Apple (AAPL) and Speed Resistance Lines

As described in our article on speed resistance lines (SRL) dated September 22, 2011 (found here), Netflix (NFLX) fell below our projected downside target of $99.58. Although we thought that the stock would be worth considering below such a level, we had to concede that, “...the difficulty may be that the sentiment that pushed the stock price to $298.73 would likely be just the opposite to push the price down.” Assuming the purchase of the stock at $99.58, an investor would have gained 21.10% based on the current price of $120.59.

Naturally, we wondered what Edson Gould’s speed resistance lines would say about Apple Computer (AAPL). The very first thing that we look for, to determine speed resistance lines, is the most recent peak in the price.  Because AAPL is continually making new highs, we only need to use the latest price of $455.68 as our starting point.

Based on Gould’s work, Apple (AAPL) has a conservative downside target of $230.09 and the extreme downside target is $151.89.  When we ran the same calculations on Netflix (NFLX) in September 2011, we made a seemingly innocuous error.  We overlooked the fact that NFLX had a lower support line (red line) at the price level of $85.  In this case, we have denoted AAPL’s support line (also in red line), at $117.05, as a potential downside target for the stock.

As the price of Apple increases, so too does the SRL lines based on the work of Edson Gould.  The rampant enthusiasm for AAPL suggests that the stock isn’t likely to decline to the indicated levels any time soon.  However, when and if you see AAPL start to make a swan dive, the levels indicated are reasonable downside targets.

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Insurance Watch List: January 27, 2012

The following is one of our personal favorite watch lists.  We started tracking the insurance industry in January 2011 and we're very impressed with the results so far. 

Anyone who wishes to be successful in insurance stocks should read the book The Davis Dynasty by John Rothchild.  The book starts with Shelby Collum Davis investing approximately $50,000 to $100,000 that ultimately grew to $900 million after 47 years.  The strategies employed by Davis seem more accessible to average investors as opposed to Warren Buffett's leveraged strategies and education from Benjamin Graham.

Symbol	Name	Price	P/E	EPS	Yield	P/B	payout ratio	% from Low
Y	Alleghany Corp.	288.05	18.07	15.94	0	0.88	0.00%	3.98%
NWLI	National Western Life Insurance	143.2	7.28	19.66	0.30%	0.4	1.83%	10.15%
ANAT	American National Insurance	72.64	11.29	6.44	4.20%	0.53	47.83%	10.55%
TWGP	Tower Group, Inc.	21.91	10.8	2.03	3.40%	0.85	36.95%	10.77%
HCC	HCC Insurance Holdings, Inc.	27.94	11.56	2.42	2.20%	0.93	25.62%	13.30%
L	Loews Corp.	37.63	12.25	3.07	0.70%	0.79	8.14%	14.38%
XL	XL Group plc	20.3	28.19	0.72	2.20%	0.67	61.11%	14.75%
KCLI	Kansas City Life Insurance	32.36	13.6	2.38	3.30%	0.51	45.38%	15.53%
SLF	Sun Life Financial	20.14	13.63	1.48	6.90%	0.82	93.24%	15.75%
RE	Everest Re Group	85.15	25.56	3.33	2.30%	0.76	57.66%	16.09%
UNM	Unum Group	22.92	8.01	2.86	1.80%	0.71	14.69%	16.23%
ENH	Endurance Specialty Holdings	37.08	70.76	0.52	3.20%	0.58	230.77%	17.08%
WSH	Willis Group Holdings	38.73	24.42	1.59	2.70%	2.51	65.41%	17.22%
THG	Hanover Insurance Group	36.69	35.87	1.02	3.30%	0.67	117.65%	18.35%

Watch List Summary

Alleghany Corp. (Y) appears to be an exceptional investment opportunity.  First and foremost, Alleghany Corp. has emerged as the suitor of our current holding of Transatlantic Holdings (TRH).  Even Warren Buffett was turned down by Transatlantic holdings after he lobbed a lowball offer for TRH.  Despite this fact, Alleghany is acquiring Transatlantic Holdings at a price nearly 10% below book value.  This alone suggests that Alleghany has an eye values.   We've been adamant that Transatlantic Holdings was a great value (found here) and is trading 8% below the offer price of $59.79.

The Punchline: Being within 4% of the 52-week low and 12% below book value, Alleghany (Y) is definitely a long-term buying opportunity at $288.  We'd make Alleghany a two part acquisition that comprises 15% of the portfolio when completed.  Keep in mind that the stock has a downside target of $266 based on Dow Theory.

In the News: January 28, 2012

High-Tech Employee AntiTrust Litigation (PDF) at Lieff, Cabraser, Heimann & Bernstein, LLP
Apple, Google Must Face Antitrust Lawsuit Over Tech Employee-Poaching Ban at Bloomberg
Former Groupon sales reps countersue over tactics at Reuters
What Makes FPA Crescent Tick? at Morningstar
Olympus panel clears accounting firms of blame in scandal at Reuters
The Fannie and Freddie Chronicles, Cont. at Barron’s
Paulson Digs Deep Hole, Needs Big Returns To Recoup Losses at Barron’s
Digital music sales top physical sales at CNNMoney
Milk futures: Better than gold at CNNMoney
FHA says: It's ok to flip that house at CNNMoney
Your cell phone is out of your control at CNNMoney
Gold, Silver Move Towards 3-4% Weekly Gains; Time To Sell Miners? at Barron’s
Gold ETF almost a sell at MarketWatch
What's behind Netflix's 22% spike? at CNNMoney
Is the ETF bubble about to burst? At CNNMoney
Gold Is The Hottest Currency In The World at Forbes
Be Prepared To Sell Your Soul If You Use Google at Forbes
Merrill Lynch Hit With $1 Million Fine For Employee Note Collections at Forbes
The Big 401(k) Match Mistake at Forbes
The Pitfalls Of Variable Annuities at Forbes
Facing SEC Charges, Ex-Fannie Chief Daniel Mudd Resigns At Fortress at Forbes
What happens when you walk away from your home? at Reuters
Questioning the Volcker Rule at The Atlantic

Thoughts on Gold

A reader says:

“There's a reason Gold is the hottest in the world. Investors are simply losing faith in ALL fiat currencies. Hence, they are turning to one thing that has always been real money - GOLD!”

Our Take:

We don’t know about the far distant future of gold, governments and profligate spending.  However, we've always enjoyed a historical perspective on the topic of “real money.”  We’ve pulled a few quotes from Richard Russell’s Dow Theory Letters on the topic of “real money” in the same vein as described above.

“The US is on a treadmill to disaster via the creation of debt. In time (and the time is moving very rapidly now) the debt will destroy almost ALL forms of investments. Gold will withstand the destruction, because real money is never destroyed.” 

Dow Theory Letters.  Issue 736. August 7, 1978. Page 5.

“Coming up in a month, a year, a few years (I can’t time it) is the BIG PROBLEM, the problem that I’ve warned about for a long time. How do you get people to hold paper “money” when they have increasing doubts about its worth? The answer: you must make it CONVERTIBLE into real money-gold.”

Dow Theory Letters.  Issue 766. September 26, 1979. Page 1.

“My job now seems to be to try to save my subscribers from the deceitfulness and greediness of our own Government. So I talk about the technical position of gold, of where WC are, of whether gold is still a buy and whether it will take 900 or 1000 paper dollars to buy an ounce of real money say six months or maybe even three months from now." 

Dow Theory Letters.  Issue 774. January 16, 1980. Page 7.

“‘How can the Government ever be bankrupt if it is able to create money?’ The answer is that the Government could only be bankrupt if no one would accept that money. And of course, that possibility is the reason why many survivalists will ‘never be without some kind of a position in real money - gold.’” 

Dow Theory Letters. Issue 805. March 25, 1981. Page 3.

“Why could gold be bullish? Two opposing reasons: first, with a potential crisis in the world monetary system, people turn to real money as an insurance policy. Gold is real money. Second. With unbearable deficits facing the US over coming years, politicians will be tempted to ‘print’ (monetize) some of those deficits (and suppose Edward Kennedy gets in in ‘84).”

Dow Theory Letters. Issue 841. August 11, 1982. Page 6.

Now, we’re not suggesting that the ultimate consequence of profligate spending isn’t coming.  Additionally, we’ve made a call for a secular bull market (as opposed to a cyclical bull market) in gold on September 28, 2010 and silver on September 5, 2009 .  However, much of the arguments during and after the peak in the price of gold are the same as today. 

Additionally, nothing has changed that was said about profligate spending at the peak in the price of gold in 1980 or the period from 1981 to 1999, a time when the price of gold was in a declining trend.  Therefore, we have little to help us distinguish the difference between huge government spending when gold is rising and when gold is falling.  We're sticking to the view that Dewey and Dakins' assertion that gold vacillates in a 50 to 54-year cycle is right on target (our 2009 review of their work here). 


We’re opting for the view that gold experiences good times and bad rather than the view that our nation is coming to an end.  After all, the redemption of our gold, as with all forms of insurance, is not something that we look forward to.

Source: Watterson, Bill. The Calvin and Hobbes Lazy Sunday Book. Universal Press Syndicate/Andrews and McMeel. 1989. page 49.

Nasdaq 100 Watch List

Below are the Nasdaq 100 companies that are within 15% of their respective 52-week lows. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and rigorous due diligence.

Symbol	Name	Price	P/E	EPS	Yield	P/B	% from Yr Low
BMC	BMC Software, Inc.	34.01	13.93	2.44	N/A	3.74	7.56%
DTV	DIRECTV	43.03	13.41	3.21	N/A	N/A	8.06%
CHRW	C.H. Robinson Worldwide, Inc.	67.66	26.33	2.57	2.00%	8.92	8.60%
NTAP	NetApp, Inc.	36.85	22.46	1.64	N/A	3.54	11.67%
SYMC	Symantec Corporation	16.79	19.1	0.88	N/A	2.69	12.38%
INFY	Infosys Limited	52.29	18.09	2.89	1.10%	5.03	13.38%
EXPE	Expedia, Inc.	31.04	9.21	3.37	3.60%	1.59	13.78%
VOD	Vodafone Group Plc	27.76	13.16	2.11	3.60%	1.07	14.19%
WYNN	Wynn Resorts, Limited	115.47	26.95	4.28	1.80%	5.66	14.30%

Watch List Summary

NetApp (NTAP) has fallen 39.61% from the high of $61.02 on February 11, 2011.  The low of October 2009 acts as a significant downside support since it is aligned with the long rising trendline from the 2002 low. According to Dow Theory, the current downside targets are $28.02, $22.52 and $17.02. Based on the current price of $36.85, NTAP could fall by 53% in the worst case scenario. According to Dow Theory, NTAP has  upside targets of $44.52, $50.02 and $55.52.

The Punchline: After a 39% decline in price, NetApp (NTAP) is a prime candidate for a two transaction  purchase.  The first purchase should take place starting at $30.  The second purchase should take place around $23.47.  Based on the market capitalization of NTAP may actually be a buyout candidate.

Symantec (SYMC) has declined by 19.07% from the high set on May 12, 2011.  Dow Theory ascribes downside targets of $15.08, $14.91 and $13.30.  When considering the worst case scenarios, SYMC has a downside risk of either -25.62% if the stock falls to the 2010 low of $12.34 or -39.42% at the 2009 low. Both cases  present reasonable risk/reward scenarios. The upside target is $18.67.

The Punchline:  SYMC seems like an opportune purchase for reasonable gains over next year. Consideration of a single purchase with a larger percentage of the portfolio is most ideal.  A sort of "one-and-done" with the acceptance of the downside risk of -40% is in order for SYMC.

Wynn Resorts (WYNN) has extreme downside risk. Based on Dow Theory, WYNN has just fallen below the first of three support levels at $115.47.  The next downside target, based on the Dow Theory 50% principle is $74.76 which is 35% below the current price. Our expectation is that WYNN has a high probability of falling to $74 with $64 and $40 as reasonable downside targets.

 The Punchline: The volatility profile for WYNN is only for those willing to accept extreme downside risk. "Investors" in WYNN should break their transaction up into at least 3 trades.

Watch List Performance Review

In our ongoing review of the Nasdaq 100 Watch List, we have taken the stocks from our list of January 23, 2011, based on the closing price of January 21, 2011(found here), and have checked their performance one year later. The companies on that list are provided below with the closing prices from January 21, 2011 to December 20, 2012.

Symbol	Name	2011	2012	% change
CEPH	Cephalon, Inc.	59.64	81.5	36.65%
CSCO	Cisco Systems, Inc.	20.73	19.92	-3.91%
QGEN	Qiagen N.V.	18.56	15.42	-16.92%
TEVA	Teva Pharmaceutical	52.86	45.83	-13.30%
ATVI	Activision Blizzard, Inc	11.25	12.22	8.62%
			average	2.23%
	Nasdaq 100	2268.32	2437.02	7.44%

 The Watch List from last year underperformed the Nasdaq 100 by a wide margin.  Only Cephalon (CEPH) and Activision (ATVI) were able to keep pace with the index.  Teva Pharmaceutical (TEVA) and Qiagen (QGEN) took the large hit among the top five stocks.

The Time Has Come For California Water Services (CWT)

California Water Services Group (CWT) has finally arrived at the point that we’ve anticipated for the last 2 years.  On January 3, 2010, we submitted an investment observation that CWT would continue to trade in an established 6-year range that had been identified for at least 4 other periods.  Just as a debrief, in the 2010 piece (found here), we said the following periods traded in 6-year ranges after breaking out of the previous range:

• 1976 to 1982

• 1985 to 1993

• 1993 to 1997

• 1997 to 2004

• 2005 to 2011

In a January 1, 2011 piece (found here), we reiterated our view on CWT by saying the following:

“…based on cycle analysis, the prospects of CWT making a substantial move above the prior high would be between 2011 and 2012.”

As we enter 2012, we’re of the view that this is the year that California Water Services Group will break above the 2006 and 2009 highs of $23.  Those interested in buying this stock should acquire large quantities and be prepared for the downside risk.  We are reiterating our downside targets at:

• $17.28
• $13.70
• $10.52

Finally, a boilerplate disclaimer that should be considered for any water utility stock.  Although water is critical to life, stock investors need to understand that companies in the water industry aren't a "sure thing." The biggest reason for this is that when and if water becomes “scarce,” government regulators will step in to take over (nationalize) what should otherwise be sold at the most profitable price (thereby curbing wasteful consumption.) There is literally an upside cap on profitability to a company like this due to the critical importance of the resource being sold.

Additionally, CWT should be considered a relatively risky stock because of its low daily trading volume. With a 3-month average volume of 220,000 shares, this stock may not be suitable for investors who are concerned about getting the "best" price.  However, collecting the current dividend yield of 3.40% should provide some consolation for the wait to rise above $23 in 2012.