How Dollar Cost Averaging Helps Reduce Risk, Tariff Terror for Farmers and more…

Welcome back from the holiday week. Despite a shortened trading week, the market chugged higher. A positive jobs report and surprisingly good news out of biotech inspired buyers to abandon their grills (momentarily) and join the upswing.

As I mentioned last week, we have many new subscribers, and I want to review a few tenets of my research and investing process.

Fundamental research is the basis for all of my trade suggestions. I learn as much as possible about a stock and the industry in which it operates. I analyze the company’s financials, identifying trends that indicate prosperity or problems ahead.

I must then be able to justify a higher or in the case of my put options suggestions, a lower price, for that stock. As all the stocks that I suggest are already undergoing some of the expected transformations, I expect them to perform within 9-12 months.

Sometimes I am accurate in my analysis, and a stock responds quickly. As addicting and wonderful a feeling this is, it does not make me a genius. The flip side, of course, is that sometimes a stock immediately heads in the wrong direction after my recommendation. This scenario does not make me a dunce, although it can feel that way.

This sequence is the case with my long suggestion in BJ’s (NYSE: BJ) and my short suggestion in Lindsay (NYSE: LNN). Both trades moved in the wrong direction right after my trade alert.

I suggest patience, particularly with the stock suggestions.  It is impossible to time a trade so that it immediately behaves from the moment of my recommendation; I suggest subscribers dollar cost averaging into positions. Dollar cost averaging means buying a fraction of your desired position over the course of several weeks or even a month, depending on your risk tolerance and holding horizon.

Options trades are trickier than traditional stock trades. We have already had an earnings event for Lindsay, which I reviewed in detail last week. If you own the LNN puts, I suggest holding them. All of the news I read regarding the agriculture market is super bearish, and I expect the stock to trade lower before the options expiration.

However, options trades are very time sensitive, so I suggest attempting to fill them within one week of my suggestion. If you are not filled in that time horizon, I suggest holding off.

As always, all trade suggestions come with the caveat that I may just be wrong. Please note, especially on options trades, there is an enormous risk. Buying options can result in losing 100% of the money allocated to that trade. Believe it or not, this is less risky than selling options naked, a situation where your loss is unlimited. I do my very best to avoid losing trades, but if an option is not in the money at expiration, it will expire worthless.

With all of those warnings aside, we have had many fabulous trades, and I expect more in the future. Thank you for being subscribers, and please do post any questions on Stock Talk.

Around the Portfolio:

Abbvie (NYSE: ABBV) and ANI Pharma (NSDQ: ANIP) enjoyed a boost from the unexpected good news out of Biogen (NSDQ: BIIB). Biogen’s Alzheimer’s drug showed positive results in a mid-stage trial. Biotech investors rejoiced that perhaps sentiment is shifting after months of the stocks getting hit due to disappointing trial results.

Agco Corp (NYSE: AGCO), Lindsay (NYSE: LNN) and Titan Machinery (NSDQ: TITN) are all trading higher with the market this morning but the news for their customers over the weekend could not have been worse. With the enactment of China’s 25% retaliatory tariff on soybeans last week, the trade war with the Farm Belt’s largest customer has begun.

According to the Chinese National Grains and Oils Information Center, China started buying significant amounts of soybeans from Brazil last week to find cheaper sources of this critical crop. Several news sources note that China has all but halted purchases of U.S. soybeans, which make up 50% of U.S. exports.

Farmers are already struggling with lower crop prices, and the loss of one giant customer should continue to crunch farmer’s finances. The expectation is that the grim news for the Farm Belt will leak down into these agriculture equipment stocks and send them lower.

BJ’s (NYSE: BJ) traded down mid-week possibly due to a downgrade of Costco (NSDQ: COST) by Northcoast Research last week. This downgrade is on a valuation basis, not due to any fundamental weakness in the market it serves.

The stock was initiated with a Buy rating at Loop Capital this morning with a $28 price target. This target is below my $40 one but significantly higher than current levels.

Old Dominion Freight (NSDQ: ODFL) saw its target raised to $170 from $165 at KeyBanc Capital to reflect higher tonnage shipped and better rates. The upgraded target comes after the analyst’s meeting with management.

Steelcase (NYSE: SCS) should see a pop due to a strong earnings report from office furniture manufacturer Herman Miller (NSDQ: MLHR). Herman Miller reported revenue and earnings above expectations and noted robust demand.

Synchrony Financial (NYSE: SYF) closed its $7.6B consumer credit receivables transaction with PayPal (NSDQ: PYPL). Synchrony acquired $7.6B in PayPal receivables. With the completion of the deal, PayPal and Synchrony have extended their existing co-brand consumer credit card program agreement, and Synchrony is now the exclusive issuer of the PayPal Credit online consumer financing program in the U.S., through 2028.

Stock Talk

Steve S.

Steve S.

Thanks for this discussion, Linda.

I encountered a limiting situation using dollar cost averaging with SYF: when it was time to purchase the second tranche of shares, the price had risen above your buy ceiling. I delayed the purchase until the stock had retreated, but this interrupted the discipline of purchases at regular intervals.

Linda McDonough

Linda McDonough

Your welcome Steve.
I know, it’s never easy, right? You want the stock to rise but not quite that much!
Remember my buy up to limits are suggested prices, not cast in stone. You could consider buying above those levels knowing, of course, that your upside could be limited.

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