about 13% in a matter of days because of fears the company's earnings would be soft. However, a strong earnings report from Apple sent Cirrus shares up 9.5% in one trading session. A day later, a better-than-expected revenue number caused the chipmaker's stock to jump another 18.6% in one day.
The upshot: Just three days after Cirrus Logic shares bottomed out at $20.80 because of earnings fears, a celebration of strong financial performance sent the shares all the way up to $27.87 – a 34% gain.
The events from the end of July demonstrate that this unpredictability didn't end in April.
After reporting what can only be described as weak earnings late on July 30th, Cirrus rocketed 23% the next day because of bullishness about Apple's prospects for the rest of this year.
"As I see it, Bill, what this tells you is that the slightest change in the perception of a company's fundamentals can have an enormous impact on its stock price" – much more than we usually see, Michael said.
An October to Remember?
He believes this "unsettling summer" is going to continue – for the rest of this month, and into mid-September. During this stretch, stocks that disappoint will be subject to big downdrafts, which is why Michael is advocating aggressive profit-taking during this near-term period.
"An amazing number of stocks did really well until early summer – then they sold off sharply," he said. "I spend each weekend poring over stock charts. And they mirror each other. Even Apple has yet to get back to where it was in April. What you have here is a very unsettling summer: Shoot up, correct, shoot up, correct … it's unnerving."
This could change in mid- to late September, however.
"The way things are shaping up, I think we could be in for a strong run in the fall," Michael said. "Tech stocks in particular could start to turn in mid-September or as late as mid-October and then head higher for a number of months. The whole "tech ecosystem' should start to do really well. After Labor Day you have back-to-school sales, and then the seasonal sales and holiday sales you see starting in the fall. Sales of tablets and phones will pick up. And that will be good for chips, software, accessories."
Maybe after he starts to see a lot less volatility and a lot more predictability Michael will tell folks that it's okay to occasionally swing for the fences.
Until that happens, he's advising investors to embrace the "Moneyball" mindset and take profits where you see them.
During our conversation, Michael also told me about a biotech he's uncovered that has developed a breakthrough treatment for spinal-cord injuries. The upside is huge. If you'd like to learn more click here.
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About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.