Trading
Strategies
Trading
on Volatility:
Case Study # 4 - Loewen Group
In days of yore, it's said
that Sir Lancelot once went out on a special mission for King
Arthur that took him far afield from Camelot. He rode all day and
into the evening when night fell and his horse gave out. He
desperately needed a new steed to continue his journey so he
knocked at the door of a house on a hillside to ask to borrow a
horse. An old woman answered and told him she had no horse.
"Well, perhaps a
donkey, then? Anything?" asked Lancelot.
"All I have is my
hound," said the woman. "A giant mastiff."
"Well I can ride
him," Lancelot, replied. "Bring it hither."
Calling the mutt over, the
old woman pointed at it and said, "Look at him! He's mangy,
hair falling out in clumps, ferocious mad eyes, and horrible
breath. You can't have him."
"He's perfect,"
said Lancelot. "Why can't I have him?"
"Good
sir," the crone replied, "I wouldn't think
of sending a knight out on a dog like
this!"
Bada bing! Bada boom!
Okay. Awful joke. But's
it's my segue! Speaking of...
A Dog Like This
If ever there
was a dog of a stock in recent years, it has to be Loewen Group,
the cemetery company.
This was a
high flyer for several years, rising from a split adjusted price
of $3 in December 1987 to a high of $55.50 by the end of
September 1995. The Burnaby-based company grew largely on heavily
financed acquisitions, mostly in the US. Its fast pace set it on
track to overtake SCI as North America's largest cemetery and
funeral service business.
But its
debt-powered growth came at a price - it overextended itself. It
ruffled the feathers of smaller companies it took over. It became
the target of numerous lawsuits. The company promptly went from
high flyer to basket case.
After
fluttering around for a few years in the $30 to $57 range, it
settled at $40 in the spring of 1998 where it sat for a couple of
months before its financial woes finally caught up to it in
spades. The stock plunged from $41 on June 9, 1998 to $0.35 on
June 14, 1999, an incredible loss of 99.15%.
You'll recall
that in my first three case studies of active trading (see links
after this article), I tried to determine whether one could mitigate
risk and even increase profits by selling a stock you had bought
for the long run when it dips 10% from a recent high and buying
it back when it climbs 10% from its subsequent low. In two cases, Barrick Gold and Tecsys Inc., following this plan increased
profits five fold.
In the other
case, Microsoft, there was no difference between buying and
holding the stock for the period studied or actively trading per
our formula. But a Microsoft shareholder may have had greater
peace of mind following this plan by being in cash during market
downturns.
So I wondered
what the results would be using this trading formula on a stock
in long run decline. Naturally I thought of Loewen Group. If
Loewen from June 1998 to June 1999 wasn't a dog, then fetch me
some more milkbone!
The results
amazed me. I fully expected that an investor would lose money
hand over fist on this turkey, even with this active trading
plan. The table below shows the results if an investor had bought
around $10,000 of Loewen on June 1, 1998 at $39.45 a share and
traded it per our formula through to June 14, 1999.
| Date
|
Interim
Highs & Lows |
% Change
|
Trade Price
|
Shares (After Trade)
|
Value
|
| June 1, 1998 |
$39.45 |
n/a |
n/a |
253 |
$9,981 |
| June 9, 1998 |
$41.00 |
3.93% |
$36.90 |
0 |
$9,336 |
| July 22, 1998 |
$29.60 |
-27.80% |
$32.56 |
287 |
$9,336 |
| July 29, 1998 |
$35.15 |
18.75% |
$31.64 |
0 |
$9,070 |
| Sept. 1, 1998 |
$17.25 |
-50.92% |
$18.98 |
478 |
$9,070 |
| Sept. 17, 1998
|
$24.40 |
41.45% |
$21.96 |
0 |
$10,497 |
| Oct. 8, 1998 |
$12.15 |
-50.20% |
$13.37 |
785 |
$10,497 |
| Oct. 20, 1998 |
$15.80 |
30.04% |
$14.22 |
0 |
$11,169 |
| Oct. 28, 1998 |
$13.30 |
-15.82% |
$14.63 |
763 |
$11,169 |
| Nov. 10, 1998 |
$17.45 |
31.20% |
$15.71 |
0 |
$11,990 |
| Dec. 17, 1998 |
$11.30 |
-35.24% |
$12.43 |
965 |
$11,990 |
| Dec. 24, 1998 |
$13.20 |
16.81% |
$11.88 |
0 |
$11,459 |
| Jan. 21, 1999 |
$6.15 |
-53.41% |
$6.77 |
1,694 |
$11,459 |
| Jan. 26, 1999 |
$7.50 |
21.95% |
$6.75 |
0 |
$11,434 |
| Feb. 2, 1999 |
$5.50 |
-26.67% |
$6.05 |
1,890 |
$11,434 |
| Feb. 4, 1999 |
$6.25 |
13.64% |
$5.63 |
0 |
$10,630 |
| Feb. 18, 1999 |
$2.52 |
-59.68% |
$2.77 |
3,835 |
$10,630 |
| Feb. 22, 1999 |
$3.45 |
36.90% |
$3.11 |
0 |
$11,908 |
| Mar. 5, 1999 |
$2.17 |
-37.10% |
$2.39 |
4,988 |
$11,908 |
| Mar. 8, 1999 |
$2.51 |
15.67% |
$2.26 |
0 |
$11,269 |
| Mar. 11, 1999 |
$1.23 |
-51.00% |
$1.35 |
8,329 |
$11,269 |
| Mar. 18, 1999 |
$2.84 |
130.89% |
$2.56 |
0 |
$21,289 |
| Mar. 25, 1999 |
$2.04 |
-28.17% |
$2.24 |
9,487 |
$21,289 |
| Mar. 31, 1999 |
$2.70 |
32.35% |
$2.43 |
0 |
$23,053 |
| April 19, 1999
|
$1.40 |
-48.15% |
$1.54 |
14,970 |
$23,053 |
| April 27, 1999
|
$1.72 |
22.86% |
$1.55 |
0 |
$23,173 |
| May 13, 1999 |
$1.25 |
-27.33% |
$1.38 |
16,853 |
$23,173 |
| May 14, 1999 |
$1.38 |
10.40% |
$1.24 |
0 |
$20,932 |
| June 14, 1999 |
$0.35 |
-74.64% |
$0.39 |
54,368 |
$20,932 |
Now isn't
that amazing? Of course, we were helped along by a tremendous
dead cat bounce in March 1999 when the stock soared from $1.23 to
$2.84 in one week.
Now I
wouldn't recommend going out and looking for a loser to try this
on! Loewen eventually had to seek
bankruptcy protection to stave off its creditors. There is
certainly a great deal of risk involved in playing this game.
And, of
course, my studies are predicated on being able to actually sell
the stock at exactly 10% below its recent highs and buying back
at exactly 10% above its recent lows. Declines of more than 10%
in a day, opening gaps on the next trading day, and other factors
would make it difficult to get those same results. But it does
indicate a pattern and a possibility.
Case Study # 1 -
Barrick Gold
Case Study # 2 -
Microsoft
Case Study # 3 - Tecsys
Inc.
Case Study # 5 - Nortel Networks
|
