The chicken or the egg?
I have argued, and repeat now for emphasis, that the market's leading stocks lead higher the market; the weak stocks do not lead lower the market. Ergo, one discernment you should make is to note when the leaders decline beneath pre-assigned levels of support within the up trending continuum of each. And vice-versa. To reiterate: leading stocks fulfill the role of engine as they pull higher the market; the market fulfills the role of caboose.
So please stop with the attempts to treat the market as analysand; rather analyze your portfolio's holdings -- and those you hope to purchase. This way lies opportunities galore... and consistent profits.
For example, long, long ago, one regular reader shared an investing idea with me -- Autodesk. "Sure," I said, "Its ticker is ACAD, right?" He corrected me immediately, "No. It is now ADSK. You have not looked at this position in a long time, and it warrants your attention. Here are several reasons why..." So I paid heed. And just this weekend requested he update his comments, which follow...
Autodesk/ADSK is in the design software business. It's an old company for the microcomputer software business having been around since the early 80's predating MS-DOS. Early on it came to dominate the 2 Dimensional CAD/CAM through it's program AutoCAD.
AutoCAD was neither the best nor the cheapest software in that category but it occupied the sweet spot in the middle - competent and capable of real world design projects and affordable for professionals working in small design businesses who might be brave enough to attempt to do their work on the primitive micro-computers available at that time. (As opposed to the mini-computer and main frame computers used by larger companies.) There was little in the way of a retail channel to reach these customers, and the software was sufficiently complicated to use that there developed a large base of VARs who would buy the AutoCAD software and then resell it along with custom packages for such tasks as architecture or civil engineering along with service and training. As this was a profitable business for the resellers, this network prospered and grew.
Because they owed their living to selling, supporting and customizing AutoCAD these VARs were both enthusiastic and loyal. This reselling network provided the company with two distinct advantages that they retain even today: Autodesk is supported by a vaste suite of product add-ons and symbol libraries that greatly extend it's reach, and a sales channel which is virtually impossible to duplicate and which is highly effective at selling such a product.
However, despite these advantages, by the early 1990s the company was floundering due to the eccentric conduct of it's founder and CEO (the original designer of AutoCAD) and it's engineering-driven management. It was then that Carol Bartz, the current CEO, was brought in to rationalize the company. Over the last decade she has done a remarkable job of stabilizing the company, creating a more focused business-oriented management, and both growing the market for their existing products and expanding their offerings into related niches.
The basic product is enhanced by a wide variety of add-ons for specific vertical niches - construction, architecture, electrical design, civil design, mapping, etc. and by graphics libraries containing symbols used in drawing up plans in these various industries. Additionally Autodesk has acquired or built related software products in 3D design software, and animation and graphics design for movies, TV, and computer animation and design. In these new areas they have continued to rely on their traditional reseller model, which is very well suited to such industries, as all of this software needs heavy levels of customization and support.
On a sales level it has enhanced its original niche in small design businesses and is now also found (according to their web site) in all of the Fortune 100 companies.
In brief, Autodesk has a commanding position in several important and rapidly growing markets, and a committed sales channel uniquely well-suited to sell into those markets.
This all seems pretty bullish to me. Autodesk/ADSK is a design software and digital content company. The Company's principal products include AutoCAD, AutoCAD LT, Inventor, Revit, and Civil 3D. In addition to software products, Autodesk offers a range of services, including consulting, support and training. The Company also develops, integrates, markets, sells and supports film and television compositing systems, high-definition and standard-definition broadcast editorial and finishing systems, digital cinema production systems for color grading and film finishing and animation, visualization and streaming media products. In addition, the Company's Location Services division offers a technology platform designed to deliver location-based applications to wired, mobile and wireless users. This link will take you to an intriguing 33-page .pdf slideshow of the company.
For the nine months ended 31 October 2005 (Q4 will be announced ~21 February), Autodesk's revenues increased 26% to $1.11B. Net income increased 58% to $245.9M. Revenues reflect higher new seat & subscription sales and higher penetration of vertical & 3D products. Net income also reflects higher operating margins, decreased cost of maintenance revenues, increased interest & other income and the absence of restructuring charges.
And guess what...? The stock reflects these successes. And it appears more are to come... So rather than fret over the market's rally during the first two weeks of this year (and thus seek reasons to sell existing holdings and not to purchase new opportunities), I instead seek to buy those that are set up for additional upside glory and sell only those existing holdings that have maxxed out their rise and reversed. Autodesk/ADSK is an example of the former -- upside room to run and about to do just that.
[click image to view enlargement]
Note the two trend lines -- the rising trend line, long term and confirmed multiple times and the declining trend line, short term and confirmed a handful of times. When an irresistable force (the long term up trend) meets a seemingly immovable object (the short term down trend), the long term trend tends to emerge triumphant. Of course, the pre-requisite is to study the subtle clues. (As I have shown, and continue to show, how to perceive.) NB: the critical test and reversal this past Thursday at the long term trend line of rising bottoms.
I contend (really, I know) that Autodesk/ADSK nears its breakout from this short term base; it is now only a matter of weeks, perhaps even days before the 'event' itself occurs. There are several price points to watch: $44 (above the rounded-up 50-day sma; unimportant), $45 (breaches the short term line of declining tops; important), $46 (confirms and ends the double bottom - not highlighted; critical), and ~$48 (confirms that the uptrend re-asserts itself; important). A decline in price beneath $39 would signify a reversal of the long term trend; treat that level as stop. My initial price objective following the breakout: $58-60/share. This translates, at current prices, as $16 of probable upside reward and $4 of possible downside risk, or a 4:1 reward:risk ratio. This opportunity thus qualifies, to me, as a worthy risk. I already have purchased Autodesk/ADSK shares, and will purchase several more lots under $45 (the last trade on Friday was at $42.88) in the days and weeks ahead. Of course, the lower the acquisition cost, the better; preferably near critical support in the $41-39 zone.
Yes, I always note the market's trend and trajectory -- to do otherwise is folly -- but I do not allow it (the market) to frighten or confuse me, as it does too many other investors. ("The market has risen too far too fast -- it will decline now!") Nor do I study the market (rather than the specific opportunities) in the attempt to find what I should buy (or sell). It is the continuum of the leading companies' stocks that always prevails. At worst, professional investors (yes, such as me) instead will sell the obvious winners across all periodicities (what I term as the middle of the chart; another visual clue) in favor of the long term winners that merely hesitate intermediate term. This is one method of moving from overvalued to undervalued on the basis of technical analysis. Some of this approach is predicated on experiential wisdom: I know many patterns and setups (mine is a very visual approach, thus helping to make more objective a process that relies on subjective interpretations), and thus I know how they tend to fulfill themselves. This is an uncommon approach and little understood; I am sure I have done a piss-poor job of clarifying it, both in this post and previously. As always, your questions could help clarify the matter for us all; please ask.
NB: this past Thursday, when Autodesk/ADSK stemmed its short term decline and reversed upwards, the trend became long and short term up and intermediate term sideways (base) to up and rapidly approaching powerful upside intermediate term breakout, hence, up in all periodicities. Nonetheless, the shares have yet to break out, and up. Yes, I am very bullish on this particular opportunity, and thus will purchase more shares (and lots) than I otherwise would.
It is time to make some serious (spending) money. Or lose only a few $$ in the attempt!
-- David M Gordon / The Deipnosophist
posted by David M Gordon | 12:05 AM
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