Many traders have heard about George Soros' exceptional abilities.
His most famous trade will probably always be his bet against the Bank of England.
In 1992, Soros knew that the central bank would be unable to maintain its policy of tying the value of the British pound to the European Exchange Rate, the predecessor to the euro.
Soros built a large position in the pound as it rose based on his analysis that the Bank of England would eventually have to abandon their currency peg. His analysis was correct, although few traders would have the ability to duplicate this strategy, which required selling at least $1.5 billion worth of the currency into a bull market.
While few can trade like Soros, any trader can benefit from his analysis.
Like all other large traders, Soros is required to disclose his U.S. stock market holdings to the Securities and Exchange Commission once a quarter.
In his latest filing, we learn that Soros has positions in 107 different stocks, an unusually high number compared to Warren Buffett who reported positions in 41 stocks, or Carl Icahn who owned only 16 different stocks at the time of his latest filing.
Among Soros' largest holdings are financial stocks, with Citigroup (NYSE: C) and American International Group (AIG) being the two largest positions in his portfolio. His biggest buy last quarter was Morgan Stanley (MS), another financial. These positions could be part of a trade based on Soros' macroeconomic analysis.
Individual traders can never fully benefit from that type of analysis because Soros reveals only a part of what he's thinking through infrequent public statements. What we can benefit from is a study of his stock picks. With a system, we could find the individual positions among his holdings with the greatest potential rewards.
I developed a trading system that finds the stocks with the highest relative strength (RS) and greatest improvements in cash flow. These two factors identify stocks with strong fundamentals and great technicals. The results tend to beat the market with less risk.
This system can be applied to any group of stocks, and it buys only the top-ranked stocks, up to three at a time. When risk increases too much, the system moves to cash. Turning it loose on Soros' holdings, we find that the system rules would have delivered an annual average gain of 17.3% a year over the past 10 years while the S&P gained 5.33%.
The worst loss an investor suffered using this system with the list of stocks that Soros owns would have been 24%, while the S&P 500 fell more than 55% over that same time.
(I define risk in terms of the worst loss rather than using the more academic approach relying on standard deviations because traders lose dollars rather than standard deviations.)
MSI provides radio systems and ruggedized computers to government and commercial users. The stock has only been trading since January 2011, and has been in a strong uptrend most of that time, gaining almost 70% in just over two years.
Given the strong uptrend, there really isn't a price target to identify for the stock. The best strategy to trade a stock like this might be to use a trailing stop, such as the lower Bollinger Band for more aggressive traders or the 20-week moving average shown between the two Bollinger Bands for a more conservative trade.
Anadarko Petroleum is an oil and gas company that is expected to enter a period of rapid earnings growth. Analysts expect earnings per share (EPS) growth to average about 20% a year in the next five years after averaging only 1% a year in the past five years. If they are right, APC could be worth about $96 a share, or 20 times expected EPS of $4.82 in 2014. This is more than 11% above the current price.
The chart shows that APC is in an accelerating uptrend and is near resistance formed by the 2012 highs. A breakthrough could push the price at least $20 higher based on the depth of the decline seen since those highs.
Applying a trading system to the holdings of great investors can help us find the best of their best ideas. George Soros has already done the analysis and said that there is something he likes about the companies he owns. My system finds the timeliest picks among his holdings.
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