Buying Stocks: Value Approach vs Point and Figure Charts

by | Apr 9, 2011 | Asset Management

This is a transcription of the Mullooly Asset Management podcast from April 7, 2011.

Lauren: Hi and welcome to the Mullooly Asset Management podcast for April 7th. I’m Lauren O’Grady and with me is Tom Mullooly, President of Mullooly Asset.

So, Tom, we’ve looked at John Dorfman’s column this week in Bloomberg, and it seems like you’ve got something to say.

Tom: I do, Lauren. And this week, Dorfman writes about his four pummeled stock for savvy investors. And I want to apologize in advance because I think I’m going to go off on John Dorfman. I really think that if you’re a savvy investor, you won’t buy stocks that are going down.

I think it’s good to buy investing companies that are at a good price, at a reasonable price, and give you the opportunity to make money. But I don’t think you need to be a hero and try and catch a falling knife. And some of the companies that he’s talking about are really falling knives. Sometimes you need to just step out of the way and let them fall to the ground and then we can pick them up much cheaper.

One of the companies on the list is Best Buy and he talks about how the company came out with a poor earnings report in March and the stock fell 9% in 2 days. Well, Best Buy trades for about $30 a share right now. If the stock is falling 9% in a day, that means it fell less than $3 a share, not a catastrophe. I really think that if you’re a believer in Best Buy—I’m not—but if you’re a believer in Best Buy, then I don’t think a 9% drop in 2 days is really going to be the end of the world.

Dorfman writes for Bloomberg, he’s a syndicated columnist, so you may see his columns in your local newspaper or you may find them online. But he is also a money manager out of Boston and we’ve got two completely different approaches. Dorfman takes a value approach, where he’s very patient, he can buy stocks that he believes are on sale, and he can wait a long, long time for things to work out.

I don’t know about you, but I like to open my monthly statement and see the value go up, even a little bit, every month. I want to see some kind of forward progress. It doesn’t happen every month, but over the long haul, I’d like to see little incremental gains. I think that just psychology is a lot easier to work with. I just don’t think I want to take these kind of risks with my money or my client’s money.

So in putting together his casualty list, he talks about how in the first quarter, out of 2,300 stocks on the Standard & Poor’s Index, there’s 2,339 US stocks with a market value of more than a half a billion dollars. Out of that 2,339 companies, about 225 made his cut off, where they had to drop by at least 7%. So he came up with a bottom 10%, let’s say, of performing stocks. You know what? I just don’t think there’s much merit in looking, you know, trying to pick among the litter. I think you’d be better off buying stocks, in my opinion, buy stocks that go up. They’re going up for a reason, because people are buying them. And they’re buying them for lots of different reasons. I don’t really care what your reason may be for buying the stock, it might be the same as mine. But the important thing is, to buy stocks that are in positive trends. And, you know, when you’re trying to pick among the bottom performers, it’s hard to find stocks that are moving in positive trends.

So some of the other stocks that he talks about on his list, one of them was Expedia, and Expedia’s stock fell 9% in the first quarter, he blames this drop primarily on the Department of Transportation came out in February and it told online travel companies that they can’t show bias in displaying flights and fares, even if they have a dispute with a particular airline. The last time I looked, the internet was not regulated by the Department of Transportation. If Expedia and some of these other companies are having disputes with American Airlines or whatever company, I think they have the opportunity to at least say, “Hey, you know what? We want to play fair, you play fair with us.” It’s their company and the Department of Transportation really should just butt out.

But we’re finding that the government is doing the same thing now with Google. Just this week, the FTC, the Federal Trade Commission, announced that they are going to start investigating Google because they want to find out how Google is ranking pages and how pages, some pages, bubble up to the top of the search engine rankings and others do not. Basically the FTC, the government, wants to find out Google’s secret sauce. You know what? I think they should just go ask the Colonel over at Kentucky Fried Chicken for his secret recipe first. I just don’t think this is something that a lot of companies really want to do. It’s their own proprietary formula.

Two of the other companies on the list, Getty Realty, that’s a holding company for the leases on Getty gas stations that are here, dotted up in the northeast. They got involved in a deal with Luke Oil Petroleum, they’ve been involved with Luke Oil now for several years. I don’t really follow the stock and it’s not something that I really want to follow either, it’s just not a chart that excites me, it doesn’t have much in the way of technical attributes.

The other name that’s on this list is ValueClick, which is an internet company, it’s got a very poor technicals, even though it’s in a positive trend, I just think there are better ideas in that sector that you could go after, so if someone’s really looking to buy ValueClick, there are plenty of other names that I would offer up as substitutes.

Lauren: He also had a follow up on his casualty list from last year, the names on the list were Couer d’Alene Mines, Goodrich Petroleum, Nutrisystem, Piper Jaffray.

Tom: Yeah, let’s talk about some of these. Just as a follow up, he mentioned Couer d’Alene Mines, he’s not going to chase it here because it’s up 132% in 12 months. Well, no kidding if he has read a newspaper or turned on the TV, he’s seen what’s happened with gold and silver prices. It’s no secret that the miners of gold and silver are going to be going up just as fast, so that shouldn’t come as a surprise to anybody. Those companies have been in favored sectors now for a long time.

One of the other companies that he mentioned was Goodrich Petroleum, symbol is GDP, again, a petroleum company, the energy stocks have been doing great for the last, for nearly the last year. Goodrich is up about 42% in the past year, so again, Dorfman says he doesn’t want to chase it at these kind of prices.

Now, one of the other stocks that he mentioned was Piper Jaffray, a brokerage firm. The brokerage stocks, the Wall Street firms have been out of favor now for four years. There is absolutely no reason why we want to be involved in some of these things. We only want to buy stocks when the market’s on offense, we want to buy in favored sectors, and we want to buy companies in those sectors that are in positive trends. So Piper Jaffray didn’t fit any of these qualifications, and so this would not show up on my list.

And the last one that he mentioned from his previous list was Nutrisystem. I guess a lot of people still need to go on a diet, but, you know, about a year and a half ago, at the end of 2009, Nutrisystem was trading at $30 a share, it’s now $13. Last summer, in July, this stock gave a pretty significant triple-bottom sell signal. It had also broken support. This thing is just a catastrophe waiting to happen. It’s got no technical attributes and it’s something that doesn’t look like, at least on the chart basis, when you look at it, it doesn’t even look like it’s finished going down. So I’m not going to predict what’s going to happen to Nutrisystem, maybe the stock will lose some weight, I know I certainly need to do some.

But what we want to do, the goal behind these podcasts, is we want to remind everybody that before you go out and make a decision to buy or sell an investment, you really need to speak with a registered investment advisor. Someone who’s got your interests in mind. Now, that might be your financial advisor at a brokerage firm, it might be an independent investment advisor, whoever you feel comfortable working with, someone who’s got a game plan and knows what to do with your investments in up markets, as well as down markets. These are the people you really need to make a consultation with before you decide to make a buy or sell in your portfolio.

Now, if you don’t have an investment advisor, we encourage you to contact us. You can reach us on the phone at 732-223-9000, or you can also find us on the web at, that’s

So thanks again for listening. Lauren, thank you very much for joining me on the podcast this week.

Lauren: That’s great, and we’ll talk to you next week.

Tom: Okay. Take care.