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So, if you go long a stock putting out good news, while simultaneously shorting their competition, you will often see something like this happen: The stock putting out the good news pulls the sector higher. If you are long the news stock, and short the weakest competitor in the sector, chances are good that both will be winning plays. This isn't a new concept, but one that lost favor in the 90's, as everyone simply went long. Article: Quite a few firms are getting involved with "pairs trading" and we thought we just might take a moment to explain what the term means. Pairs trading means that you simultaneously go long one stock in a sector and you go short supernumerary one. On the surface, you might be thinking, "why would anyone do that?" Well, for a couple reasons. First, in just up and down every sector there are a couple leaders and everyone else is a laggard. For instance, in the tech area, IBM consistently outperforms others in general. In the financial sector, GS can rack up points better than most. So, leaning long the leaders when the time is right often pays you generously. Likewise, some companies often produce more good news than others. Some of it is "manufactured" and some of it is real, but the street tends to pay attention to the news generators and they often press them higher. So, if you go long a stock putting out good news, while simultaneously shorting their competition, you will often see something like this happen: The stock putting out the good news pulls the sector higher. But, in a day or two, the others in the sector often start falling back, while the news generator holds up, or even keeps rising. If you are long the news stock, and short the weakest competitor in the sector, chance are good that both will be winning plays. This isn't a new concept, but one that lost favor in the 90's, as everyone simply went long. Now the idea of pairs trading is noxious on again, and it's worth your doing some homework on it if it sounds intriguing to you. Forex Trading Strategy. - Learn how to day trade/swing trade major currency pairs. Someone who reads the blog sent me an email asking about a specific Japanese net-net. Rather than trying to choose the best net-nets from among the entire hoard in Japan, I would suggest doing one of two things:
In my own portfolio, I went with option #2. I bought 5 Japanese net cash stocks last year. I've since sold one of them. I have some cash. And am looking to add a couple more Japanese net cash stocks. Right now, they make up 30% of my portfolio. Again, I'm willing to go as high as 50% in Japan. We'll see what happens. But that's me. What would I suggest for others interested in Japanese stocks? Here's how I would look at Japan. If you can find stocks selling for less than net cash with few/no operating losses in their long-term history, buy them. Don't so much look for net-nets in general. Start with an even higher standard. Start with profitable, net cash companies. They are close to non-existent in the U.S. But not Japan. After that, I'm not sure I would necessarily just look at net-nets. For example, there are some cheap Japanese gas companies that are not net-nets (most of their assets are PP&E) but are super reasonably priced on an EV/EBIT basis. To me, it is more important to find totally obvious bargains than to get caught up in the definition of what a net-net is or isn't. Totally obvious bargains fall into a few categories. Here are 2:
In fact, if you really look, you may find some gas companies, grocery stores, etc. that are very cheap on an EV/EBIT or EV/EBITDA basis that you like better than some of the net-nets. That’s fine. Buy the most obvious bargains. The things that are clearly selling for less than they are worth. If you're only going to buy half a dozen Japanese net-nets, you should look for net cash bargains. Once we are talking about receivables, inventory, etc. you need to know more about the business. So it needs to be a simple business or a business you can learn about. That's harder. For me personally that means it makes sense to buy net cash bargains in Japan and look for net-nets on the basis of receivables, inventory, etc. in the U.S. Because in the U.S., I have a better chance of knowing the difference between a predictable business and an unpredictable business. If I could find 10 consistently profitable companies selling below net cash in the U.S., I wouldn’t buy any Japanese stock. Because I understand American businesses better. But I also understand that a consistently profitable company selling for less than net cash will work out as an investment regardless of how well I understand the business. And, of course, the idea is to buy a handful of these companies. Not just one. Talk to Geoff about Japanese Net-Nets Article Index: | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 | 25 | 26 | 27 |
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