Greedy When Fearful

Note: This applies to my limited interest in trading, not investing

Peter Lynch describes buying a plunging stock as trying to catch a falling knife. I know exactly what he’s talking about as I’ve bought stocks on their way down to zero. I was hoping for a recovery, like in the case of my five-bagger with Ford (F), only to be greeted with bankruptcy. For every Ford I find I can have four losers and still break even. Not bad. But, these losers can take years to turn around (like my current trade with National Bank Of Greece (NBG)) and take nerves of steel.

I’ve got a new strategy I would like to try for my trades (I still love buying falling stocks for my 30 year investments). Buying The Right Of The V is an attempt to buy a recovery story near the beginning of its recovery. The advantage of buying a stock on its way down is its always on your radar. When good/bad news hits the stock, you know, because the stock will swing in double-digit percentages. With this new strategy, I’ve created a watch list called “Bankruptcy Watch.” In this list, I keep track of turnaround stories I’m interested in. The trick here is when a stock gets hammered, I edit the cost basis on my watch list as if I were doubling down on the stock. If a $5 stock rally’s 50% to $7.50, that’s a huge move and probably means the fundamentals have improved. If it was on my watch list at $10, it would look like a 25% loss. A loss might slip under my radar, but, a 50% gain? I won’t miss that. Adjusting the “virtual cost basis” on the way down is a crucial component to this strategy. Another crucial component is to find out what caused the massive move. I’m waiting for the moment the fundamentals change. Stock price alone won’t tell you this, but it’s a great alarm system.

**ALERT** **ALERT** SVU IS LESS BAD THAN IT WAS A YEAR AGO **ALERT** **ALERT**

I’m trying this strategy today with the hated, worst-of-breed discount grocer, SuperValu Inc. (SVU). You probably know them as Albertsons, Cub Foods, Jewel-Osco, Save-A-Lot, Shoppers, or Acme. Since 2007 their sales have been on a steady decline, and their debt increased to a massive 7.4 billion. The market has punished SVU with a 80%+ decline which is why it’s been on my “Bankruptcy Watch” list for the past 8 months. But, I think the stock bottomed in January because things are getting better. SVU beat analysts’ expectations and gave positive 2011 guidance with their latest quarter. They are paying down another 500 million in debt with their improved cash flow. SVU is less bad than it was a year ago and was rewarded with 55% increase in share price since it’s January bottom. Motley Fool Hidden Gems analyst Seth Jayson 8 months ago mentioned this story and its been on my radar ever since. He has recommended it and purchased it three times already for his Hidden Gems service. I have been watching and waiting for that quarter that signals SVU is off life support and ready to fight. The one major disadvantage of waiting for the company to improve is you miss the bottom and some of it’s easy money. But, Seth Jayson is a brilliant analyst, and extremely conservative. He thinks SVU can reach at least $16-$20 a share by just becoming mediocre. I agree with his logic.

Even though I missed the first 55%, I think I can still land a double-bagger trade here with less risk because the fundamentals are finally starting to improve after 4 years of pain. I’ll be selling SVU after a double. I typically avoid grocers like the plague and only like this company as a recovery play. That’s the strategy of Buying The Right Of The V.

Monty