March 2007 Monthly Update - J.G's Success Story

A Case History:

This month I will offer a case history of a PlainLanguagePlace subscriber.  The story begins with her first trade in February of 2007. 

J.G. is a new PLP subscriber and long time friend.  The stock she picked for her free analysis was Smith Micro Software Inc., ticker symbol SMSI.  The company offers products in the technology and communication-related markets, including wireless, mobile music, data compression, and diagnostic and utility software. 

Through a series of emails and her studying the techniques in Researching Stocks with Yahoo (http://www.plainlanguageplace.com/researching_stocks_with_yahoo.html) she decided that SMSI would be the stock for the speculative part of her portfolio.  She had recently transferred about $9,000 from a bank IRA account that was paying 2% interest into a Fidelity IRA brokerage account.  I recommended that about 10 to 20% be used for more risky investments to stay ahead of inflation.  Her goal was to make 10% profit in her first year because the 2% was not keeping up with inflation and she was actually losing money.  Skipping ahead, she made her 10% in the first two months and is shooting for more.

The criteria on choosing SMSI were as follows. 

First checking the price chart she noticed that it was trading below its 50 day moving average.  This is a good thing for stocks not in a prolonged downtrend.  Then checking the Key Statistics page in Yahoo Finance (http://finance.yahoo.com/q/ks?s=SMSI)  it was found that the PEG (price earnings ratio compared to growth) was 0.91 indicating that the stock was not overpriced at the moment.  A PEG of 1.0 is considered fair value and anything below that is considered cheap.

Checking further she noticed that the quarterly revenue (sales) growth year over year was 115% which is excellent.  The earnings growth for the same period was 63% and that is what really counts.  Looking to see the company’s cash position she noticed that the Current Ratio was 20.8 which means that there were plenty of assets to pay the bills.  A current ratio of 2.0 is considered acceptable.  Also the fact that the company has $0 of debt was just icing on the cake.

Seeing that only 60% of the outstanding stock was owned by institutions (mutual funds) showed that there was still plenty of room for the big boys to buy in.  Remember that mutual funds are the competition of individual investors.  If you can stay ahead of them they can help propel your portfolio to new heights fast.  So not noticing any major red flags she decided to take the plunge and buy some SMSI.

Then two weeks after J.G. increased her holdings in SMSI the company reported its 4^th quarter results.  (http://biz.yahoo.com/ap/070228/earns_smith_micro.html?.v=1)  In the report it showed that sales and earnings more than doubled beating most analysts estimates.  The stock price began rising immediately and has been climbing ever since.

Having luck in the telecommunications industry J.G. continued her research and found Tele Norte Leste Participacoes S.A (ticker TNE) which is a Brazilian phone company.  Checking the price chart she noticed that it was just breaking above its 50 day moving average.  The 50 day is considered a major resistance point and it is generally bullish if the stock can push above it.

On the Key Statistics page (http://finance.yahoo.com/q/ks?s=TNE) of TNE she noticed that the PEG was very cheap at 0.51.  The Price to Sales ratio of 0.79 was extremely good.  Any P/S ratio below 1.5 is outstanding.  The sales and earnings growth showed flat performance but with the PEG and P/S looking so good it indicated little risk for a sudden drop in price.  The percent of the float held by institutions was 47% which showed that the stock was somewhat “undiscovered”.

Two weeks after her purchase of TNE the apparent undervaluation was noticed by the rest of the industry and merger talks were rumored.  J.G. emailed me right away with the news and asked for some advice.  The stock price had risen 5% that day and another 5% the next day.  I told her to hold on because there was no telling how high the price would go.  I advised her to set stop-loss orders to protect her profits.  A stop-loss can prevent a dramatic loss but also can be used to lock in profits.  Then as the price continued to rise I advised her to keep pace by raising her stop-loss as appropriate.  That strategy is working so far.

J.G.’s Trading Details:

Bought SMSI 100 shares 2/12/07 at $13.41/share  $1341.00    

Sold  SMSI 100 shares 3/13/07 at $18.00/share      $1800.00

Profit:  $459.00 – 39.90 fees =  $ 419.10

Bought SMSI 100 shares 2/23/07 at $12.35/share  $1235.00

Current SMSI 100 shares 4/11/07 is $19.18/share  $1918.00

If I sold today profit would be:  683.00 – 39.90 fees = $643.10

Bought TNE 100 shares  3/19/07  at $13.08/share    $1308.00

Current TNE 100 shares 4/11/07 is $17.11/share     $ 1711.00

If I sold today profit would be 403.00 – 39.90 fees =  $ 363.10

Profit of $1425.30 since I started my trading at the first of the year.

Remember that all PLP subscribers are entitled to one free stock analysis just by emailing me at Ken@plainlanguageplace.com

Good Luck

Ken