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- Buy 200 shares of Ultra-Short Oil and Gas ProShares (DUG, news, msgs) at the market, with a limit set at $36.
- Buy 100 shares of U.S. Dollar Index Bullish Fund (UUP, news, msgs) at the market.
- Buy 200 shares of Adobe Systems (ADBE, news, msgs) at the market, with a one-half allocation limit set at $42.
- Buy 175 shares of Ansys (ANSS, news, msgs) at the market, with a limit set at $46.50. Place a sell stop at $41.
- Buy 100 shares of ITT Educational Services (ESI, news, msgs) at the market, with a limit set at $92.
- Buy 100 shares of UltraShort S&P500 ProShares (SDS, news, msgs) at the market, with a limit set at $70.
Strategy Lab is MSN Money's stock-picking challenge. To learn more about the game and the contenders, click here.
Didn't it used to be easier? I mean it seems that there are obstacles everywhere these days. From currency and commodities to consumers and credit, when will it end?
Maybe it won't and this will be the environment we will have to adjust to. So perhaps now is the time to turn those obstacles into opportunities.
With that in mind, I am adding to my portfolio a position that goes contrary to popular opinion that oil prices will provide unlimited profits to companies within the oil and gas sector. One of the best ways to do this is to take a shotgun approach rather than trying to pinpoint a particular stock. This way, the sector is covered and if the thesis holds, that will give the best exposure. Since the portfolio has $100,000 to invest, the purchase of Ultra-Short Oil and Gas ProShares (DUG, news, msgs), an "Ultra" ETF from ProShares, essentially provides a 200% inverse exposure that tracks the Dow Jones U.S. Oil & Gas Index ($DJTENG).
In essence, for every dollar invested, two dollars are working. If the index moves higher by 5%, this will move lower by 10%. If the index falls 5%, this will rise by 10%.
More to the point, it is a short position, or an investment against companies likeExxonMobil (XOM, news, msgs), Occidental Petroleum (OXY, news, msgs), Schlumberger (SLB, news, msgs), ConocoPhillips (COP, news, msgs) and Chevron (CVX, news, msgs).
(See the MSN Money ETF Center.)
The theory is that no matter what the price of oil does over the next several months, these companies will have a difficult time making money. If oil moves higher, consumers will have no choice but to work harder at conserving and utilizing alternative transportation sources. The auto industry (what is left of it) will need to manufacture more efficient cars, mostly due to consumer demand which will also eventually curb demand. The recent parabolic run-up in oil prices seems to have caused enough outrage to finally get the auto industry to notice that it is time for a change. Therefore, reduced oil demand will be just one of the reasons why these companies could see profit erosion.
Ultra-Short Oil and Gas ProShares is a position that I have profitably invested in for client portfolios during the past few months. The idea that the oil sector will run up forever was squashed last Thursday when ExxonMobil (XOM, news, msgs) reported and fell short of expectations. It is now more evident that this sector could be seeing hard times ahead.
The extended logic goes like this: If the price of oil declines, earnings will slow, and many of these companies will be pressured to reduce the prices for finished products -- i.e., gas. This will cause additional problems, as oil inventories acquired at higher prices will further compress margins. And, don't get me started on the Enron loophole fiasco. By finally acknowledging the bastardization of our commodity trading systems, prices should continue to reign in as unregulated speculation subsides. (See the Enron loophole discussion.)
In another contrarian play that will help to create the base diversification for the portfolio, I am investing in the U.S. dollar. That's right -- beaten up as it may be and with all of the problems we have seen within the financial sector, the dollar is getting set to move higher. Whether it is because of the relationship with oil or the fact that many countries are starting to realize that their exports are not benefiting from such a disparity of their currency to the dollar, the downside is limited and the upside has potential. That is the Disciplined Investor's basic investment philosophy, also known as the Skyscraper Approach. More on that in my next journal update.
This will also be invested through an ETF -- U.S. Dollar Index Bullish Fund (UUP, news, msgs). It is designed to replicate the performance of being long the dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
The one caveat for this investment is the time frame. The Strategy Lab round is six months long, and while the dollar is due to move up, the timing is the one wild card. Even so, a small position in the portfolio with a limited downside allowance is a reasonable investment that will add currency diversification. With all of the conditions we are seeing, diversification is key.
Now, for my core holdings, I am entering into a few positions -- albeit gingerly. The markets are not fooling around these days and there is no reason to be a cowboy. While 55 positions are potentially available from the initial screens, only a few qualified all the way and meet the conditions available for the portfolio.
First, the screen that we are using looks for consistency on earnings growth that provides for overlays of quality and looks to weed out those companies that may not meet the size, margin or trading criteria that I am looking for. Remember that each market cycle will benefit a different style and quality of stocks that will outperform during that cycle. Now is the time for a higher level of quality and consistency, particularly when it comes to past and future earnings expectations.
Beyond the screen and the fundamental review, charts are examined for entry and exit points. Currently, the list of investments is lean when it comes to those that have made it all the way through to this part of the strategy. In my next journal entry I will cover more details about each position. For now, here are the positions and some initial thoughts:
I am buying Adobe Systems (ADBE, news, msgs) as it has provided a great deal of consistency and seems poised to breakout. Even during the past few days when the market stumbled, it held its ground nicely. The ideal price for an initial entry will be above $43 as that will provide confirmation of the trend. Therefore only a portion of the allocation will be bought now. Adobe had a great product line that is highly regarded by its user base.
Ansys (ANSS, news, msgs) is also meeting all the portfolio criteria. This company has a great record for growth, has increasing institutional interest and is holding up extremely well in the face of this economic slowdown. Low debt ratio, increasing quarterly EPS, and a nice gain in volume are all showing a buy signal. Downside protection for this is important as the average daily volume is only about 1.2 million. So, I will add a sell stop at $41.
ITT Educational Services (ESI, news, msgs) is a company that provides vocational training. This is a position that may do well as many people are looking for work in this economy. A new start with a new skill. Shares have been looking for a reason to move higher. So, we will enter with care. Downside leak below $85 will be alerted.
Finally, for downside protection and a small hedge against broad-based market risk, UltraShort S&P500 ProShares (SDS, news, msgs) -- a 200% inverse S&P 500 ETF will be used until it appears that these markets straighten out.
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