Account 16

This is the current allocation in account #16. It is owned by Jane Stewart, but for reasons of anonymity, we'll call her Ms. Smith.
Ms. Smith doesn't know that her account is the most aggressive of the ones we trade. All she knows is that she makes about 25% a year. There isn't a lot of capital in this account, so we trade it more aggressively than any other. Our other accounts have shares of CREE and MRVL, for reasons of diversification.

VECO

Click chart to enlarge

What a tough call. VECO is at the top of its channel, and thereby triggers a short term sell in our book. On the other hand, the fundamentals make VECO look cheap, even at $43!

Here's the math...

If VECO grows at a conservative 20% a year, then we should expect its P/E to be approx 25, assuming a PEG ratio of about 1.2.

VECO's current EPS is 88 cents. This would make a fair price for VECO of .88(25) = $22.

Using its current EPS, VECO looks expensive. But if you look ahead a quarter or two, you'll see a whole different picture. In June, the 88 cents becomes $1.57. By December, it becomes $2.34.

Using the June estimate, a fair price for a share of VECO would be 1.57(25) = $39. So it's not overvalued at all. Looking out to December, we calculate a fair price of 2.34(25) = $59.

If VECO were to go from its current price of $43 to a price of $59 by December, that would be a 33% increase in just 9 months. We fully expect that VECO will reach $59, and perhaps even trade in the 80's by the end of the year.

So do you sell now because the technicals tell you to lighten up on the shares? Or do you hold because the fundamentals are telling you to buy more? We cannot answer this, as it's up to an individual's investing style (tolerance for risk). As for us, we're not heavily invested to begin with, so there's no impetus to run for the exits. If anything, we're looking to add to our LED positions. If we get a huge rally to impossible heights well above the top of the channel, we'll lighten up on the shares. In the meantime, though, we're going to let the fundamentals be our guide. If we were very heavily invested in VECO, we would lighten up here.

It should be noted that CREE and AIXG have higher P/E's than VECO, and a surge to the upside would therefore be more of a reason to sell those names. We're willing to hold a stock that is valued for the next quarter's EPS, but not one that is valued 9 to 12 months out. We continue to see value in MRVL, as well as strong technicals.

Diversification

Diversification is preached by most "professional" money managers. For the record, it is not right to use the term "professional" in conjunction with the term "money manager" unless the word "professional" is in quotes. Although our dealings with Wall Street have unwillingly forced us to accept that crime pays as long as it's white collar crime, we have a hard time accepting that any criminal deserves to be called a "professional". The crazy part of it all is that if they name their firm "Bradstreet Wharton Wellington Financial, LLC", somehow it makes them feel as if what they're doing is "professional". Some of the more brainwashed among them have even been able to convince themselves that what they do is legal. But we digress.
Here at "Snotwheel Financial", our advice is different. If you look into studies about diversification, you'll find that owning just 3 or 4 stocks removes such a large component of the risk of not being diversified, that there's really no need to own more than that. We don't believe in diversifying amongst sectors at all. We like to buy 3 or 4 stocks in the hot sector and that's it. The reason we diversify within the sector is to remove company specific risk, which is always present. These risks vary from uncontrollable events such as natural disasters to creative accounting. The reason most "professional" money managers own dozens of stocks is because they have little choice. They have billions of dollars to invest, and do not want to own more than 10% of any given company. If you're a small investor, you're not bound by these requirements, and can therefore beat the "professionals" at their own game.

VECO

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VECO has been trading sideways for the past several months. This may be discouraging to investors who meanwhile watched CREE rocket to new highs. But we're not in the least bit discouraged by VECO's recent performance. We see a perfectly healthy chart that needed to rest after a long run from early Nov to early Jan. VECO is wedging itself into an ascending triangle, an extremely bullish formation marked by higher lows and horizontal resistance. (see lines drawn on chart above).

All of this is happening within the trend channel, above an uptrending moving average, and with the backdrop of a relatively bullish broader market. This all points to an impending breakout for VECO to new all-time highs. We're early to point this out, as the stock is likely to struggle for a few days at resistance (+/-38) before making its move. Not all breakouts from ascending triangles are the same. A lot of its power is derived from the action of the broader market. If VECO can climb to 38, then have the market drop for a few sessions while VECO manages to tread water, then the rebound in the broader market will translate into a powerful breakout for VECO. Conversely, if VECO begins to break out and the market then decides to sell off for a few sessions, VECO's breakout may be thwarted. Regardless, it's important to note that with each passing day, this chart is bottling up more and more potential energy. We feel that it's only a matter of time before it reaches 40, which is more than 10% higher than its current price. With this one trade alone, an investor could statistically outpace the yearly performance of 87.9% of mutual fund managers.

Cree's Channel

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With all of these growth stocks, there comes a time when it gets hard to even draw a channel on them because their charts start to look parabolic. If you switch from an arithmetic chart to a logarithmic chart, you can straighten the chart out and see it more clearly. The strongest stocks look parabolic even on a log chart. Any stock that looks parabolic on a log chart is a strong sell in our opinion. No company can sustain that kind of growth. The numbers just get too big.

CREE has not gone parabolic on a log chart yet, but has definitely done it on an arithmetic chart. We can only draw a trend channel going back about 5 months on an arithmetic chart of CREE, as pictured above. Regardless of how you draw the channel, you have to admit that CREE is a tempting sell. If we were heavily invested, we'd be lightening up a bit on these shares. Considering we're only partially invested, we're going to ride it out. Based on the trend channel, CREE could reach 75 before needing any kind of a pullback. At 75, we'd be very tempted to take some off the table in an attempt to repurchase those shares at a lower price within a week or so. There's only so far a stock can go before people start taking some profits, and CREE is definitely in the nosebleed section at the moment. We'd feel more comfortable with it if it were just running parallel along the yellow line. It's a double-edged sword because we like to see the relative strength, but at the same time we don't want the stock to overheat out of fear that a sharp drop could rattle investor confidence. The best thing CREE could do is go sideways for a month while the market goes lower. That would take a lot of the risk out of the picture.