Navellier and Mechel — Cautionary Tale

By Travis Johnson, Stock Gumshoe, July 29, 2008

Greetings from the road, everyone — my time is limited today so I’m sharing a very interesting comment that a reader sent in … we’ll call him Carlo.

Carlo looked into Louis Navellier’s recent history with the formerly highflying Russian steel (and coal) stock, Mechel (MTL). This was also a Robert Hsu pick for a while, I’m told (Hsu and Navellier have the same publisher), but the same little birdie also told me that Hsu sold his Mechel at a very lucky time. Navellier apparently didn’t (I have no way of knowing for sure), though I imagine he has probably sold it by now.

I’m sharing this note just to offer yet another little cautionary tale — Navellier’s system is built on earnings momentum and growth, among other similar quantitative measures, and like any other system it can fall prey to big downside surprises. MTL’s was essentially political in nature, which means it probably shouldn’t have been that much of a surprise in Russia, but one can never quite predict where bad news will come from … and stocks like this that build a following among growth and momentum investors can fall much harder than most when those surprises do occur.

I’ve never lookd at Mechel in any detail and don’t know whether the severely beaten down price now is an opportunity, but if you have an opinion feel free to share.

Here, without further ado, is Carlo’s compilation of Navellier’s notes about Mechel over the last couple months — if you’ve got a chance, go back and read over them … would you have been convinced that this was a great stock to buy?

MTL today (07/29) is still going down … $18 and counting.

Again, I don’t really mean to single out Louis Navellier, though he’s one of the more aggressive advertisers and I write about him quite a bit — just wanted to share Carlo’s walk down memory lane, and offer a little sober reminder that very few systems are really effective at predicting the bad news shocks that occasionally hit the companies we know and love.

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    1. steve
      Jul 29 2008, 03:57:36 pm

      Louie, E mailed me special instructions yesterday
      to put in a ‘GTC’ order to sell (MTL) at $22.00
      he predicts a dead cat bounce. I bet he sold already. we’ll see if it bounces back up to 22

    2. Steven Mitchell
      Jul 29 2008, 07:01:14 pm

      From his blog: “Yesterday, shares of Mechel (MTL) plunged 38%….The good news is that the stock is bouncing back today by over 13%, and the company has released an official statement saying that it will cooperate with the government. I’ll keep new posted on any further developments in Mechel.
      Posted by Louis Navellier on July 25, 2008 1:32 PM”

      What he doesn’t say is that the day before “yesterday” (the 23rd) the stock closed at 36.61…already 38% off its high. At 18, the stock was 69% off its high. After plummeting 40 bucks without so much as a “look out below” from him, the 13% rally he’s talking about was all of $3.36. How can this guy stay in business?

    3. Bigdummyjoe
      Jul 29 2008, 07:46:46 pm

      He stays in business because he’s actually very good and what he does and most people are very bad at investing. Actually most people who buy stocks aren’t investing. They are gambling. But they either don’t know it or they are deluded into thinking that they are investing. That’s how he does it.

    4. spreadtrader
      Jul 29 2008, 10:10:39 pm

      Just so that I understand….this guy was closely following this recommended stock on at least a weekly basis, during which time (less than 60 days)it lost 69% of its value. At no time did this very good investor counsel his very bad gambling subscribers (who don’t really understand investing) to sell it; and that makes him very good at what he does? ANYBODY can pick stocks. What separates the “good investors” from the wannabes is the ability to cut losses and lock in profits. It appears that this gentleman can do neither. He’s a wannabe. Even an ordinary chart reader could tell that this stock needed to be sold no later than June 24th. It’s not what you make, it’s what you keep. By the way, what does he charge for the privilege of watching 69% percent of your money (not his) disappear?

    5. DonBull
      Jul 30 2008, 09:52:56 am

      Back in 1995, I went to a presentation by Louie (in Sarasota), have followed what he throws out for free (never subscribed), he’s not a good picker! Believe he is in the same unspectacular stable (Philips) with Tobin Smith, etc.
      which grinds out yards long email enticements (they apparently pay copywriters by the yard).

    6. Jim
      Jul 30 2008, 09:54:34 am

      Hey Folks does anybody know what the stock simble
      is for the stock that Warren Buffet bought $500 million worth?? I would love to know just to see if its true. Thanks

    7. fireball
      Jul 30 2008, 10:07:47 am

      from what i can tell by following l.n. some, his advice may be pretty good on some quick trades. i believe he has sacrificed some integrity during these rougher tighter times. as investments from my limited perspective he has not done well. hey if anyone wants to send a few thousand i will tell you my next guess but i would advise you to just follow the gumshoe as he helps me make my guesses quite a bit.

    8. Elissa Stein
      Jul 30 2008, 10:27:33 am

      Yes, Louie has his share of rocks that plummet. So does Steven Leeb. You should see what he did after he recommended AYR and it started to plummet. He endorsed it again! Then, a day or two later, he issued an urgent message to sell. It’s lost over 50% from where he recommended it. You just can’t rely on these guys to warn. They don’t seem to have the expertise they tout.

    9. Indya
      Jul 30 2008, 10:28:44 am

      Anyone who invests in Russia has done absolutely no research or ahs lost all perspective. Sorry for the losers but it’s inevitable that the govt, i.e., Putin & Co, will own everything that isn’t alrewady theirs. What does the Gumshoe always say about one-owner stocks? It applies in spades in Russia.

    10. Gerry
      Jul 30 2008, 10:48:14 am

      On another front and Paraphasing DonBull “…they apparently pay copywriters by the yard.”
      Has anybody read Crooks Jr’s pub yesterday about “for Big Game Hunters, in Forex”? – Very enticing. I would like to ear comments.

    11. Keith
      Jul 30 2008, 10:48:37 am

      If you stick with Louie’s conservative picks he actually has done pretty well through the years. I’m not sure why anybody in their right mind would invest a dime in “Putin’s” Russia.

    12. Dan
      Jul 30 2008, 10:54:00 am

      I used to gamble on football. I used my own reasoning for the first couple of years and did terrible. Then I responded to emails from supposed experts in the gambling field, paid a few of them for their services, with similar results. Finally, my wife made me quit. Now I fill this need to gamble by buying and selling stocks, following the same pattern–trying to pick on my own, then following touts like Crammer and Navelier.

      Stocks, football…same thing. Neither is an investment. They’re both just gambling.

    13. SageNot
      Jul 30 2008, 10:54:50 am

      Bigdummyjoe ISN’T!!! You bet that you’re gambling when you say that buying stocks is just investing. Warren Buffett invests (in the businesses), most of us are gambling to some extent. Good gamblers set loss limits so that they have skin left to play with, hence a trailing stop loss s/b used with stocks to lessen the hit when the stuff hits the fan.

      Forgive me for re-posting one of Mark Skousen’s rules; “never, never let a big gain become a loss” or words to that effect. It’s just dumb to say that you’re investing (gambling) for a bigger gain, when all you have to do is buy back in if you were wrong to sell. What’s a “round-trip” commission compared to the $$ carnage that “buy & hold” subjects you to w/o a reasonable stop?

      I’m with you Bigdummyjoe!


    14. TC
      Jul 30 2008, 12:38:14 pm

      To add my 2 cents, and to be perfectly open and honest, I did jump on the Navellier’s hype train a little over a month ago and bought into GTE – he was touting that this one would ‘double by next Friday or your money back!’ Well, when he moved the ‘next Friday’ bit up a week (I think it was at least twice) it still didn’t help. It’s all been downhill.

      Sure everyone says wonderful things about GTE and how the company is going strong, but for a ‘two-bagger’ that Navellier said it would be, WRONG! I’m currently 33% DOWN! In the long run Navellier may be right about the potential….but for a quick gain as blatantly predicted, this is a real bummer.

    15. Nick
      Jul 30 2008, 05:02:09 pm

      Louie’s latest “$13 solar doubler” seems to be Solarfun (SOLF) — last round of earnings produced a damn good bounce, but with the way the market is right now I’m not sure if it will repeat. Anyone fancy some SOLF?

    16. Tom
      Jul 30 2008, 05:54:51 pm

      I bought FSYS, GTE & GSI as per Navellier recommendation(not subrscribed to it yet; thought I’ll go by his free recos to see how he is before subscribing). All stocks are down till now. Still awaiting to reach my buy price. Got the lastest reco about some “$13 solar doubler”. Maybe its SOLF. Not sure.

    17. JohnnnyB
      Jul 30 2008, 06:31:05 pm

      Todays discussion has one aspect not asked by anyone. Who are these investment letter writers really working for? Your financial health and well being or theirs and the company they are touting?

      The comments about gambling are very true. I think about that aspect of investing each time I make a trade and challenge myself (are you gambling today JohnnyB or are you making a reasonable investment choice?) That is a tough call. I wonder how many of us are in it for the excitement and adrenalin rush it brings to be on the right side of the trade. The feeling of blowing your horn on the message sight for the stock. Not something I do, but for some.

      As for me I really yearn for someone who can give me good advide that I can follow because I just need to be in charge of my own financial situation and missed econ 101 otherwise I guess a good mutual fund would be more practicle. I might even sleep better at night.

      I also agree with the comments that it takes a lot of courage for a newsletter writer to say “Hey I’m wrong on this trade, get out now”. Now there are a couple like that at Stansberry I like. Two times I have had trades recommended to me were in situations where the company touted maintained that they had huge cash reserves, when they didn’t. That always hurts an advisor, bam your blindsided by the company you depended on to tell you the truth. Unfortunately we have witnessed more and more of this sort of sickness on Wall Street as the financial market continues to fall. First they started misrepresenting the quality of the investment they were selling and then they lied later on about their balance sheet. Gambling may be the operative word in this day and age of investing, when you are not sure who you really can trust.

      Speaking of trust thank goodness for “Gumshoe Guy”, a breath of fresh air in troubling times. WOW!

    18. Read&Invest
      Jul 30 2008, 10:35:41 pm

      I tried Crooks and used my money=back guarantee. I was not impressed. Navallier has a good long term track record, but it’s based upon the market going up more than down. You will lose money with him and almost anyone in a bear market. Lately I’ve made $ selling deep out-of-the money put options on big down days where the expiration is less than a month away. You’d be surprised how much people will pay you when they are scared and greedy. I own a small amount of SOLF. I haven’t made money on it yet, but one nice earnings pop and I’ll be in the green. Mechel is probably a good speculative stock now, but if Putin is intent on killing it, you could lose it all. I think the new government doesn’t want the market killed by Putin. It’s a political power struggle issue now, not an investing issue. The company is in an investment sweet spot except for Putin. Navallier is big on agriculture and oil. For the short term at least, that’s the best part of the market. financials still seem risky to me.

    19. Bart
      Jul 31 2008, 09:48:30 am

      I’m with you guys. It appears to me that Navallier’s stocks are generally high priced with little room to move, so the average investor probably can’t do it. Only if you can play the average on the portfolio as a whole and be in when he is does it appear you have a shot at it working. It’s more like educated gaming.

      On Russia, there is no power struggle. Putin controls the government. He merely moved to a different position because time was up on how long he could be president. His boy was put in that job so he still effectively controls it.

    20. A.Nony Mouse
      Jul 31 2008, 10:43:19 am

      In Hsu’s latest update, he states that subscribers who followed his buy/sell advice on Mechel would have booked a 249% profit. Admits he was lucky with his sell call timing. A word of advice to perspective Hsu subscribers…wait for the $199 13 week sale on his AsiaPacific Edge Newsletter. The gains are much better than China Stratgy. Plus If you have a little bit on the ball you can learn how he thinks and can become you own Robert Hsu with the help of Investor’s Business Daily weekly top 100 stocks

    21. Big Mo
      Jul 31 2008, 08:51:28 pm

      JohnnyB, you are right. The investment letter writers are basically in it for themselves (though there are a few exceptions). One thousand subscribers at $200 apiece is a cool $200,000. Spamming costs nothing.
      Think about it. Is it any different from the old ads that claimed “Make $6,000/month in your spare time at home stuffing envelopes. Send me $20 to find out how.”
      Or “How I made $1 million in real estate in 18 months with no money and no experience. Send $50 for my information kit.”
      If the stock picker, the real estate expert, and every other get-rich-quick hypster really had a magic formula, why would they need your chump-change? Think about it.
      Again, there are a few good investment newsletters out there, but the majority are a cottage industry unto themselves.

    22. womanwithportfolio
      Aug 1 2008, 09:56:59 am

      Hello, fellow Gummies. Long time no see. I just wanted to put in a word for three aspects of investing that have been slammed of late ( often for good reason, I admit). One is the “story,” the other “fundamentals,” and the other is “buy and hold.”

      When a market is in volatile bear territory, there is often little rhyme or reason to why stocks get bought and sold, other than momentum, sector swing and herd instinct, as well as black-hole hedge fund action, in which case both the story and the impetus to hold for a better day are lost or hidden, irrespective of their long-term merits. The technicals are reflecting the movements of the market in terms of demand and avoidance, as well as volume, and good techical analysts can recognize recurring patterns that are predictive of near-term action. More power to them.

      Frankly, however, most investors don’t have the time or skill to succeed in frequent, active trading, so in those cases, the ultimate safe buy and hold is a good array of index funds that allow for bizarre fluctuations and recovery when the market regains a foothold. The volatility also allows long-term investors to add to their holdings of stocks that have long-term potential (to be gleaned both from fundamentals and from the “story”).

      The “story,” from my point of view, along with fundamentals, can allow you to find a good stock before the technical guys pick up on it, in part because there may not be enough volume to make a judgment on technicals. A recent example is one of my favorites, Peerless Manufacturing, which I wrote about in Seeking Alpha when it had negligible volume. I was going on story and on fundamentals when I found it, and it has proved to be one of my better stocks. Of course, now that it has some volume, its fate may be better judged by technicals, at least in the short term, but I like its long term story as well.

      Another stock that has a good story but that gets battered periodically for no discernible reason from my point of view is Calgon Carbon (CCC). They just had a blowout report, and if I had been following technicals, I would have sold a good stock.

      I think it’s important to recognize that each of us has an investment strategy that we’ve found to work for us, reflecting our long term goals, the time we have to spend on investing, and our risk tolerance. Bear markets obviously test everyone’s risk tolerance, but if you’ve been through them before, you know that the sun will rise again, and there will always be boats rising with the tide. If you have index funds, and if you’ve held some good long term stocks, particularly those that pay dividends, you’ll come out the other end with a decent portfolio.

      For those with the time and technical skills to try to discern which way the wind is blowing in the short term, that will work, too. Just not for everyone. Using the full array of tools, which include story, fundamentals, and technical, seems to me a good approach for many of us.

      By the way, from my experience, using stops doesn’t always work. There are traders I know who do nothing but try to pick off stocks from folks who have not been wise in setting their stops. And then of course there are the plunges in which your stock just falls through your limit. There are no safe limits in free fall, unfortunately.

    23. womanwithportfolio
      Aug 1 2008, 01:25:19 pm

      Farley, I agree that simply indexing the S&P is not the way to riches, though using dollar-cost averaging over the past ten years would improve your results over a lump sum initial investment, and considering dividend reinvestment, you’d have made money on your simple S&P index. And you wouldn’t have been hammered as hard by the huge losses some folks experienced in the dotcom bust, discouraging them from the market for good.

      There is a smart way to indexing, which many successful institutional investors use, and which individuals can use as well. You can use ETFs as well as funds, and it involves a range of asset classes. If you want to increase performance, you can do some minor tweaking or shifting by overweighting and underweighting some of your allocations as conditions change. The best index portfolios have outperformed a great majority of actively managed funds, particularly if you consider trading costs and taxes, which tend to eat up profits over the long term. If you want to seek alpha, you can invest in individual stocks and sectors, as most of us do who follow the Gumshoe, but a base of index funds gives you a safety net. (Farley, not everyone has enough dough to interest a top money manager. The best ones I know have a minimum of $1 million, and actually they’ve underperformed the index portfolios. Some of my wealthy friends have not been sleeping well at night.)

      I’m not saying by any means that indexing would outperform a whiz like Farley, simply that the average investor can get dinged by trying to time the market. Not everyone has the resources, talent, time or experience to win by trading frequently. That doesn’t mean holding onto stocks forever, like dead fish. It means holding on to the ones whose fundamentals are holding up, and whose earnings have major potential to increase or surprise. And yes, one not yet owned by everyone under the sun, so that there’s still demand.

    24. Donato
      Aug 1 2008, 04:22:31 pm

      To Woman With Portfolio . . .
      Those were two very well put posts’. It has taken me awhile, but I’ve come to accept the fact that successful investing in the stock market (for me anyway) is a combination of using the technicals, fundamentals, value investing, and trends.

      As long as I use those four concepts in somewhat equal portions, I make money.

    25. Lawless
      Aug 6 2008, 09:15:32 am

      I got stopped out of Mechel long before Navellier recommended to sell. I’m glad I didn’t follow Navellier’s recommendation of not using stop losses.

    26. womanwithportfolio
      Aug 6 2008, 05:52:18 pm

      With regard to institutions shifting to indexing, here’s a recent development. The Massachusetts state pension fund pulled $2 billion in assets from Legg Mason Inc.’s Bill Miller and four other firms as part of a plan to shift all U.S. equity assets from managers who actively pick stocks to buy and sell.

      The board of the $50.6 billion pension fund approved the switch at a meeting today, citing “inconsistent performance,” said Francy Ronayne, a spokeswoman for Massachusetts Treasurer Timothy Cahill in Boston. The money was assigned to portfolios run by State Street Corp. and three hedge funds that are designed to track the investment performance of indexes, or baskets of securities.

      “We’ve determined that active managers add no value over long periods of time,” Michael Travaglini, director of the Massachusetts Pension Reserve, said in an interview.

      That doesn’t mean that stock pickers are obsolete, just that indexing is a good base for building a portfolio over the long term. One of my husband’s longtime from-childhood friends, who is one of the richest men in the country, and who advises huge institutions like state pension funds, told me way back when to start with indexes. And so far he’s been proven right.

    27. StockGumshoe
      Aug 6 2008, 06:03:09 pm

      WWP — Certainly that’s the basic strategy that probably most folks should start with, at least (though it’s hard in years like these, the anomaly years when actively managed funds on average beat the index). If your goal is to beat the market, you have to at least start by doing as well as the market, which is surprisingly difficult to do on a consistent basis.

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