The Bull Is Back

What a fabulous Friday to cap off a super week in the stock market. Times like this don’t come along often, so when they do I like to celebrate. The traditional response to an up week is to call for bad times ahead, warn that it can’t last forever, and make some quip about the gullibility of the average investor. All of which I’ll get to in a moment. But first, the celebration phase.

The Dow gained 3% for the week, and is now down just 0.5% so far in 2005. Double The Dow is down 1.4%, exceeding its mandate of twice the Dow in either direction. That often happens when recovering from a loss because it falls twice as much and then has a smaller base from which to grow its recovery. It eventually catches up and surpasses, though, and I see no reason that this time will be different. I absolutely love investing in the Dow. It will never go away. It will always recover. At twice the Dow’s performance, I consider Double The Dow to be one of the best long-term monthly investment programs available, and I’m the only one who advocates it. Tells you something about the financial industry. Last year, this portfolio hit a low of about -16% before fully recovering and finishing the year at +5%. Money invested during the low months gained roughly 25% by year-end. That’s the general pattern with this reliable strategy. As always, you can learn all you need to know about it in Chapter 4 of my stock book and follow its performance here.

Now to investments that are decidedly NOT guaranteed to never go away.

Maxtor reported a fourth-quarter loss of $70 million. A year ago it reported a $39 million profit, so this is hardly good news at first blush. Analysts were expecting a 15-cent-loss per share, but the $70 million computes to 28 cents per share, almost double the damage foreseen. However, much of the trouble is due to one-time expenses associated with the ongoing turnaround at the company. The whole reason we were able to buy at $3.25 is that the company is having a rough go at it. It’s hated on Wall Street. My hope has always been that as the company gets its ducks in a row, it will produce better financial results and garner favorable analyst comments and become a value investor’s tech stock. When that happens, it has a chance to re-enter the mutual fund radar and get picked up in a massive buying spree. The single-digit stock price days would quickly disappear in the rearview mirror.

We may be seeing the first stages of that already. In its report, Maxtor exceeded analyst expectations of $990 million in 4Q revenue when it weighed in with $1.03 billion. I feel good to have paid a quarter over three bucks a share for a company with a billion dollars in quarterly revenue. When the new management team gets this recovery into full gear, we should see some sparkling results. After this good revenue news, the stock rose 13% to $5.54 on Friday. That puts us up 70% from $3.25.

I placed a stop-loss for half of my Maxtor shares at $5.10 on Friday and emailed my list. (To join the list, just type your email address into the box at the top of this page, then confirm in the follow-up note that you want to join. It’s completely free.) I mentioned that I hoped the stock would not hit my stop, but that I didn’t want to ride it back below $5. Thankfully, the stock did not hit $5.10, so I’m still all in and have moved my stop up to $5.30. Being so far in the black allows me the luxury of a wide margin between the current price and the stop. I’m eyeing $6 as a near-term target, but you never know and as the sage says, “You can’t go broke taking a profit.” Even as Maxtor works successfully toward its recovery, there’s danger in the market at all times. Maxtor is not the Dow. It could be cratered in an instant by something completely unexpected. I don’t expect that (ha!), but we need to protect against the possibility.

UTStarcom had a rough week that saw it plunge to 6% below our buy price. Forbes published an article that said, “UTStarcom guidance for 2005 may be at risk due to an estimated 30% decline in China’s personal access system (PAS)”. However, UTSI’s

estimates include a 50% decline in PAS, so the reaction seems overdone. My guess is that UTSI will become an acquisition target in the mid-$20s. That’s not so great, in my opinion, so I will probably look to sell if we can get back above $20 before summer. Looking to the downside, at 8% below our buy price I will sell half, with the other half to follow at 10% below.

Semiconductor stocks rose 4% on Friday and my pick, Profunds Ultra Semiconductor, rose 6%, in line with its mandate to outperform both up and down by 50%. It’s now down a mere 0.8% from our buy price of $18.09.

Finally, the Land of Dreams and Magic continues living up to its name. Disney is now up some 95% from our buy price of $15 on March 11, 2003. Looks like we’ll get that double in two years after all. Disney is a Dow stock, of course, and this individual holding serves as a great example of the many ways to use that handy list of 30 global winners. If you did nothing the rest of your life but choose your investments from the 30 stocks on the Dow, you would most likely outperform every investor you’ve ever met. Excellent work, Disney.

I hope you’re enjoying the dramatic change of sentiment in the market as much as I am. Remember that stuff I said at the beginning of this article about the bad news needing to be brought up? Forget it. We all know that the market fluctuates and therefore by definition cannot keep going at Friday’s pace forever. Just keep the good stops in place as explained on Maxtor above and keep the bulk of your money in the reliable Dow. You’ll do fine.

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