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Trading Strategies

Trading on Volatility:
Case Study # 3 - Tecsys Inc.

Value investors look for good quality undervalued stocks to buy and hold for the long term. But in the short term, market volatility and market corrections can cause a short term decline in our holdings. So we set out to examine a way to limit our downside and perhaps even profit from market volatility.

Our strategy is to sell a stock we intend to hold for the long term if it dips 10% from its recent peak price (based on daily closing prices) and buy it back when it is up 10% from its recent low. Previously we found that we could increase our profit in Barrick Gold for the period examined from 5.4% to 33.6% with our strategy. Our second case study looked at Microsoft and found the change to be negligible. Now we continue with a look at a tech stock that rode the roller coaster up in January and February 2000 and then dropped down in March and April.

Trading on Volatility - Part 3 - Tecsys Inc.

Tecsys Inc. is a leading provider of "enterprise software for e-commerce driven organizations". Its solutions include Fullstream™, full cycle e-commerce software for dot-coms, and Elite.eCom™, software enabling bricks and mortar companies to take advantage of the e-commerce revolution.

Tecsys's products facilitate warehouse management, executive information systems, financial management, order management, in fact, the complete gamut of supply chain management.

In April 2000, the company's software was launched in an Oracle database compatible format. Previously it was available only on the Informix database. The move to Oracle compatibility increased Tecsys market potential five-fold as Oracle commanded 48% of the database market compared to 11% for Informix.

Tecsys also signed Sanyo Fisher as its first Fullstream customer on the Oracle database. Other customers included 300 mid-sized and Fortune 1000 corporations in telecommunications, health care, consumer goods, computers and more.

The stock was recommended as a buy by Brent Larsen and Ryan Irvine in the December 1999 issue of FutureStock Review at $5.20. It hit $7.65 by January 1 and climbed as high as $50 before being caught up in the technology rout.

The table below follows the company's peaks and troughs from Jan. 1, 2000 to May 12, 2000.

Date Price % Change
Jan. 1, 2000 $7.65 n/a
Jan. 14, 2000 $16.25 +112.4%
Jan. 31, 2000 $12.65 -22.2%
Feb. 17, 2000 $29.75 +135.2%
Feb. 28, 2000 $23.40 -21.3%
Mar. 14, 2000 $50.00 +113.7%
Mar. 30, 2000 $22.90 -54.2%
Mar. 31, 2000 $26.75 +16.8%
Apr. 14, 2000 $13.25 -50.5%
Apr. 18, 1999 $18.00 +35.8%
Apr. 24, 2000 $15.80 -12.2%
May 2, 2000 $20.90 +32.3%
May 11, 2000 $16.00 -23.4%

If we had about $10,000 of Tecsys on Jan. 1, 2000 and held it until May 12, 2000 when it closed at $16.70, we would have gained a handsome 118.3%. Would we have done any better by trading the stock? After all, it peaked at $50 before declining to as low as $13.25 during that period. Suppose we followed a rule of selling the stock when it declined 10% from a high and bought it back again when it increased 10% from a low? The table below outlines the trades starting with $10,000 invested. I've rounded off to the nearest whole share and whole dollar. The dates are of the highs and lows, not of the trading dates which would be whenever the buy or sell signal was triggered.

Date Interim Highs & Lows Trade Price Shares (after trade) Value
Jan. 1, 2000 $7.65 $7.65 1307 $9998
Jan. 14, 2000 $16.25 $14.63 0 $19,121
Jan. 31, 2000 $12.65 $13.92 1373 $19,121
Feb. 17, 2000 $29.75 $26.78 0 $36,769
Feb. 28, 2000 $23.40 $25.74 1428 $36,769
Mar. 14, 2000 $50.00 $45.00 0 $64,260
Mar. 30, 2000 $22.90 $25.19 2551 $64,260
Mar. 31, 2000 $26.75 $24.08 0 $61,428
Apr. 14, 2000 $13.25 $14.58 4213 $61,428
Apr. 18, 1999 $18.00 $16.20 0 $68,250
Apr. 24, 2000 $15.80 $17.38 3926 $68,250
May 2, 2000 $20.90 $18.81 0 $73,848
May 11, 2000 $16.00 $17.60 4196 $73,848

As you can see from the table, one would have gained approximately 638.5% on a $10,000 investment in Tecsys Inc. by actively trading according to our formula as opposed to a gain of 118.3% by buying and holding the stock. If we factor in the cost of trading ($27 a trade with e-Trade Canada), we would have incurred costs of $297 to do all these trades. At the end of our study period we would be sitting on $73,848 in cash and waiting for the stock to close above $17.60 before buying back in.

Note too, that the particular volatility of this market results in fairly active trading - three a month. The peak and trough came together on consecutive days on May 30 and 31. To follow our system would require close monitoring of our stocks.

Please note that the table above assumes we are able to buy at exactly 10% above the bottom of a drop and sell at exactly 10% below the peak of a rise.

Yours truly, unfortunately, has been calculating these values as an experiment to see what the results would have been. I owned shares of Tecsys, but held them throughout instead of trading according to the formula. I had no idea when I set out to do this exercise what the results would be, but I can tell you, I started to restructure my portfolios and implement this system in earnest after that.

From the three studies I've done so far, two, Barrick and Tecsys, worked out to the plus side by 500% or more. The other, Microsoft, broke even. My next case study applies this formula to a stock that has been on a long run downtrend.

As noted with my earlier studies, the system works only when the difference between the peaks and troughs exceed 20%. In theory, it should work even for a stock in a long run downtrend if its troughs and peaks diverge more than 20%. Click on the next study to find out what happened.

Case Study # 1 - Barrick Gold
Case Study # 2 - Microsoft

Case Study # 4 - Loewen Group
Case Study # 5 - Nortel Networks

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