Money Management Guidelines for PCA

Stock Talk

Stuart Housden

Stuart Housden

What are the money management guidelines for Profit Catalyst Alert? Is 100% of all positions at risk or is there a cutoff where we should automatically exit positions (e.g. if a position drops to 50% of its cost basis, say)? This would be useful to know for position sizing, i.e. if money management rules assure preservation of at least some of the original investment, then position sizes can be greater than when the assumption is that all of the position might expire worthless.

Linda McDonough

Linda McDonough

Stuart,
I do not issue official stop loss or cutoffs on positions as I have been washed out of good stocks in the past due to industry noise. When a stock drops sharply, I reassess the reasons why. If the fundamentals of the stock are sound and it is getting pushed around by group sentiment or just a soft market, I try to stick it out. Sometimes I will suggest a stop loss on half a position for subscribers with lower risk tolerance. Such was the case on May 10th when I suggested a $10 stop loss on SmartSand (NSDQ: SND), a company that continues to report great numbers but was hit due to fears of sand oversupply. The stock got as low as $5 but has bounced to $9. I expect it to go much higher.
Options trades are significantly more risky than stock trades so I would take that into consideration when deciding how to size those positions.
Best,
Linda

Stuart Housden

Stuart Housden

Hi Linda,

I am only trading the options recommendations, and the practice of riding losers into the ground for a total loss means that to date my losses with PCA far outweigh my gains. I am thinking of instituting a money management approach where I exit an options position if it falls to half my entry price. I don’t think that any of the winning trades I have had with PCA made their winning run after dipping so low, so my belief is that my account would look far less anaemic if I had been following such an approach from the outset. However, I have only been trading the PCA recommendations live since late January, so I do not have a very significant sample. So my question to you is “Historically, what percentage of PCA options trades that fell in price to 50% or less of their entry price ultimately recovered to end up winners?”, and a rider to that is “What percentage of those winners had gains of 50% or greater?”.

Thank you,

Stuart Housden

Linda McDonough

Linda McDonough

Hi Stuart,
I don’t have the data on hand regarding options positions that have fallen by 50% and recovered. I can try to review some of the historical data. You can see the closed options positions on the portfolio page under the closed tab. I do think you have a good idea regarding the stop losses and it is something I’ve been trying to backtest.
I will let you know what I come up with and thank you for the question/suggestion.
Best,
Linda

Jeffrey Lagrew

Jeffrey Lagrew

Brand new to PCA, but should I look at older recommendations like SND or just stick to new alerts?

Linda McDonough

Linda McDonough

Jeffrey,
We do have quite a few names in the PCA portfolio but I do keep up to speed on the news for each one. Just last week I sold out three names due to shifting fundamentals that lessened my confidence. If a name is in the portfolio and trading below my suggested buy limit, it should be considered. WIth the options, newer trades are usually better to act upon as the timing of events and options expiration dates make those tricker.
Best,
Linda

Michael B

Michael Blanchette

Linda
I’m fairly new to PCA and have two questions for you. Question 1) on average how long do you hold on to your stocks because I noticed some that you have had for over a year are down. My philosophy with stocks is if it hasn’t performed in a year I dump it. I also hate to ride a stock up only to watch it decline. Were any of your stock picks that are now down ever up more than 1% in a two or three month period? Question 2) What was your total return last year? I realize the market has been very turbulent this year but in looking at your portfolio I see a negative return.

Linda McDonough

Linda McDonough

Michael,
1. Each stock’s suggested holding period is different. I take changing fundamentals and valuations into consideration when deciding when to issue a sell recommendation. For example, I just sold three stocks out of the portfolio, one with a large loss (NSDQ: BGFV) because the story did not pan out as I expected and the numbers were not improving. I will usually give a stock a one-quarter pass for missing numbers but otherwise do suggest selling if the story has deteriorated.
2. The suggestions in the stock portfolio have a realized gain (those that have been sold) of 19.5% since inception (January 2016). The options closed since inception, an average gain of 16.5%. For those stock positions still open, the unrealized gain is .634%, so just barely profitable and weighed down by several large unrealized losses.
3. The closed stock portfolio in 2017 averaged a 29% gain and the suggested options trades, a 14% gain.
4. All of these hypothetical profit numbers do not include transaction costs and include all trades, including options that expired worthless.
Best,
Linda

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