Our editor in chief Brian Hunt has been watching Retirement Trader's progress closely. And he noticed almost every security Doc traded followed a unique chart pattern... So he sat down with Doc and asked him for the story.
Brian Hunt: Doc... I'm a big fan of using charts to help time my trades. And I've noticed most of the trades you've made in Retirement Trader exhibit the same chart pattern... which is one of the most powerful moneymaking tools I've ever seen.
Could you tell Digest readers more about this pattern?
Dr. David Eifrig: Sure... although charting is not something I pay a lot of attention to. My fundamental approach to picking stocks turns up investments trading in this sort of chart pattern. I've traded this way successfully for years... and we're 12 for 12 so far in Retirement Trader using it.
It all comes down to buying exceptional companies when they go on sale.
I'm always looking to buy dominant blue chips like Johnson & Johnson and Microsoft when they suffer substantial corrections. These corrections can be caused by general market selloffs, temporary declines in business, management missteps, product flops, or a handful of other things.
These corrections serve to wring a lot of risk out of holding these companies... They can knock them down to dirt-cheap values. As a general rule of thumb, if you can buy an exceptional company for eight to 10 times earnings and cash flow, it's a no-brainer. The market simply won't let a dominant company sink much lower than that.
I love to buy stocks when I see these situations... when a great company gets clobbered, then bounces along the bottom of its new range for a while.
This situation produces a chart like the one (below) of Microsoft. Most people recognize Microsoft's name. It's the world leader in software. It has giant profit margins and a pristine balance sheet. Sure, it's not growing like crazy anymore, but it's still growing... still selling a lot of software.
This summer, Microsoft fell from $30 per share to $23 per share... a big fall for such a large company. This fall was largely attributable to the drop in the general market. You'll notice the stock rebounded, then traded sideways for a while...
This period after the big decline is often a terrific time to buy, provided the business is still sound. That's where fundamental analysis comes in... buying a terrific business at a good value.
Microsoft was trading for around 10 times cash flow back in September... And it has a huge cash hoard. Buying the stock was a no-brainer. We used the opportunity to make a safe gain of 10% in about two months with a combination of stocks and options in Retirement Trader.
BH: You did the same thing with blue-chip power company Exelon.
DE: You can see a selloff and sideways trading pattern, similar to the one Microsoft went through, in the one-year chart of Exelon (see below).
Back in July, Exelon was trading for about 10 times earnings... and we could easily double our money in dividends alone every 13 years. This was a stock we'd be happy owning at such a cheap price. We made a quick – and safe – gain of 10% in less than two months.
BH: Let's talk about the August trade with Intel, for one more example, then we'll get to how you safely juice the returns for Retirement Trader readers.
DE: The Intel trade was a lot like the Microsoft trade. The general stock market had fallen. Most folks were worried about a double-dip recession, which would depress demand for Intel's semiconductors. The stock fell from $23 per share to $18 per share... a drop of about 22%. This is a huge fall for a dominant blue-chip like Intel.
Folks were so worried about all this stuff, they forgot Intel is a money machine. It's the dominant manufacturer of the most essential component used in computers. All the name-brand computer makers – Microsoft, Dell, and even Apple – rely on its processors. Intel controls 80% of the global market for microprocessors.
Its nearest competitor, AMD, accounts for 10%. And AMD is dying a slow death. Its cash flows are rarely positive – only once in the past three years and twice in the past four quarters. This means more market share for Intel. Other competitors exist, but they can't match Intel for quality, price, or brand loyalty. Its profit margin in the third quarter was 23%.
For all practical purposes, Intel has no competition. It's a virtual monopoly.
With that in mind... Look at the selloff starting in early August in the chart below:
We sold a put betting Intel would fall to less than $19. The selloff sent Intel down to a laughably cheap level... around $18.
We used the selloff to make a terrific short-term gain. We made 6.5% in little more than one month...
Brian's note: Tomorrow, you'll learn how Doc's readers have managed to make faster, safer gains than you can with outright stock purchases. These strategies help folks generate large amounts of income without taking large amounts of risk. And they're perfect for retired investors.
If you're interested in a safe approach to making 20%-30% a year in your retirement account, we encourage you to join us as a Retirement Trader subscriber. To learn more about the service... and about one of the best deals we've ever offered on it... click here.
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