okay hello everybody and welcome to
Investing with IBD
sponsored by MarketSmith today is
september 2nd
2020 i'm your host Irusha Peiris and
today we have Steve Birch
back on the show Steve it's the CEO of
O'Neill Global Advisors
and also the CEO of William O'Neill and
Company
thanks for being here Steve thanks
Irusha on today's podcast we're going to
talk about the current markets
we will go over some of our new o'neill
quantitative strategies and then we will
end the episode with a few current ideas
uh so Steve let's get this episode
started by going
into your background you've been with
the company now the o'neill organization
for over 20 years why don't you uh just
briefly
walk us through uh how you got into
investing and then how you ended up as
CEO of O'Neill Global Advisors
great thanks Irusha well i'll i'll start
by giving you a disclaimer
if i talk about any stocks today it's
possible that i do own those
that OGA owns them William O'Neil may own
those just full disclaimer
and we will go over some later today and
i i want you to know that
so yeah um to your audience um i've been
on this podcast before with Scott
O'Neill
um i'll give you a little background on
myself so we have some context of where
i'm coming from and
and my work with the O'Neill
organization i've been investing for
over 40 years
i started out as an analyst in 1995 for
bill o'neil
prior to that i worked as a fundamental
commodities analyst doing a lot of
modeling on you know pork bellies uh
cattle corn crop
uh you know orange acreage um
when i moved to los angeles there was an
ad in the la times
and they were looking for a fundamental
research analyst to
write up growth stocks for bill so i
replied to that ad
i'd also had some experience as a
technical stock
trader working on wall street prior to
doing the commodity work
so when i came to o'neill i was really
intrigued that bill used both technicals
and fundamentals
and he used them to really you know find
these great growth names so it really
uh resonated with me um
in 2007 uh and i worked as a pm i was an
analyst first and i'd say about two
years in
uh bill gave me a sleeve of capital to
manage
uh so i experienced the 98.99 market
um i experienced the bear market after
that
some of the big winners that we bought
um you know qualcomm
aol um uh yahoo in in 99
uh schwab um ebay apple
uh you know facebook google netflix all
these right these are all i've watched
us
own those trade those i've traded them
um
but in 2007 you know bill
asked me to be the president of william
o'neill which was our legacy company
and we had a lot of great products there
that needed to be modernized
uh and one of the first projects you'll
find this interesting Irusha the
the first project that i was involved in
was to
redesign a product called daily graphs
so i'm going to give you a trivia
question okay
what what do these words all have in
common
with MarketSmith captro
cap via market trove
and spindle any idea what those
how they're related to the word
MarketSmith
i i the the thing that comes to mind is
a kind of a treasure trove of
information or
stock information okay yeah that's true
about market trove yeah
well it's an interesting little back
story when we when we took that product
bill had designed daily graphs
in the 1970s and he designed it
specifically for
retail customers right and
it was run on mainframe and it was
printed
and we mailed the database books out
every week
and so we decided we're gonna we're
gonna reinvent this product and we're
gonna give it a new name
so we found this firm up in sausalito
called lexicon
fascinating company and they had named
they came up with the name pentium
swiffer
silverlight these the linguists at this
shop were just amazing so we hired this
firm and said we've got this
analysis tool we've got this product
that people love
and bill designed it and it's going to
go online it's going to have this really
cool interface and we showed them
a lot of the uh you know the graphics of
what MarketSmith looks like today
and they came up with market smiths so
those names were the finalists
and uh you know i'm so glad we didn't
use spindle
yes because we'd be saying welcome to
the spindle podcast
we did like market trove because you're
you're kind of on that like a treasure
trove of information
but uh so yeah a little a little trivia
and it's appropriate that we talk about
that because
you and i were just discussing yesterday
yeah i couldn't believe this
that MarketSmith is almost 10 years old
that's right
next week it's september september 10th
september 10th
yeah it's going to have its 10-year
birthday that is amazing to me it is
it doesn't feel like that long ago i
know i know
so you know it's real it's and i do
appreciate
everybody that has subscribed and has
given great feedback
absolutely because it was a passion to
build it
um we've gotten great reviews and i know
people
uh really enjoy using the tool it's it's
we love it you know i think it was it
was my first big project for bill
and then as you know just to carry on
and finish up about myself
i've been at the firm for 25 years so i
worked directly under bill
i moved into managing william o'neill
uh re creating daily graphs as market
smith
and then we embarked on another journey
where we recreated
this legacy product uh it was called
wanda at the time
now it's called panerai we went global
we had a lot more tools a lot more
sophisticated
analysis for institutional investors and
then we opened up an operation in india
to help us collect our data and do a lot
of our technical development
we opened up an operation in china and
just last year
we opened up a new company called
O'Neill Global Advisors
and that's a very very exciting i want
to spend a little bit of time
talking about what is O'Neill Global
Advisors doing and what kind of
strategies we work on
the research that's going on in that
organization
um but first another little trivia let
me see if i can pull it up on my
computer
i'm going to look here for an article
because we get a lot of questions about
the current market so why don't we talk
about that right now
yeah well look let me uh well first the
cur
we would continue to be in a strong
market for for those of you who are
who are new to this now it's funny steve
we when you're talking yesterday
we were both we knew it was coming but
we were both like you know stunned at
how strong uh
the our portfolios were moving all our
kind of stocks were moving
and it was unusual and and it was kind
of extreme at that point so some kind of
pullback
was coming and of course right when
we're about to record this podcast
it came right i know so you know this is
an interesting
time um you and i have spoken roger it's
very similar to
what happened in 1999 you know there's
this little there's bubbling going on
there there's a lot of
euphoria their evaluations are stretched
and if any of your listeners are you
know i'm sure they're browsing the web
and they're watching television and
they're reading other
other pieces and it can get very
confusing as to well what's going to
happen and where is this going to go
and how long does this thing run
so i want to read a piece and we'll this
will take about a minute
and i have a i have a very large library
of books you know i've been doing this
for 40 years
and um i just stumbled on this i was
looking for something on my computer the
other day and i had this
pdf of an article from
july of 1960 july of 19 before
before when many of your listeners were
born
and the writer of the article was this
gentleman named burton crane who was a
great um
business writer for the new york times
and he
wrote um he was writing about market
excesses
in 1960 in the summer of 1960
and um this is what he says so in a rye
commentary on market excesses
jack dreyfus president of dreyfus fund
points to um and i'm going to pause here
for a minute jack dreyfus you know the
story Irusha and some of our listeners
probably know this
that when bill o'neil uh was trading
back in the 1960s
he had this epiphany where the number
one fund was the dreyfus fund
right and bill was a young guy he was
probably the age of many of your
listeners he was in his 20s
um late 20s probably and he started
thinking how is this guy doing it
this guy dreyfus is just killing it with
his fun so he
he got the holdings of the fund and he
marked up on these charts
where was dreyfuss buying these stocks
and he had this
epiphany where he goes oh my god he's
buying them at new highs
no one ever does that everybody buys the
stocks go down
so he had he realized that jack dreifus
was a chartist and he truly was he was a
very
technically oriented trader but he ran
his fun
jack drivers ran his fund with a partner
who was a was a fundamentalist so they
kind of had
the best of both worlds and jack was
born in alabama
he was a uh you know had a kind of a
rise sense of humor
and uh so i'm going to go on and read
what what jack was saying about the
excesses in 1960. jack says he points to
a nice
little company that's been making
shoelaces
for 40 years and sells at a respectable
six times earnings ratio change the name
he advises from
shoelaces inc to electronic
and silicon firth burners
in today's market the words silicon and
electronic
are worth 15 times earnings
however the real play in this stock
comes from the word firth burners which
no one understands
a word that no one understands entitles
you to double your entire score
therefore we have six times earnings for
the shoelace business
and 15 times earnings for electronics
and silicon
a total of 21 times earnings multiply
this by two for firth burners and we now
have a score of 42 times earnings
for the new company this is simple
anyone can do it
now be sure says mr dreyfus you don't go
near a book on security analysis written
by graham and dodd
these misguided people had the silly
notion that you should study securities
before you buy them graham and dodd for
your listeners were the
the the authors of a great book on value
investing
exactly the bible the bible right nope
dreyfus goes on to say and listen to
this and think about the parallels
in today's market studying securities
can be
fatal while you're studying them they're
apt to double
and by the time you find you wouldn't
have bought them in the first place
they will probably have tripled and
that's what happened in 1960
and what's really interesting is right
after
the commentary from dreyfus
roy neuberger who founded new burger in
berman many people might know that firm
is quoted this is not a good time for an
investment account to have a dis
distorted or very large common stock
position at no time in the past
except in the last year or so if common
stocks been generally
as overvalued in relation to earnings
dividends and business prospects as they
are
at present so what's fascinating to me
is even 60 years ago
people were ringing their hands about oh
my god
um everything's overvalued dreyfus is
making fun of the fact that
there's craziness in these markets
sometimes and there's
human emotion right so you fast forward
today or
or to 1999 as you and i were talking
right you had the internet bubble and if
you had a dot-com
at the end of your name there's
immediate premium attached right
now it's like anybody that's going to
benefit from work from home
or anyone's going to have you know cloud
or sas so
the the import whether you agree or
disagree with this is beside the point
the
the thing to take away is that human
nature is the same
right there's enthusiasm there's emotion
there's optimism
that gets dialed into how prices stocks
are priced
and so our job as technicians
not as fundamentalists but as
technicians is to really understand how
to read the charts
so we can gauge what human psychology is
saying about
you know our disposition to that
particular company or that stock
and are we still in love with it and is
there room to grow and so we'll talk a
little bit later about
about um you know what we do at o'neill
and how we try to
quantify this now steve
now steve what one thing though that uh
you you find out very quickly when
you're investing your own money in the
markets
and even when you're if you're learning
this strategy and trying to learn how to
uh interpret behavioring charts it gets
very very emotional right and and you
lose your discipline
very very quickly i think that's
probably the biggest
challenge we all have is the euphoria
when you're doing well
and then that and then the fear of
missing out like oh i should have bought
more
or i thought it was too high and i sold
it a month ago now what do i do
and it's that um that whipsawing of
emotion like you say that really
undoes many many people it's also really
trip tricky Irusha because
um you know really understanding and
following
a rules-based approach and i know you've
talked and people have read
investors.com about bill's concept of
follow-through days and distribution
days
well it takes quite a bit of discipline
to just tune out all the contradictory
noise and follow those signals
that's true right i mean when you're in
a bull market and you're getting
distribution
and it's really kind of telling you
clearly that
the market is having trouble going
higher and you know institutions are
unloading their names and installing and
we don't know if it's going to plunge
it's not we're not trying to forecast
the magnitude
but we are picking up that there's a
change in character
right well i mean i think february is a
perfect example of that
right we didn't know exactly i mean we
knew that yeah that that the the
coronavirus is out there and china had
it
uh but we didn't know how bad or how bad
it could get
right but we were interpreting the
market right and so
so interpreting it day by day week by
week helps you to
put aside your prognostications and your
opinions and just say it is what it is
you know we're getting this distribution
and i don't know and then you'll you'll
like you know you'll respond in kind by
reducing your your exposure to equities
and so one of the things to your point
about the emotions one of the things
that we found
um with with market timing you know your
exposure to equities and with individual
stock selection is
you really often need a rules-based
approach
to overcome that human emotion um
and so i was going to mention at O'Neill
Global Advisors one of the interesting
things that we've done
to really extend bill's legacy is
we've used quantitative systematic
analysis
to come up with strategies that can
implement
things like the follow-through and
distribution concepts
and as a matter of fact i was going to
mention Irusha we have a we designed
this strategy that is a market timing
strategy
and it is simply going along the market
going short the market
or if it gets chopped out chopped up
because of false positives
it sits on the sidelines very similar to
what
we might do as discretionary traders if
we were you know
trying to trade the major trends so
let's hold up there let's just take a
quick break okay and then we'll return
we'll talk more about this strategy
and so the market is in an uptrend a
pretty strong uptrend but
we could have some time off here some
stocks have
gone a little overheated and they may
pull back so just make sure you're
disciplined
but when we return we're going to talk
about these strategies
so we'll be back
i am here with Scott St. Clair Scott's
one of
our senior product coaches at MarketSmith now Scott there are a ton of
publicly traded stocks just on the u.s i
think it's over 5 000
stocks who has the time to go through
all these stocks and find the very best
ones yeah most people don't right so
what you need is a tool like MarketSmith
we have decades of research on
what makes a great winning stock
so we've done all the research for you
so we're going to try to highlight those
specific
stocks with those great data points so
if you're looking for that next great
potential big winner
orange stock ideas button you just click
on it and you've got some of the main
reports
that we use including the growth 250.
yeah and the growth 250
is the first list that i go through on
the weekends
yeah it's the most popular one but there
are others there's a breaking out today
stocks near a pivot
and then the blue dot list right which
is very popular it's going to show you
the stocks with the best relative
strength
so we've done a lot of the work for you
what you have to do is review these
lists
you're going to come up with some of the
best ideas in that current market
environment
perfect MarketSmith saves you time and
makes investment research
that much easier for more information go
to investors.com/podcast2020
Steve bIrch is our guest on Investing
with IBD sponsored by
MarketSmith okay Steve let's continue
this conversation
uh about the new quantitative strategies
uh from O'Neill Global Advisors and
so you mentioned that Bill was a
discretionary manager
and so why did you go more towards this
systematized
approach well you if anyone's read
or met bill or bended the workshops he's
he's often said
you need to have rules right you need to
have rules and we've always believed in
that and it's to
address the emotion that comes into play
and so it's it's really hard to find
another Bill O'Neil i
i've worked as the cio of the family
office the chief investment officer
and i oversee many discretionary traders
and Scott O'Neill and i had a long
conversation about and
you know where do we where do we take
our asset management the internal
running of the money do we try to go
find another Bill O'Neill that
might be out there might not be out
there we have to it's going to be very
hard
if this key man risk with just one
individual like bill
and we had a stable of of of people but
our business has changed right it's
we have we're involved in many many
ventures across the world
and so our risk profile has changed so
we thought well
why don't we look at we've got a great
database big data warehouse
there's this trend towards quantitative
analysis machine learning
uh data science and we need that across
all of our businesses so we said let's
build that out so about five years ago
we started a quantitative group within
the firm
to do research and to really understand
many of these and document all the
things that we
teach and talk about for instance
relative strength rank
as a matter of fact i think russia you
can probably pull this up on your
computer if you look at
our website o'neill global advisors
we have a tab there that allows people
free of charge to go
read our research and you could show you
could open that up and under
we have a report that came out recently
called rs rating
it's all relative now anybody can go to
this site
oneilglobaladvisors.com and read this
report
and it's very very thorough it's very
rigorous it's very statistical
its intended audience is someone in the
institutional or
quantitative space that's really trying
to understand
how to apply some of our proprietary
ratings and rankings and have we
back tested them have we seen that there
really is
al alpha if you use this in your as a
factor in your process
right and so we have an article on
relative strength we have it on new
highs
we have one on uh eps rank and that
that team of data scientists and um an
analyst is going to continually produce
these research reports
but anyone can go and anybody can go to
oneillglobaladvisor.com
under research and these are free for
anybody if they want to check out
yeah i think because that would be
interesting especially for for our
customers
we're always preaching about rs rating
now here
here is a a a paper a white paper
right on this or even new highs we
always talk about new highs so right so
that's
really good and you'll see we do a lot
of our work across the world we
we study the same phenomena in china in
india because we have offices there and
we have
we have customers there and we really
are trying to formalize and understand
these
factors that drive returns now a natural
outgrowth
if you if you have all these discoveries
why are we not investing and we are
and so this year we decided to build
some strategies
and there are ones called chameleon
one's called raven another one's called
timberwolf
as i mentioned chameleon is a market
timing strategy that uses the
follow-through day and distribution
concepts
raven is a strategy that is very very
similar to
what a traditional canceling user would
use you know where it's very bottom-up
stock picking-centric it combines your
rs
your eps your accumulation distribution
with
technical breakouts of certain patterns
but it
but what it does is it actually hedges
Irusha so it'll take
short positions in stocks that are
technically weak
with really poor ratings you know so we
really are
we're really raising the game in terms
of terms of the sophistication of how we
apply our research
by building real trading strategies
around the research
and then we have another one um you and
i were discussing this one the other day
some of your listeners might be familiar
with earning stability
right that's a that's a measurement of
um
how how um stable or variable
are the earnings quarter to quarter so a
firm like procter and gambler visa is
going to have a very low or
stability number in MarketSmith and
they're very consistent they're tried
and true and hopefully
their earnings are growing you have
another firm that's maybe
a young upstart where it's going from no
earnings to positive earnings or maybe
they're kind of cyclical
and they'll have lots of variability in
their earnings we discovered in some of
this quantitative research that there
really is a relationship between stocks
with
high earnings variability and high
earning stability and you can
you can hedge those two universes and
you can extract some alpha by
by running a hedge portfolio between
those we also incorporate some other
proprietary factors to build those
portfolios so that's our
timberwolf strategy so it's really
fascinating stuff i would encourage
people that want to learn more to to
hit the website read the research you
can send us a
request for um us for information about
these
uh these strategies in our research and
we can be more than happy to respond
we have a large team to Irusha does
people don't realize
we just did a count the other day we
have about 55
people working across the globe on
quantitative strategies in some form of
fashion yeah we
that's a lot bigger than i yeah it's
amazing i mean we have data scientists
quant analysts bsas in shanghai
in bangalore in mumbai and here in um
in los angeles all working on a variety
of strategies for those markets
so um so let's talk about
let's let's jump back and talk about uh
because i know everyone's curious
on um current environment stocks
things that are working that are not
working and maybe a learning lesson or
two from
and i and you know me i can go ramble
for you know
i don't know
keep me on keep me on track here
um yeah so well well let me ask you this
question
with uh so obviously this market is is
very very unusual
within it and it's so strong uh we we
we've mentioned the 99 market is there
any other kind of market
out there that reminds you of this
market that
that listeners can go and study and and
uh
maybe get some other stocks to to see
how they behave in those type of
environments yeah the two
the two periods that i can relate to
are the the the go-go years of the 1960s
and bill wrote about this and he made
really his his first fortune there in
the early 60s and 60s in syntax
and syntax is a great example you know
he often talks about that this
for those that don't know the story i
won't go in the whole story but
syntax was the was uh uh offered the
first birth control pill that was widely
adopted not the first they were actually
the second
oh wow it's kind of fascinating you know
you know a lot of times you think uh you
know oh apple was the first
or well not really you know sony came
out with the walkman but apple came out
with the ipod
right so a lot of these great innovators
are not necessarily the first
you know myspace facebook that's true
right
um always remember that right so no but
the the periods that are of interest to
me uh there was a period in this
in the mid 60s 63 to 67
which they called the go-go years and
gogo years was where every growth name
and as jack dreif was
was eluding in 1960 anything that had
some
you know fancy new name that was sort of
hot and
and sexy was moving and attracting lots
of capital and expanding multiples were
seen
all over the market bill had a fund in
67 that was up
like 118 or 120 percent he had like
number one performing fund in that year
in 99 it was kind of the same thing and
and what i
what we're discussing you and i talk
about this and with some of the other
um people at the firm you know in 99 we
had this
end point of y2k
and everyone thought that the world was
going to stop
everything was on mainframes they
weren't coded for four digits
um even at O'Neil we were worried about
that because we had a mainframe
generating all of our our data in our
charts and so that
that coupled with the fact that the
internet was still kind of young
and you had all this growth going on in
the internet you had the cisco's you had
um
you know the qualcomm's you had yet you
had uh yahoo that was in aol
you know clearly there was demand and
i'll say this
here's some of the things that that that
i see going on
when when a company like zoom
pulls their numbers forward that quickly
where they
you know i think on zoom the the highest
quarterly estimate on the street was
maybe 52 cents they come in at
almost double almost double that like 90
92 95
whatever it was when you get when you
get those kind of
massive surprises because of demand
you typically have some secular
wind at your back where there's
something going on that you need to
take us you got to step outside and say
what really is fundamentally changing
here that i'm not aware of
and we've talked often about you know
the internet phenomenon when
there was a world without the internet
that your listeners probably won't
believe but there was
and there was a world without you know
the pc
that was and there was a world prior to
the semiconductor
and bill played fairchild semi you know
the ones that really were making the
first transistor and
and so in hindsight it's so easy to go
oh yeah that's
that must have been the transition and
turning point right but when you're in
the middle of it all it's
really hard to know whether it's truly
secular or not
but um oftentimes you'll see it in a
company's earnings
where you're just absolutely shocked
that they're able to generate those kind
of
sales numbers and they're pulling them
forward meaning they're making
this quarter what we thought they were
gonna they were gonna make a year
uh come a year out they're just it's
just really really accelerating so
i see some parallels there uh zoom is
just one instance
it really remains to be seen whether
we're going to have a continuation of
this work from home
but it is an interesting phenomenon and
it reminds me of
some of the changes that that we've
documented the cell phone the internet
the pc
um you know airline travel bill wrote
about a lot of this these sort of
secular
growth phenomenons that we can all play
um
but let me you and i mentioned you know
we've talked about 99 for people to
study
i was trading in 99 i had an account in
99 it was a
it was probably the best year percent
wise that we've ever had in the firm
we used a lot of leverage and a lot of
concentration
to really really parlay those gains and
so one of the
bits of advice and you and i have talked
about this quite a bit is
the takeaway from 99 is to study climax
tops
right you know you really want to think
about well
what's a climax top well bill wrote
about that and ibd has a lot of good
information on
what are the telltale signs of a stock
going through climatic buying
right i don't i don't have not to go
into all of it but there are
easily uh measurable factors you can
look at
how high they get above their 200 day
what stage based this is
um you know the largest widest weekly
bar or daily bar and so on
you guys can build a little checklist of
like okay
if this happens it might be going
through a climax now what was
interesting in 99 it wasn't just
one stock i mean we had many many stocks
that were doing
this crazy euphoric climatic action
and if you teach yourself how to
recognize that you can
apply that rule and ignore all the
opinions and all the emotion
and really try to book some of this on
the way up rather than
selling it after these stocks have
peaked and now they've corrected
because psychologically i mean it's a
different psychological challenge
selling into a climax right because
you're you're thinking oh you know maybe
i'll
hold on to half the position or i'll
you know i'll just sell 10 percent i
still i'm gonna
you know as an example i've heard people
say i'll never sell tesla
and i and i have to remind them you know
there are a bunch of people that said
they would never sell blackberry
yeah exactly or nokia yeah or motor
blockbuster
or blockbuster so and
and you and i were chatting about this
the other day um
bill made a lot of money in syntax now
here you are you know here you
are in the 1960s with this birth control
pill
and the sexual revolution and you know
all
no one really had anything like this and
there was huge demand for this
and you think oh my god that must have
been a secular winner right
well that stock went up so fast in six
months
that it did peak and even though there
was huge demand it had a
very very stretched valuation and it
corrected
about 70 it's sold off you know
um because well why does that happen
because
people get a little too excited you know
they really are dialing in unsustainable
growth expectations
and so the other thing that i that that
i've been talking to some of the
pms about as we try to gauge like where
are we on this cycle and compared to 99
and we did this in 99 and bill did this
with syntax was
we went through our models and we looked
at not
just well how high did it go you know it
went up x percent
um some go up thousands of percent go up
some go to 300 percent
we really looked at the multiples that
they had at the beginning of their move
at the end of the move and we tried to
use that as a gauge
of investor euphoria so we call this
multiple expansion the PE
so the PE was 50 when it broke out
and then we measured at the very very
peak what was the p when it finally
topped out we go the PE was
you know 120. it went from 50 to 120
more than doubled
um and then we just kind of take that as
a guide and we try to
measure current environment to say well
are we are we seeing all these multiples
expand beyond
historical ranges and if they are maybe
we're in a
topping environment and i'll tell you
you know people are gonna say well are
we i go well
we're not there yet we're not there yet
our models would indicate that there's
still room
for names like Nvidia Tesla believe it
or not
there's still room for stocks like zoom
and
you know how can that be the highest
price the highest price
target on the street is this and they
just got downgraded and all i can say is
in 1999
those stocks blew through every analyst
price target
until it got to the point where the
analysts just gave up and they started
giving
out crazy price targets right absolutely
crazy ones
where they go it doesn't my dcf models
my dividend discount models don't make
any sense i'm just going to pick a
number
because this market only wants
ridiculous price targets right and
that's
that all kind of clustered around when
things were ending
yeah the other thing the other the last
thing to pay so you want to think about
climax tops you want to think about
um you know multiple expansions
and the last is you want to think about
stock splits
and so you know i have a list here
of from our 1998-99 model book study
and there were there are a good 30 some
odd names that many people
will probably recognize that had massive
runs in 1999
yahoo amazon aol nokia
ebay schwab sun microsystems
cisco um emulux
qualcomm adobe checkpoint siebel
um business objects oracle monster
ntap cree you guys some of these people
know
now what's there's a couple interesting
things here which one of these arusha do
you think
split five times split
five times during the 98-99 period
well i i would think yahoo would open
one you are
dead right it was yeah okay okay now
people are like
are you kidding me it's split five times
i'm like yep it's split
five that's incredible i thought it was
like four or five over like a two-year
two-year run two-year-old now that gives
you an idea of how
i mean somebody made the comment to me
the other day like well you know i just
can't see
i can't see this stock doubling again
you know just because it split and
and i said you should have seen the
numbers some of these
internet companies were printing in 99
in terms of top
line now remember this is the other
interesting thing nobody cared about
earnings in 99
it was a really weird time they were so
euphoric
about the internet and this whole new
thing called the internet
and how it was going to change the world
right and
we didn't need earnings all we needed
was customers that wanted our products
so all you cared about was top line
growth right
right and so they would throw caution in
the wind and and every value guy i think
even buffett was like i can't figure
this out right people that are
that are using valuations to the quote i
just
did earlier on you know dreyfus you know
used in his article
you're by the time you figure out you
never would have bought in the first
place it's probably tripled
yes exactly and that's all because of
you know just
we're humans we get excited about these
entrepreneurs and these innovators
but yes yahoo was split uh that many
times
um we had qualcomm did a two for one and
then did a four for one
that that had a big fight a lot lots of
splits nokia did three splits a two for
one a two for one and a four for one
right um and there was this sort of um
you know this interesting clustering and
build a document at this it wasn't just
in 99 he'd seen this happen
also like in the go-go years and other
times where
and and to be clear if you're if your
audience doesn't really understand
what split is for why we do it it really
doesn't have any purpose other than to
bring the price down
and the person that enjoys having a
lower price is typically the retail
public because they have an anchoring
bias
on price right and and i can't tell you
the number of people that say i can't
buy
this stock because it's over a thousand
dollars a share it's too expensive that
does not matter
what's interesting too arusha's and i
don't know if
splitting really is going to be as
pervasive as some
people say i know jim cramer's been
advocating that more stocks should split
but you know with with uh platforms like
robin hood and
and fidelity and others that do
fractional uh spying
yeah the need to split i think is going
to diminish but
an older generation of traders would
really have this anchoring bias and
they'd say i can i
always have to buy a hundred shares and
a thousand dollar stock
at 100 shares is i can't afford that you
know and they'd always have these
objections
yeah um so so companies would it's an
accounting function
you double the number of shares you cut
the stock price in half the very next
day
the market cap hasn't changed one bit
all you've done is distribute more
shares
and you've lowered the price but the
retail public is like oh
it's cheap i can come in there and buy
and there's all this sort of yeah this
crazy demand
yep so Steve let's take another quick
break here uh so remember having a
system
and a set of rules will help you manage
the emotions in the market
so climax tops and splits can give you
that indication that maybe your stock is
getting a little
overheated and you might want to manage
your risk
coming up next we will discuss a few
ideas stay tuned
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with Steve Birch on Investing with IBD
sponsored by MarketSmith okay Steve now
we've talked about climax tops we've
talked about splits
uh let's get into some stocks that have
been doing well
uh so far this year and uh really well
uh and what i'm going to do is i'm going
to pull up my MarketSmith charts
and you know we we spoke about it
already
let's let's pull up Tesla right here so
everyone can take a look at it
and uh you can see here on the weekly
chart the amazing run
that it really started back in 2019
at the end of 2019 and then you had the
pandemic kind of correct
and cause it to fall off and now it's
just on a another uh
rocket ship uh all the way up to 500
after the four for one split
right no you know the the i guess
everyone's going to think of this name
differently if you bought it down there
when it was you know
fifty dollars and you got a 500 stock uh
you're you're wondering how high can it
go and should i take my profit if you
bought it recently you're worried about
how much can it correct
right you know the moving averages are
are are great
tools to help you answer that simple
question
what is the trend of the stock is it
still in an uptrend
it still is now we know the valuation is
stretched and we know that people are
attaching a lot of high expectations on
their ability to deliver
but you know bill would often talk about
this stocks have a high valuation for a
reason
it's not a bad thing it's actually a
good thing it's a reflection of our
of our euphoria and our our our
confidence in the management
you know if you have a stock that's uh
trading at a three multiple
actually scott o'neill and i were
discussing one today
and uh and we were worried this company
was going to go bankrupt because we were
just happy to be looking at it as a
name that we had we're familiar with and
bill would say well there's a reason
it's trading at a three multiple
it's not because it's cheap and you
should buy it it's because
they're running into management problems
their their market's changed
it's been disrupted they're they're all
kind of you and you can see it in the
earnings
right so with the name like tesla we're
never
you know and bill would say i don't
really look at valuation
and let that influence whether i should
sell it or buy it that's not
part of our process our process is well
does it have all those telltale
characteristics you can see it in the
earnings
right yep um does it have the uh
uh the management does it have the
innovative product
yes yes and yes um
a lot of this is gonna be back to the
chart where you say well
if i was the current owner what would it
have to do for me to bail and get out of
this well
it's going to probably correct they all
do it's gone through its own corrections
there's going to be a volatile
period well what can i expect from a
correction
i go back on our empirical studies
because we've looked at
thousands of great model book stocks
and we know what a typical normal
correction looks like
and we know what an abnormal correction
looks like and so that's when your chart
reading skills come into play
so um and i don't know no one knows
no one on listening to this call knows
where tesla is going to be
in one week in one month and six months
no one knows
that's why we just interpret and we
score it
every day and right now tesla
is fine it is still bullish it is still
in an uptrend
is there a secondary buy point no i
would not buy it here
would you sell it here if i you owned it
no i would not sell it here
what are we waiting for we're watching
to see
how it behaves after this run-up it just
broke out
it just went through a big split now we
want to see
when i say it behaves you've got buyers
and sellers
that are voting every day with their
shares and that gets painted as a bar on
the chart
now a strong name should hold
trend should consolidate it can wiggle
around and go up or down five ten
percent
there's nothing wrong a weak name will
start seeing distribution we'll start
seeing people going you know
maybe i'm not as bullish maybe i should
just get out right so it's a really
interesting time where
you really do have to read the tape on
tesla and ask that hard question
was the behavior of the stock today
abnormal
does it look like distribution does it
look like maybe people are giving up on
it they're
less bullish i don't know what the
reasons are maybe there's something in
the ether then they're not
maybe it's regulatory maybe there's a
competitor maybe it's the opposite
maybe it's acting so resilient the rs
line just won't break it doesn't seem to
ever it sells off in the morning
and then it rallies back in the
afternoon you know and you have all
these little
signals and you're thinking maybe
there's something else out there that
people are still really excited about
that management has they've got this
edge they've got
you know and that's what makes it so
interesting to be a technician because
as you read the chart
the chart's going to be your first
leading indicator
of what potentially is going to come out
later right and then usually the
fundamentals will come out a little bit
later
and they'll confirm what you're seeing
in the chart so right now no tesla
uh full disclosure i own it i've owned
it for a for a while i never
i didn't buy it down at 50. um but it
has to
yep yeah and and um it's a it's a
it's a great fundamental growth story
that
fits within that profile of many of our
models where you had a new ceo you have
an innovative ceo
a dynamic one like steve jobs was you
have elon musk
they're evangelists they're visionaries
they produce a great product they have a
loyal customer base
and you know he has to execute and
deliver
and we're going to measure that not by
just reading articles about
musk and about tesla we're going to
measure it every time they release their
earnings
yeah and steve you know you know it was
funny because i just brought up
uh the point this was probably a few
years a few months ago when we were in
the pandemic in march
a number of us were talking about stocks
and we were talking about
the concept of cancer and what stocks
fit that and you asked that question
to a few of us and and i think i said
dexcom but
one person said tesla right and
in the end you know when you think from
a larger concept
tesla always kind of fits that because
the
the elon musk is kind of thinking
outside the box
they're changing the world in many ways
and so when the stock gets going take it
very seriously
yeah i mean these are these are in
hindsight when we start our models
they look so easy in the middle of the
battle you do have to understand
what are they doing that's creating that
competitive moat
what are they doing to change the world
this and that's a big book name you know
that's really changing the world it's
coming out with a
with a better you know music device like
the ipod
they don't have to be the first mover
they don't we've seen that happen where
i mean there have been other
electric car companies prior to tesla
right tv one and others
it's on execution it's on vision it's on
design
so they get an audience that loves their
product and that
really believes in their product and
then it's their ability to parlay that
and you could take that outside the u.s
and do it in
china and so there's there's just so
many fascinating
fascinating stories now many people
would say well i can't model that
there's no just i can't there's no
future cash flow to model
what they might do well market models
that by
attaching a large rich multiple right
we're we're discounting that already
so the debate is over like well is the
discount you know are we
are we really fully discounted or do
they have other things they're working
on and a lot of this is a bet on
the vision of management and their
ability to deliver now
what's interesting is even with a
company like apple because i own that i
was one of my big winners
uh in the you know when back in 2004
yeah
yeah and bill and i would have a lot of
discussion over
um when apple would go through these
corrections right
he was always worried that
that might be the end because you know
syntax went down 70 yeah and i would
debate with him on the fundamentals and
why apple was
unique and why they were changing the
world in a certain way and
their loyal customer base he'd listen
but he would always go back and say well
they've got to be able to hold earnings
they've got the chart needs to do this
and if it doesn't then you're probably
wrong
yeah and so you then you know he would
challenge me on don't get too stubborn
be flexible
i would challenge him on don't think
every correction is going to turn
into a wipeout right and that's where it
gets really interesting so yeah the
tesla owners that
that um that suffer through
the inevitable correction are going to
be challenged they're going to have to
really think about
is the correction showing me technical
signs that maybe there's something out
there on the horizon i need to be
worried about
and that's why you just become nimble
and you you you can't marry yourself to
a position you remember the nokias
remember the blackberries
and you you trim you trim a little bit
you take some off and then you add back
a little bit later
yeah and i think the the nice thing is
when you have one of these stocks that
has all that potential
uh you let the let the chart tell you
when to get in when you get out of the
stock
and and a lot of times that makes it
easy and then you don't have to debate
as much because the chart's going to
tell you like you said steve
when these institutions finally uh
figure out that hey you know this
company's not going to grow up this
ridiculous
multiple anymore they're not going to be
able to meet those expectations
you're going to see it on the chart
you're going to see the selling over
a number of months and so none of these
funds are trying to sneak out of it
right so uh there's there's one idea
that we had it only had the time to go
over
uh that's worth you know keeping an eye
on so thanks steve for joining us today
i know you have to to run to another
meeting
i do thanks Irusha we'll we'll do it
again
next week we are going to have Brian
Shannon on the show Brian is a long time
trader and also the founder of
alphatrends.com so that's it for this
week on Investing with IBD
i'm Irusha Peiris and thanks for
listening
