A Rough Week & What to do Now

This week we watched the market demonstrate why this game is not for the faint of heart.  During the worst week for the stock market in nearly 2 years, The Dow Jones dropped nearly 4%; my personal portfolio dropped more than 7%, a little over $3,600.

Down

What happened this week?  President Trump gave a State of the Union address and touted the growth in the stock market, low unemployment and all around strong economic growth under his administration.  The jobs report was slightly better than expected, 200,000 jobs added instead of the predicted 180,000.  There was some good news for the middle class, wages are actually rising for the first time in a long time.  Somehow despite all that good news, the stock market dropped like a rock.

There is much speculation on why this happened.   The leading theory is that because the economy is doing well, the federal reserve will likely raise interest rates making borrowing more expensive.  If this is the case, we know from history the stock market is more than capable of growing while interest rates are higher than they are now.  So fear not, this week was likely a correction.  It could be the start of a recession but the truth is, no one is capable of predicting the market all the time.  Some get it right sometimes but no one gets it right all the time.

We know the market always trends upward in the long run.  This means that 3 years from now the market will most likely be higher than it is now.  So play the long game, invest when the market goes down because everything is on sale and invest when the market goes up, because this is the best time to make large gains.

 

This week I made the following contributions:

$105 to my IRA
$50 to my E*Trade Brokerage account
$400 to my new Robinhood Brokerage account

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New Index Fund

1/30/2018

Today I decided to get out of a few small positions I had taken in my IRA account and invest in an index fund for cannabis.  Index funds are single shares you can buy that have ownership in multiple companies.  Fund managers can make funds to any index they want.  The most well-known Index Funds are ones that follow the S&P 500, the Dow and the Nasdaq.

I wanted to adjust my portfolio to have larger positions, especially in more stable stocks and funds.  If you invest $1000 in a stock and it goes up 5%, you earn $50.  Invest $5,000 in the same stock and you will earn $250.  This is not to say it’s not worth investing small amounts if that is all you have.  While it might make sense to invest smaller amounts into more volatile stocks, I think it is better to invest larger amounts into more stable stocks.  NEE and GSK are probably good stocks that will make money over time, but I don’t think they are the best fit for me right now.

MJX is geared toward the emerging cannabis market.  They have stock in foreign and domestic companies, those that are involved in the recreational market as well as the industrial and medical.  I only just recently stumbled across this fund and thought it would be a good buy for my IRA.  As long as laws across the country and around the world continue to allow more legal business in this market this fund should grow.  I expect this fund will follow the trend I have seen from a similar fund available in Canada HMMJ.TO.

Here are my transactions:

I sold all 19 shares of GSK for $38.21 each total sale was $719.02
I sold all 4 shares of NEE for $155.2456 each total sale was $614.01

If you add what I just sold it for, plus the dividends, then subtract the price paid, I lost $27.69.  All part of the learning curve.

I bought 49 shares of MJX for $35.37 each, total cost was $1,740.08

 

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Tax Reform

At the end of last year, Congress and the President passed sweeping legislation to change the tax system in this country.  I will not discuss the politics of this here.  I will discuss the impact on my individual financial situation only.  This reform included a cut to my individual tax rate from 2018 through 2025.  In 2025, the tax rate is scheduled to return to the old levels.

The IRS moved quickly and released withholding tables 2 weeks ago and you can find them here.  These tables tell employers how much to withhold from each employee’s paycheck.

I received my first paycheck with the new withholding rates today.  The resulting change to my paycheck is an additional $41 in take-home pay each week.  With the extra income, I have decided to increase my investing.  Starting today and each following week I will contribute the following:

$105 to my IRA (unchanged)
$50 to my brokerage account (up from $25)

Turbulent Times Could Bring Sky High Profits

As promised, here is my trade for the week:

As I scanned the financial news I was looking at  “Trending Tickers” on Yahoo! Finance and last night I saw United Airlines (UAL) lost 11% on some news that it wanted to compete on price with the budget airlines.  Investors didn’t seem to like this news and a brief analysis I watched said their margins were already too tight and this could drive them to lose money.  United already had a rough 2017 with several scandals that painted them in a bad light; you can Google “United Scandal” to learn all about it.  The company has been working on its PR in an attempt to repair its image.

In my last post, How to BUY Profitable Stocks, we know the PE Ratio is very important to measure companies against their competitors.  Here are all the airline PE ratios I could find quickly:

17.8  Southwest (LUV)
14.1  American (AAL)
13.2  Spirit (SAVE)
12.9 China East (CEA)
12.6 China South (ZNH)
11.4  Delta (DAL)
11.4  JetBlue (JBLU)
9.8   United (UAL)  LOWEST IN THE INDUSTRY!!

 

UAL

Over the past few years, the airlines have seen many ups and downs, as shown in the graph above.  I didn’t take a whole lot from the 1-year and 5-year graphs but they do show a general upward trend with some volatility. The price for UAL has more than doubled in the past 5 years.  The PE Ratio is the lowest in the industry and the recent price drop is a buying opportunity for me.  Even if they have trouble being profitable with their new strategy, they can always go back to the old one.  I’m having trouble finding a reason not to buy this stock.

One last note, we see that in pre-market trading (purple circle above) the price is already starting to recover, most likely due to other bargain hunters like myself.  In order to avoid buying higher than I want to, I set up a LIMIT trade for 15 shares at $70.  This means that if the price goes above $70 before my trade is executed, nothing will happen.  The order was placed just before 7 am eastern and should be executed at 9:30 when the markets open.

I made the following transactions:

I transferred $500 from my side hustle checking account to my brokerage account
I bought 15 shares of UAL for $69.36 each for a total cost of $1,047.35.

 

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How to BUY profitable stocks

 

Hello and thank you all for making this blog an early success!!  Please like and follow to see where we go.

I want to start by addressing one of the main requests I have received: more detail about what I consider before making a trade.  For now, I have been light on exactly what to look at because I have been doing a lot of guessing.  I decided to make some trades and evaluate them afterward. The explanations I have given in the earlier posts are the only reasons I decided to make those particular trades.  The following is a summary of what I have learned to date and the considerations I now make before trading.

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3 key parameters:

First, the company profile – what do they do and is the demand likely to increase?
Second, historical pricing – where the price has been can indicate where it is going.
Third, PE Ratio – how does this price compare with rest of the industry?
Let’s dive deeper into each one of these parameters, using Rite-Aid (RAD) as an example.

 

Company Profile
You can find this info on Yahoo! Finance
See the image below
PROFILE

Scroll down to the description and make sure that, to the best of your knowledge, the business they are in should see an increase in demand in the coming months and years.  In this case, RAD provides retail drug stores and basic clinics among other healthcare-related services and provisions.  You are welcome to read their full profile here.  As I see it, there is no risk of people in the United States needing less health care or fewer prescriptions filled for the foreseeable future.  So right now this stock passes the initial test.

Historical Pricing
You can find this info on Yahoo! Finance
I like to look at the past year and past 5 years.

1 Year Price1 YEAR

The one-year price gives you a good idea of the short-term trend.  Here we see it  was trending downward until it bottomed out (green arrow) a few months ago.  To the left, we see that the lowest price in the past year (52 weeks) is $1.38, while the highest is $7.23.  We may not ever make back to $7 but it is not unreasonable to think it could go to $3 or $4 per share.  Remember, percentage increase is what we really care about.  Markets tend to go lower than they need to go, then correct with price increases; but remember, they go higher than needed, too, then they correct with a price decrease.  Keep the goal in mind: buy low and sell high.

 

5 Year Price

5 year

The 5-year price tells us more about the long-term trend.  From 2014-2016 the price bounced between $7+ and $4 per share.  The most likely cause I can find is that its competitors, primarily Walgreens and CVS, have moved more quickly into offering additional health-care services like clinics.  RAD is working on providing a similar concept but is behind the curve.  I found this information by paying attention to the news over the past few years. Nothing magical, simply staying informed.

At a minimum, I will read several dozen headlines across multiple news agencies each day.  I scan the national news using Google News, I look at financial news from Yahoo! Finance, FOX Business, and CNBC.  I spend less than 20 minutes a day on news reading, if you’re going to be involved in the market you need to know what going on in the world.

 

PE Ratio
You can find this info on Yahoo! Finance
See the image belowPE RATIO

PE stands for Price-to-Earnings and is an important ratio when comparing competitors and determining the potential future price.  The price is the price-per-share divided by the earnings per share or EPS (this number is directly below the PE ration above).  So for this example, take the price/EPS or $2.34 / $0.15 = 15.6.  The PE Ratio listed is a few minutes behind so it is slightly different, but you get the idea.  Walgreens and CVS have a PE ratio of about 21 and 16.5, respectively, as of 1/23/2018.

The PE ratio gives a way to compare companies to each other since the share price and EPS can vary greatly; the PE ratio brings things into perspective.  Since RAD is the lowest of the three, it is the most likely to go up.  A share price increase is the way the market corrects these imbalances so long as everything else is equal.

 

Other factors

There are a huge number of other factors that the professionals consider when making a trade or buying a stock.  I am trying to move slowly and learn things as they seem relevant.  Every time I approached investing before 2017 I got overwhelmed and ended up doing nothing.  I may not have everything figured out yet, but I am learning.

Please let me know your thoughts.  Do you have any other considerations? Do you consider more or less than I do?  Does all this make sense?  I’m happy to clarify anything that seems vague.

Thanks for reading and happy trading!

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