Last week Wayne Himelsein, one of my managers, made two great calls. First, he said the market would “buy on rumor, sell on news” on the interest rate cut, and it did exactly that. Second, while the market meandered down all week, Wayne’s pick, Estee Lauder, was up. That’s the kind of skill it takes to make money in bad markets.
Kam: Your call on the market’s reaction to the Fed’s move, your call on Estee Lauder. You laid out the risk by a few pennies, and it held up precisely as you said it would, any others that fit that profile right now?
Wayne Himelsein: Thanks Ken. Yes, a stock in my current portfolio that shares that criteria is Keysight Technologies, which I will elaborate further on in short order, but before I do so, I want to talk a bit more on Estee Lauder. As you noted, and in reference to our discussion last week, I harped on a very precise level of $191.31, which was the low of its August gap.
As you likely recall from last week, I was impressed with its revisiting that level with a mid September low of $191.34 (on Tuesday of the prior week), which came within 3 pennies of the key level, but did not dip below. I loved how it held strong there and remarked how this behavior “screams buyers”, and more importantly, presents an ideal risk-reward scenario.
Kam: Yes, I very much recall all that. It bounced right above that price for days, but would not break it. I also distinctly recall your emphasis on the ideal risk-reward scenario. This was really the core idea of the discussion, is that what you are touching on again?
Himelsein: Yes, that’s the idea which is such a powerful point that it deserves to be reiterated, As discussed prior, the most beautiful trades are those for which the odds are greatly in one’s favor, where the upside vs downside ratio is larger than most others.
Estee Lauder was at this precise level, where one could buy and participate in extended future gains, or get out if it broke by just a tad. It happened to climb up this prior week (as anticipated), which, of course, showed how well it honored the level (and the thesis), particularly in light of the pressure of the broader market sliding down around it.
The twist that I want to illuminate is still how good it was had it not followed through. This is the concept of judging a trade not by whether one made or lost money on it, but whether it was the right choice; not judging by what happened, but by the decision. This is formally known as outcome bias.
Kam: Interesting. So you are saying that even if it failed and went down with the market last week, it still would have been what you describe as a “beautiful trade”? It seems most people would have a tough time judging a loss as “beautiful”!
Himelsein: That’s exactly my point. But had it trickled down and broke the key price level, it still would have been a beautiful trade. Think of it as playing blackjack and you are dealt two face cards. If you held 20 in your hand, you have to stand, and would be totally nuts to hit. If the dealer then showed 21, and you lost the hand, you would never say “well next time I’m going to hit.”
You lost, but given the impressive odds in your favor, you did the absolute right thing. And to that end, you should, and would, do that exact same thing every single time you are in that same position. Literally, even if you lost five in a row. The outcome does not alter the decision.
Kam: I very clearly see what you’re saying, and I wholeheartedly agree. So I’ll give that to you: Estee Lauder was a beautiful trade, and would’ve been regardless of what it did this past week! Given that, I can’t help but want to know more about Keysight, which you said fits that same profile?
Himelsein: I’ll jump more into the similar beauty of Keysight. First things first, from a larger lens perspective, Keysight has been on a tear since early 2015. It’s one of those unstoppable trends that is always a good “buy on dips” until it breaks its trend. The big question, of course, is the best risk-reward level (or best odds) to pick up that dip.
For this, I’ll jump to this year, where its been on fire. By early January, it had already recovered its drop with the market in Q4 of 2018. It was, in fact, one of the fastest stocks in the S&P 500 to recover. That shows strength. It then went on to make new highs regularly. By March/April, it was up over 30% on the year.
Kam: Wow, I’m looking at this vertical move in the first quarter of this year and am almost scared at how angelic it was. At the same time, it’s kind of gone nowhere further since then. What does this tell you?
Himelsein: It tells me that I want it! After such a vertical move, and with such perfection, a stock needs to breathe, to almost “catch up with itself”. It did this, and it did this well. As you might notice, it stopped in the low 90’s, at roughly 93, in April. It then dipped down, gave back a bit of its gain, and returned to full recovery by July 1st at, lo and behold, 93-ish.
It then took another smaller dip down, and a quick leap back up by July 24th, at of course, 93-ish. Then again, another dip down, except much less of a dip than the prior one, and only until it shared a nice earnings report on August 22nd, at which point it gapped straight up to a low near… 93-ish. This was meaningful for two reasons; one, the obvious key level, and two, that it was now above, and no longer below.
Kam: I see all this. It’s been moving sideways since April, with some ups and downs in between, but all the time seeming to be attracted to that key level. So now that it’s above it, you’re a buyer?
Himelsein: It’s even better than that. It got above, then has moved somewhat sideways since, touching that 93-ish point 3 or 4 times. It then climbed a bit in September, making a new high at 102 on the 19th, but then has slowly retraced ever since. It’s been dragging down with the market, “dipping” if you will, including a big 3% drop this past Friday.
However, and this is a big however, it’s 3% Friday drop brought it down to 96, only a few dollars away from our sweet spot. One could wait another day or two, but at this point, for my taste, it’s close enough; there’s just a few dollars of risk below it before exiting the trade, and major unknown upside to be had on the heels of its prior strength.
It is, at this juncture, a beautiful risk-reward entry. And there you have it, my insight on Keysight!
My Take: Wayne has an 18+ year track record delivering nearly twice S&P 500’s return over that period. Few managers have outperformed the market for as long and by as wide a margin.
Click here to learn more about Wayne, the stocks he has been buying recently, and sign up to be notified when he updates his views.