Click chart to enlargeThis chart doesn't show the damage yet, but the fertilizers are expected to open considerably lower tomorrow after MOS's less than stellar report tonight. In after hours, the stock is down over $12 to $56.
When these stocks broke their trendlines and moving averages back in July/August, we said they were all headed to $0. Truth be told, it was an easy call to make. It is now coming true, one step at a time. When a sector (or an individual stock) breaks down, it's over.
Valuations such as P/E ratios and PEG's are useful on the way up because they compare risk levels between like securities. They are relative measures, not intrinsic ones, making them completely and entirely useless on the way down. For downtrending stocks, a different valuation model is used, which is called "intrinsic value".
Unfortunately for most stocks, their intrinsic value (what they're actually worth divided by their number of outstanding shares) is rarely more than $1. In the case of MOS, we estimate it's approximate intrinsic value to be in the ballpark of 14 cents per share. Ok, it's not $0, but as far as your portfolio is concerned, it might as well be.
The reason most stocks are intrinsically worth less than $1 has nothing to do with the weak economy. It has to do with the staggering number of outstanding shares they create today. In our opinion, the market functioned much better in decades past. This was because back then, a share of stock actually had some real intrinsic value. A share of CocaCola (KO) may have cost you $4, but at least $1.75 of that represented the value of the company's real estate, etc.
If you are a value investor today, we suggest you look for value in the real estate market instead of wasting your time in the stock market. Stocks only have relative value, and are solely based on momentum. When the momentum is gone, $0 is the next stop in all cases. On that note, we urge you to look at a chart of once-powerful CROX, and we would like to reiterate that our current public candidate for bankruptcy is GM.
26 comments:
Snot, I think the agriculture business is a little different than the flip-flop business.
And DDM has the same looking chart, so I guess the DOW is going to $0
Totally different, but the stocks are the same. You cannot compare a company to its chart, unless you want to lose big.
The indexes are the only thing to be buying in this market. Even they must be bought carefully. Stocks are a minefield right now. The odds are better in Vegas, and you'll have more fun there.
You are a fucking moron. Really. A moron. Truly stupid. Perhaps even retarded.
We have to assume that you own MOS. Good call. We may be stupid, maybe even retarded, but we're making money this year.
Snot,
Your calls are spot on!
Please keep the post comming.
Great stuff
Calling him a moron is stupid idiot. Just disagree. Even Snot will tell you that MOS will bounce giving you the opportunity to get out.
How do you figure that the intrinsic value of a stock is only pennies on the dollar when the price to earnings is commonly a 10 to 1 or 20 to 1 ratio. Also, many stocks pay 2% or 6% or even more in dividends each year. A company that is in business and operating well rather than going bankrupt is worth more than the sum total of its property, because it has a product (patents, services, commodities, etc.) to offer and it is making money. Sometimes we see one business buy out another business and shareholders sometimes get a premium price on their stock rather than 14 cents per $67 a share.
P.S. - MOS reported great earnings, but they are being trashed in afterhours due to the forecast for coming quarters. It is not a good time to be in commodities, that's for sure.
MOS's p/e was low when it was $100 per share. Now it's lower. It will be even lower when it's trading in the 40's. We're the first to admit it's due for a bounce, but it's locked in a downtrend and p/e's don't matter on the way down.
We've been trading stocks for over 20 years, and have tried every different approach to the market you can imagine. If you're confident in your fundamental analysis and it works for you, then good for you. But we've seen thousands of people over the years try to crunch the numbers and come up with a price they think a stock is worth, only to watch it go much, much lower. The real fundamental investors are not interested in stocks like MOS. They are feretting out the smaller, lesser known names that are truly trading at a value relative to tangible assets. This notion of applying a formula to a company's intellectual properties or growth model, etc is a recipe for disaster. Maybe CROX is not the right comparison, but don't you think fundamental investors who thought it was cheap after a 80% slide are scratching their heads now that it's down over 95%?
There are too many variables to allow P/E ratios and such to be accurate predictors of a stock's value. Not only is the "E" completely variable (it can even go negative), but P/E levels themselves are negotiable. Ever hear of multiple compression? Combine a lower "E" than expected, and compress that multiple a little, and POOF, half your "value" is gone. We make over 50% a year by trading based primarily on TA. There's more to it than that. We were actually pounding the table on the ferts when they were in an uptrend. Somewhere in this blog is a pie chart of our portfolio showing how heavily we were trading the ferts. We made a killing on them. But we also know when to bail, which is something die hard fundamentalists have a lot of trouble with. This is because they fall in love with a stock and cannot let it go. The lower it goes, the more they buy. It's financial suicide. We learned many years ago to avoid downtrending stocks completely, no matter how "cheap" they appear, and it is still something we strongly advise on this blog. Good luck to you -Snot (don't judge us by name, we cannot reveal our fund here)
I take great solace in the Zero price prediction. A tongue-in-cheek buy signal!
Thanks!
You are assuming that anyone who dares to question your claim that MOS has a value of only 14 cents and that the same is true in a similar manner for all stocks, that the questioner must own MOS and be giving a knee jerk reaction. Sorry to disappoint you. I do not know about the other posters here, but I do not own MOS or any other fertilizer company -- never have, in fact, except for a couple of day trades long ago. I do not have any materials ETFs either or MOO. Good luck to you too.
Ed
BTW - When MOS crashed afterhours, POT, AGU, and CF followed, to a lesser degree. Fertilizer stocks will be seriously ugly tomorrow.
Ed, you seem like a very smart and reasonable person. Please be aware that we realize that MOS is worth a lot more than 14 cents. However, from $162 all the way down to $30 (or wherever it bottoms out), the safest mentality to maintain for the health of one's bottom line is that the stock is going to 14 cents, or 0.
This helps people avoid falling into the trap of buying "cheap" shares at 150, 140, 130... 60, 50... you get the idea. A falling knife is just that. Our education in the market does not come from an accredited finance school, it comes from the school of hard knocks. Some really hard knocks. We've learned to alter our psychology to be in tune with the reality of how stocks move. We feel strongly that any stock, no matter how "good", is toxic when locked in a downtrend. No valuation model can stop a stock in freefall.
We realize how ludicrous it is to say that MOS is worth 14 cents, and to compare it to CROX. We didn't think that anyone would take us seriously. But until it bottoms out, goes sideways for a while, and eventually turns around, it is toxic. The correct mentality to have when dealing with a stock in MOS's current position is that it is going to zero. It's the safest mindset to have. Good luck with your trading -Snot.
Dear snotwheel.
I am astonished (but not entirely surprised).
I am a bit worried about a couple of trades I have put on in my girlfriend's 401K (small entries so far). I put on an energy services and basic materials position when they had come down about 30-35% in that 6-week period and were at a possible turning point at the low side of the uptrend channel (as well as gold when it was at its cheapest).
So basically I should get out of those trades on the first upthrust, am I right? And then just sit and wait for a bottom and get on another trade until then?
In these conditions I am trading my own account in some speculative stocks that HAVE been beaten down to $1.00 or pennies (ABK, SCA, etc), and the other trades are leveraged ETFs that track indexes or sectorss, so I agree with you there.
Hi Snot!
What do you think about Apple? Is this the same story?
It's funny that you'd trade your GF's account differently than your own. We cannot comment on the penny stocks (we think they're all toxic to a portfolio).
As for the current trades, if you're trying to swim upstream (go long in a bear market), you should draw a downtrending channel on the charts of the stocks you own. It's a very dangerous game, but theoretically you could buy at the bottom and sell at the top of the channel. We do this with the indexes, but never buy individual stocks that are downtrending.
We do recommend selling when they rally to the tops of these channels. If they break out and rally after you sell, you aren't missing much. They will pull back and allow you to enter their new uptrend. More likely, they drop very quickly from the top of the channel. (see MOS on 8-28 and 9-22 are examples of this)
So the risk/reward ratio favors selling the rallies in bear markets. If there were a formula to accurately calculate risk/reward ratios, it would demand that you sell at the top of the channel because the risk of holding on for further gains far outweighs the potential reward.
In this way, the stock market is like playing poker, and you can improve your poker game dramatically by always calculating the odds before you bet.
AAPL's chart is horrible. If you look at a long term chart (going back to 2004), it has even broken its long term trendline. It will likely bounce soon, as it's been hit unreasonably hard lately.
For whatever reason, AAPL is one of those stocks that has such a following, that it doesn't play by the same rules as other stocks.
It doesn't mean it won't get slammed if the market crashes. But it will be one of the first to rebound and rally strongly when the market eventually does come back. AAPL has many, many loyal followers and shareholders. It is in a category of its own in that sense. Despite this added level of security, we still do not want to own any individual stock in a bear market.
Thanks. I have sold it at 180. :)
Dear Snot,
You have been saying that all stocks go to zero and you have been using GM and CROX as your prime examples -- not really a balanced pair of examples -- for so long that I did take you literally and therefore, not seriously. Now I get it. You are using extreme overstatement and exaggeration in order to keep emotion out of the trade. In that way you don't allow the following to kick into gear: "These fertilizers have been great in the past. They'll be great again." "I love LDK. It is just a conspiracy that is holding it down, but when Peng finishes that factory, it is going to $100 overnight." But I, for one, could not take your argument seriously, because I took you literally. If you had just said, "MOS is stage 4. Stay away until the chart forms a bottom and until it gives back the first 25% of the channel for a new uptrend (which may take a year or two to happen)", then I would have said, "Amen."
Personally, half my money is in bonds and the equities are in large caps with very, very limited exposure to energy and financials and none to fertilizers, not that all of them are doing great.
For the next year, I'm thinking of long WMT, TGT, MO, BUD, MCD, PG, JNJ and short materials. How does that sound.
We're back in DDM at 53. It's like Dejavu all over again.
We feel naked without at least some DDM. Looking to add at 51.
Anon,
You put it better than we could. It's a psychological game. Assuming a stock is going to $0 relieves you of all the conspiracy theories and fundamental recalculations... all the way down.
But we are serious that once stocks are forgotten by the momo players, they change hands to the value players who keep them locked in a sideways / modest uptrend for decades. They are never the same. Look at DRYS (yet another bad example?) After its huge run in mid 2007, it's just been a disaster. There are bounces, sure, but the sustained growth phase is over.
Your allocation is good. Not sure about the picks for next year because we don't follow individual stocks too closely unless they are in an uptrend. We don't look out that far, but if it works for you, then amen.
Wow, there goes our alarm... MOS at 46. Fun to watch when you don't own:)
Good luck -Snot
Hi Snot,
Thanks for your sharing your valuable experience. Looking at AA, it is a basic materals stock that trading at multi-year low. Given it is part of the Dow component, do you think its trading trench may be different from the AG sector like Mos or CF?
Thanks,
Edward
Just bought more DDM at 50.9
AA is a safer bet that the ferts for sure. The ferts were mostly high flying momo stocks built on hype. AA is a better long term bet. It also appears that it is seriously due for a very tradable bounce. It's just completed an S-curve drop which usually leads up to a rally. Over the very short term, it will likely moce higher. That said, it is a downtrending stock in a bear market. Why not wait until the market puts in a real bottom and AA stops plunging before considering buying into it? No one knows where the bottom is. No matter how skilled you are at fundamental analysis, it's impossible to pick a bottom. It's only after a stock (or the market) begins a new uptrend that a bottom can be called. And it's not to late to buy in at that time, you just pay a little more for the added security. The right time to buy AA may not be for many months.
Yes Mr. Snot you appear to be correct in your "the stock is going to zero theory" I did not originally believe this as a novice to the market. In my first 8 months of trading, the trades I choose on my own have almost always turned out bad. The money I did make was mostly on your tips or following your rules. My very dumbest mistake was buying this RIO stock. I quickly fell behind on it several thousand dollars and did not want to sell at that point. I tried to average down a bit but never had enough money or enough of a bounce to make it work. So I held and held, and yesterday I got my first margin call. The stock has lost about 55% since I bought. RIO is now in a pissing contest with China over a price increase and China has told them to f-off. In addition along the way they sold some additional shares and diluted the share price. So now I am many thousands down and selling stuff to cover my margin calls. It does indeed look like 0 is the next stop for this stock. This has been a very hard and painful lesson. Mostly because I have no one to blame but myself. It is actually very embarrassing.I appreciate your thoughts on the blog and have pledged a new to stop doing very stupid expensive things....:(
Well, I wouldn't say I've traded my own stuff differently than my girlfriend's. I daytrade and swing trade though, and her account is a 401K so it doesn't allow for as much fiddling as my trading accounts. I bought and sold DGP twice after 30-35% moves (last two bottoms to the last two tops), and I have TRIED to bottom pick DIG and UYM, but as you have explained, a broken trend thats been piled on for 5 years may just unwind to zero (whether it be figuratively or literally). I guess I feel even sillier because I was piling on the short side of commodities and oil at the top, calling for their annihilation. Then I started liking them when they approached the bottom trend line, even though I KNEW it looked precarious by the texture of how it fell, and how fast it fell. I REALLY should have known better. When the trend broke down I rationalized that their fundamentals with "catch them", and if people paid that much for US Steel and Alcoa 6 weeks ago they'd pay 30% less now. I just didn't understand, but I will never forget this lesson. To my credit, I bought VERY few shares on the way down, NEVER loaded up and dug in my heels. My GFs account I had set to contribute 20% to energy/20% materials/20% nat gas (recently) and put only SOME money into those, ASSUMING I might be wrong about them finding support, so I could buy more lower. NOW I realize I fell into the same rationalizing folly you described with MOSAIC today. So at least I didn't go down with the ship. I will lighten up her materials/energy to nearly nothing on the next pullback (countertrend rally). I don't feel I have to liquidate on a day like today, I'd rather wait like last time I lightened her after a nice 3 day rally that took it nearly back to my first entry.
Do you think its a mistake to leave some of her future contributions going to these though, as it is a small trickle or is that just as silly as leaving a sum of money in a downtrending fund? Whats the philosophy of making small contributions to downtrending funds even if you don't let a large sum sit in one?
I understand that its a philosophical thing where you must just look away from it and wait til it SHOWS you the bottom.
Also, the penny stocks I do have are in REALLY small shares. Like 250 shares at a time. I know what you mean by them being toxic though so I am trying to break myself of the silly habit, but they are SO fun! ABK was a 10-bagger from its lows. I never let a large position ride on a penny stock, they literally are odds and ends and most have between $200 and $600 in any penny stock.
Post a Comment