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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Big Mo
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Big Mo
July 31, 2008 8:51 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.

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womanwithportfolio
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August 1, 2008 9:56 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.

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womanwithportfolio
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August 1, 2008 1:25 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.

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Donato
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August 1, 2008 4:22 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.

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Lawless
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Lawless
August 6, 2008 9:15 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.

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womanwithportfolio
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August 6, 2008 5:52 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.

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Gravity Switch
Gravity Switch
August 6, 2008 6:03 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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