Tuesday, February 14, 2012

Q&A with Mark Minervini 2/15/12 - Your Questions Answered

QUESTION: How do you handle existing positions heading into their earnings? A perfect example would be CBM, which you mentioned you had a position and actually added to it recently, but after earnings it gapped down the next day by as much as 25%. Do you hold the stock into earnings, reduce your position, sell outright, or hold on and if it gaps below your stop, just sell ASAP? -Bob

ANSWER: I will tell you exactly how I handled the CBM trade. I took my initial position on 1/6/12 and then doubled up on 1/27/12. Then, on 2/3/12 I sold the second half for a small 4.14% profit. I held my initial position into earnings because I felt they would deliver a good report (I was wrong). The stock gapped down and I sold at the open for a -13.04% loss on the initial position. On the whole position I lost -4.24%. The fact that I traded around my position and nailed down a little profit added to my willingness to hold into earnings. Sometimes I hold and sometimes I don't. It's not an exact science, but I would suggest you never hold an oversized position into earnings. If the stock breaks down on a poor report, I almost always sell immediately. I don't care if it comes back and as it turned out I was wrong to sell; I'm already wrong, at that point I’m not interested in protecting my ego, I'm only interested in protecting my portfolio from additional loss. -MM



QUESTION: I have heard you mention that you know roughly how much percentage gain you can expect from your winning trades. Is this based on the structure of the pattern, volume patterns and how tight the pattern is? Can you expect to gain more % trading from a longer base formation relative to shorter continuation patterns?
-Andrew

ANSWER: It has nothing to do with any of the above. It is based solely on the results I have produced over time. Your results encompass all of the above; it's all that really matters in the long run. When I say I know what I can "expect" from my trading, I'm referring to my average result and not any particular single event. Analyzing results and using the information for future trading is a big part of how I trade. We have recently made available to our members the same software I use to log and track results, which helps them make better and more accurate assumptions, optimize sell discipline and track trading deviations. -MM


If you have a stock trading question you can submit it to askmarkminervini@gmail.com and then look for your answer here each week. Keep in mind, Mark answers questions in the order they are received.
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2 comments:

  1. Thanks for answering my question, I remember you said: "There are no failures, only results" So basically if you are willing to learn from your results and make the changes necessary then superior performance is something that can be attainable!

    ReplyDelete

  2. You can do it! The only way you fail is to quit.
    -MM

    ReplyDelete

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MARK MINERVINI'S STOCK SELECTION STRATEGY

Specific Entry Point Analysis® -SEPA®

Specific Entry Point Analysis® - SEPA® was developed by Mark Minervini. The methodology’s foundation is built upon historical precedent analysis of past stock market “SUPER PERFORMERS.” To determine what characteristics make a stock likely to advance significantly, historical models of top price performers and industry leaders are archived in the Minervini confidential database. These models are based upon sets of characteristics prevalent in exceptional winning stocks.

PATTERNS OF EXCELLENCE
On-going efforts are focused on identifying in detail the characteristics of the most successful performers of the past to determine what makes a stock likely to outperform its peers in the future. Based on these attributes, current investment candidates can be compared and scrutinized for criteria in-line with our proprietary Leadership Profile®. This success blueprint is the fundamental basis for our stock selection. The database and profile is continually updated to account for market dynamics and new available data. The SEPA® model takes into account thousands of historic company profiles going back over many market cycles spanning numerous decades. In order to find rapidly growing companies with the ability to sustain above average appreciation, a unique combination of quantitative screening, fundamental research and qualitative analysis serve as core selection criteria for the SEPA® investment process.

Additionally, the SEPA® ranking process scores each company based on earnings surprises, estimate revisions and company issued guidance in order to determine the probability for future price performance catalysts. A unique component of the SEPA® process is a focus on “where” a stock is within its earnings maturation cycle. Each day, computers systematically analyze thousands of stocks for specific data items using a proprietary series of absolute, relative and time dimension calculations. The extensive fundamental research ranks each investment candidate for probable earnings surprise.

Specific Entry Point Analysis® focuses on identifying, company-by-company, the precursors of inefficient pricing in order to distinguish appropriate entry points. Utilizing SEPA® Technology, stocks displaying the potential for significant price appreciation are identified and pinpointed. While nothing is perfect, the proven SEPA® Technology consistently highlights many of the best investment ideas and stock market leaders before they’re widely recognized by Wall Street.
The SEPA® screening process can be summarized as follows:

1. Stocks are screened through a series of "filters" based on earnings, sales, profit margins, relative price performance and price trend characteristics. Approximately 95% of all stocks in the market are eliminated in this first screen leaving roughly 1,000 initial contenders.

2. These remaining stocks are scrutinized and ranked for similarity to a proprietary Leadership Profile® in-line with specific fundamental and technical factors exhibited by historic models. This second stage of qualifiers removes most of the remaining companies, leaving a narrowed list of investment ideas for further review and evaluation.

3. The final stage is a comprehensive manual review. The narrowed list of candidates are examined individually and scored according to a “relative prioritizing” ranking process which considers the following characteristics:

- Reported earnings and sales
- Earnings surprise history
- EPS and sales acceleration
- Company issued guidance
- Earnings estimate revisions
- Profit margins (historic & projected)
- Industry and market position
- Potential "catalysts" (new products, services or industry changes)
- Performance compared to other stocks in same sector
- Price momentum, price trend and trading volume analysis
- Liquidity

The SEPA® ranking process is focused on identifying three key elements:

1. The potential for future earnings and sales surprises
2. The potential for institutional volume support
3. The potential for rapid price appreciation based on a supply/demand imbalance

Profiting from the Earnings Cycle

Individual stocks can go through extended periods of underperformance, in some instances for decades – Eastman Kodak’s stock price took twenty-four years (1973-1997) to just break even while the S&P 500 Index advanced 500%. While some stocks languish, companies with superior improving fundamentals can perform exceptionally well.

Large institutional buyers (mutual funds, pension plans, hedge funds, etc.) have the greatest buying power to influence a stock’s share price. So, what do they look for? Earnings and sales surprise and estimate revisions contribute to valuation model changes and thus impact buying and selling pressure. The subsequent buying pressure that comes from an earnings surprise or a company materially raising guidance generally leads to a higher stock price, which in turn attracts momentum buyers.

An understanding of how Wall Street works and identifying what specific characteristic will attract institutional buyers into a stock is our daily focus. The graph below illustrates a typical earnings maturation cycle and where we focus our efforts on buying and selling within the cycle
Summary of the SEPA® Process

HISTORICAL PRECEDENT ANALYSIS
-Study of the best performing stocks over each market cycle
-Characteristics defined and archived in our database
-Blueprint is constructed based on attributes of winners

COMPUTER SURVEILLANCE
-Computers screen 8,000+ stocks daily
-Narrows down the top 1%
-Companies displaying specific characteristics are identified

LEADERSHIP PROFILING
-Data is compared to all stocks
-Results are compared to a Leadership Profile®
-Profile is continually updated to reflect new information

RANKING AND SELECTION
-Candidates are monitored for specific criteria convergence
-Catalyst such as earnings surprise, company issued guidance
-Entry point defined based on risk/reward

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