NEW YORK (TheStreet) -- Trend-following looks great on paper and in hindsight, but many investors find it difficult to pull the trigger and buy a stock that is trading near its recent highs. Having a plan for your entries and exits is what allows investors to succeed even when emotionally it may be challenging to execute.
The opposite is value investing, or what many refer to as catching a falling knife. You can make money with either method, but I suggest you pick one or the other and stick with it. When it comes to investing, "Jack of all trades, master of none" types usually feed the masters. Oversized consistent gains are difficult enough with one method, and let alone trying to bounce from method to method.
There is a sweet spot in trend following for the average investor; it's called buying on dips. Buying on dips is satisfying to many because "you're getting a deal" and at the same time you're still following the overall longer term trend.
In my last 52 Week Highs You Should Buy Now we did pretty well. Five winners that outperformed S&P 500's SPY results of 0.12%
Let's take a look and examine the results. I use the closing prices on the date of publication and Tuesday to calculate the return (with the exception of Carnival, Walgreen, and Citi).
Carnival CCL + 0%
NorthStar Realty Finance NRF + 10.6%
Bank of New York BK + 1.9%
Walgreen WAG + 4.5%
Citigroup C + 8.8%
Bank of America BAC + 5.4%
Carnival's cost basis is calculated differently because I provided entry instructions to wait on buying until a pullback which happened two days later.
Walgreen's cost basis is calculated differently because I wrote to wait for a price retracement "in the $36 to $36.50" range, which happened three days later. I am using the top of the range price of $36.50 to calculate the cost basis.
Citi's cost basis is calculated based on the article's suggestion to wait until $39, which happened about three days after the article.
Here are buys trading near their 52-week highs, but don't chase any of them. Chasing is for stop losses only. ORI data by YCharts
Old Republic International ORI
Background: Old Republic International engages in underwriting insurance products in the U.S. and Canada. Old Republic trades an average of 1.2 million shares per day with a market cap of $2.9 billion.
52-Week High: $11.35
Price to Book: 0.77
Old Republic has made a new 52-week high in four of the last five trading sessions. Investors receive 71 cents annually in dividends for a yield of 6.3%. The dividend is at risk based on estimated earnings, but insiders are buying none the less.
If a dividend cut was a serious concern, I would expect to see greater short interest. A highly followed stock like Old Republic is not about to be missed by the shorts. The short interest is minor and only 2.9%.
Look for an entry price just under $11 to lower your risk profile.
ORI Revenue Per Share TTM data by YCharts
CCE data by YCharts
Coca-Cola Ent. CCE
Background: Coca-Cola Enterprises produces, distributes, and markets nonalcoholic beverages. It provides still and sparkling waters, juices, sports drinks, juice drinks, coffee-based beverages, and teas. Coca-Cola trades an average of 2.5 million shares per day with a market cap of $9.4 billion.
52-Week High: $32.91
Price to Book: 3.29
The "other Coke," Coca-Cola Co. KO is what most people think of first when they hear "Coke", but both companies are important to the overall operation.
Coca-Cola Enterprises is staring at $33 a share, and building what is known as a bull flag in technical analysis. The higher share price has pushed the yield to less than 2%, but if you wait and buy under $32, the yield works out to 2%. This is the same price I suggest waiting for. There is no short interest to speak of. The last reported short interest is only 1.5% of the average trading float.
Holding out for $32 may mean you miss another leg higher without looking back, but the alternative may mean paying much more than you need to.
TWX data by YCharts
Time Warner TWX Time Warner operates as a media and entertainment company in the U.S. and internationally. It operates in three segments: Networks, film and TV entertainment, and publishing. Time Warner trades an average of 5.4 million shares per day with a market cap of $47 billion.
52 Week High:$49.96
Price to Book: 1.55
I am suggesting that investors wait for a retracement in price in several tickers in this article, and Time Warner is included. On the daily chart, Time Warner is extended and with an oversized risk of downward price pressure.
I don't know that Time Warner will retrace, but I am guided by past results in similar chart patterns. Look for support near $47 as an entry price. TheStreet reiterated its buy recommendation, and you can read the article here.
Time Warner offers an attractive yield and has a recent history of raising the dividend in February. With a payout ratio less than 40%, there doesn't appear to be a reason why shareholders can't cautiously be optimistic for another bump in the dividend rate.
On a yearly basis, the dividend is now $1.04 per share for a yield of 2.1%. As I wrote earlier, I would not chase this one, and the round number $50 is likely to be tested for a while. The small amount of short interest is 2.1%. TWX Revenue Per Share TTM data by YCharts
PHM data by YCharts
PulteGroup, Inc. PHM
Background: PulteGroup, through its subsidiaries, engages in homebuilding and financial services businesses primarily in the U.S. The company's homebuilding business includes the acquisition and development of land primarily for residential purposes within the U.S.; and the construction of housing on such lands. PulteGroup trades an average of 8 million shares per day with a market cap of $7.5 billion.
52-Week High: $19.47
Price to Book: 3.51
Last year was a great year, relatively speaking, to be a home builder investor. Shares in PulteGroup are no exception and the price more than doubled from this time in 2012.
PulteGroup has quite a bit of short interest, especially for a company tearing it up. The current proportion sold short based on the float is 7.3%, and I find this much interest by short sellers worth looking at in more depth.
It appears the daily chart wants to continue higher, but the weekly chart is at odds and suggests a price dip may be the ideal time to enter. Look for a price near support around $17.50 as a good place to enter. Otherwise, buying at this level is closer to chasing a high-flying stock than I care to get. That said, PulteGroup's recovery demonstrates what can happen when the Fed decides to prop up an industry. Earnings are growing and at the current rate of growth a reinstatement of the dividend may not be far off.
PulteGroup suspended its dividend in 2008, but earnings in 2013 are expected to increase 70% over 2012 levels. This is what makes PulteGroup a buy, but be sure to let it give you a dip in price first. PHM Revenue Per Share TTM data by YCharts
SIRI data by YCharts
Sirius XM Radio SIRI
Background: Sirius XM Radio provides satellite radio services in the U.S. and Canada. The company broadcasts approximately 135 channels, including music, sports, entertainment, comedy, talk, news, traffic, and weather channels on subscription fee basis through two satellite radio systems. Sirius XM trades an average of 58.2 million shares per day with a market cap of $16.4 billion.
52-Week High: $3.15
Price to Book: 3.85
I have followed SiriusXM on and off now for almost two years. Sirius is a fun stock because the Internet is always buzzing about investors who bought at next to nothing and watched it come back from the dead.
I never shorted Sirius, but I made money selling call options many times. Sirius trades at an unusually large price-to-earnings ratio due to the large perma-bull base of investors.
As a result of so many hard-core investors, you can't look at the metrics and dismiss Sirius as overpriced out of hand. Otherwise, you run the risk of not giving Sirius the full attention it warrants.
Also, unlike most stocks that trade for less than $5, Sirius doesn't appear to be a bankruptcy candidate (any longer). At the same time, don't expect to get rich from buying Sirius at this level because it is right on the edge of being controlled by Liberty Media LMCA , and there are more than five billion (yes with a b) shares in the float for a market value of nearly $18 billion.
With $18 billion chasing earnings of $400 to $500 million a year, the upside is limited but still acceptable on a percentage basis. Look for a buying dip near $2.95 as an entry target. For the bearish thesis, the super-sized valuation has not been lost on the shorts.
Short interest is near 10% and short sellers should not be ignored. That said, they are under pressure and underwater with the price at yearly highs. If shorts decide to say uncle and exit, they may push the stock price up even further if enough of them decide they had enough at once. SIRI Revenue Per Share TTM data by YCharts
At the time of publication the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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