Logan Ramasamy's Stock Weblog

JENNIFER OPENSHAW on 2/13/2009
The 15-Minute Tip: Blue-chip bargains
A look at four picks from the big-stock bargain rack
By Jennifer Openshaw
Last update: 7:16 p.m. EST Feb. 11, 2009NEW YORK (MarketWatch) -- The winter doldrums bring out sales for so many out-of-season items -- swimwear, lawn mowers, and of course Christmas decorations. But this year's best winter sale might be on blue-chip stocks. Once you factor in the dividends these stocks pay, they just might be the smartest purchases of all.
1. General Electric
GE (GEGeneral Electric Company
News , chart , profile , more

Delayed quote dataAdd to portfolio
Analyst
Create alert Insider
Discuss
Financials
Sponsored by:
GE) has paid a quarterly dividend for over one hundred years, and is selling for an all-time low. At around $11 a share, their dividend amounts to an almost 10% annual return on your investment. Stung by their exposure to the financial services end of their business, GE is now focusing on the parts of the business that manufacture tangibles like jet engines, electricity-producing gas turbines, wind-power components, and equipment used in gas and oil production. Warren Buffett put his money on the table ($3 billion of it, anyway) when he invested in GE last spring. That's pretty good company, don't you think?
2. Wal-Mart
Lee Scott, the president and chief executive of Wal-Mart (WMTWal-Mart Stores Inc
News , chart , profile , more

Delayed quote dataAdd to portfolio
Analyst
Create alert Insider
Discuss
Financials
Sponsored by:
WMT) , recently acknowledged that it's an "interesting" time in retail. But Scott said he believed they had the best management team in place, "possibly ever." Quoting Buffett's philosophy that the best businesses are like a castle surrounded by a moat, Scott assured investors that at Wal-Mart they are now focusing on widening their moat -- their competitive advantages as a discounter -- to stay ahead of the competition.
3. Procter & Gamble
An American icon that consistently reinvents itself, P&G (PGThe Procter & Gamble Company
News , chart , profile , more

Delayed quote dataAdd to portfolio
Analyst
Create alert Insider
Discuss
Financials
Sponsored by:
PG) was known in the 1960s largely for cleaning products like Tide and Cheer, and food products like Jif peanut butter and Duncan Hines cake mixes. They still sell the detergents, but now P&G derives income from a more diverse range of goods -- from the Olay cosmetics brand to Gillette razors -- that you can find pretty much everywhere. And P&G is also spreading into Mr. Clean car washes and Tide dry cleaners, so that's an even larger net it's casting.
On the financial side, P&G stock is selling at a 52-week low. Last month, Chief Executive A.G. Lafley warned that P&G is "recession-resistant, but not recession-proof," but this company has always emerged strong from lean times.
4. iShares Dow Jones Select Dividend Exchange Traded Fund
If you don't like individual stocks, this blue-chip fund (DVYiShares:Dow Sel Div Ix
News , chart , profile , more

Delayed quote dataAdd to portfolio
Analyst
Create alert Insider
Discuss
Financials
Sponsored by:
DVY) invests in an assortment of high-yielding stocks. Its holdings are mostly in energy, like Chevron (CVXChevron Corp
News , chart , profile , more

Delayed quote dataAdd to portfolio
Analyst
Create alert Insider
Discuss
Financials
Sponsored by:
CVX) , utilities like Entergy (ETREntergy Corporation
News , chart , profile , more

Delayed quote dataAdd to portfolio
Analyst
Create alert Insider
Discuss
Financials
Sponsored by:
ETR) , and select financial services stocks like PNC Financial Services (PNCThe PNC Financial Services Group, Inc
News , chart , profile , more

Delayed quote dataAdd to portfolio
Analyst
Create alert Insider
Discuss
Financials
Sponsored by:
PNC) . These three stocks are among their top 10 holdings.
On sale means on sale: This fund once sold for over $64 last year, and it's now down to $34. That's a big markdown for a blue-chip fund with no single stock taking up more than 2% of its portfolio. And it's a solid dividend play, returning 5.85% at the current price. Yes, dividends are at risk these days, but the amount of diversification within this fund means you don't have as much to worry about.
Buy a company, not more stuff
If you have some extra cash, instead of buying stuff, take 15 minutes to think about buying the company. It may not help the American economy as much, but it might help your economy a lot more. And if you want to practice, you can give these stocks a dry run at WeSeed.com, where you can learn about investing for free before doing it in the real world, and hear what others have to say about these very companies.
As always: Do your homework before you buy.
Jennifer Openshaw, author of " The Millionaire Zone," is co-founder and president of WeSeed, whose mission is to enable people to discover the stock market in their everyday lives through their passions, their fashion, their careers, their kids and the brands they know and love. You can reach her at jopenshaw@weseed.com.

Apple (AAPL)
Given the current gloomy outlook for consumer spending, it was not at all surprising when Apple's management team lowered revenue and earnings forecasts in its most recent conference call. And, while it was also not at all surprising to see the stock drop in response to the news, we have to admit that we are a little amazed at how quickly investors have lost sight of the fact that the company's Mac line is continuing to "tear up the track" with regards to recapturing PC market share.
Yes, the iPod and iPhone are exciting products -- and both clearly represent meaningful sources of revenue for the company -- but in our opinion, they are also functioning as a very effective form of "bait" that is luring consumers into Apple Stores around the country -- and ultimately back to the Mac for their next PC purchase.
Not only is the elegance and ease-of-use of Apple's new Leopard operating system causing a number of former Windows users to say "hasta la vista, Vista," the company is also setting the pace for the industry in terms of hardware design and functionality, especially when it comes to laptops.
And, while we will be the first to admit that "weak stocks often get even weaker before they finally find their footing," we believe that Apple's stock is currently trading at levels that will look very cheap 18-24 months from now.
AAPL is considered a strong buy under $145 and a buy under $180.

Chart

Celgene (CELG):
is another stock that took a rather nasty tumble a few months ago in response to a serious bout of "investor panic," but with the stock now up close to 35% off the lows that were set just six weeks ago, it appears that cooler heads are once again returning to the table.
Not only does the company have one of the deepest product pipelines in the industry, it is in the process of acquiring Pharmion (PHRM) , which will give it access to a much larger sales force around the world. The lack of a significant sales force has been one of the few themes short sellers have been able to pin their hopes on over the years when it comes to bad mouthing Clegene, and once the Pharmion deal closes, this "no sales force" argument will lose much of its merit as well.
Celgene is sitting on roughly $2.5 billion in cash (some of which will admittedly be spent on the Pharmion deal), and as we have said before, "if we could own just one biotech stock for the next 10 years, Celgene would be it."
CELG is therefore considered a strong buy under $55 and a buy under $64.
chart

NVIDIA (NVDA)
Along with Apple's stock, Nvidia's (NVDA) has been hit pretty hard in response to investors' recent "the sky is falling" approach to forecasting consumer spending. However, while we do not disagree that we may see a slowdown in the economy over the next couple of quarters, we do think that the 30%-plus reduction in market capitalization that investors have handed the company is unjustified.
We say this for the simple reason that Nvidia dominates the market in which it participates ("programmable graphics processors") and is in superb shape financially (roughly $1.8 billion in cash, no debt). And, generally speaking, "the strong tend to get stronger" as economic slowdowns run their course due to the fact that it is even more difficult for less entrenched players to weather the slowdown ("Times are tough all over," as the saying goes).
NVDA is considered a strong buy under $25 and a buy under $28.
Chart

Deere & Co (DE), Intuitive Surgical (ISRG), Monsanto Company (MON) have outstanding estimate and chart picture.

Sivy on stocks:
In particular, companies that derive a large percentage of their earnings from outside the U.S. have the best chance of riding out a bad domestic economy. For example, two of the stocks I recommended in last month's column - Hewlett-Packard (HPQ, Fortune 500) and 3M (MMM, Fortune 500) - get at least 60% of their sales abroad.

Spotting true bargains during this downturn is no layup, though. Price/earnings ratios based on anticipated results may be misleading, for instance, because growth may not come through as expected this year. So make sure that a stock also looks cheap compared with its peers based on P/Es using 2007 earnings.

Another smart way to compare stocks is by ratios of price to cash flow (the cash per share a company actually generates each year). The reason: Cash figures tend to be less volatile than earnings.

Three stocks to watch
In doing a little bargain hunting among stocks in the Sivy 70, I found three that have solid prospects, trade at P/Es below 15 based on 2007 earnings and are priced at less than 10 times cash flow. Those multiples count as cheap by anyone's calculations.

DuPont (DD, Fortune 500) announced 27% earnings per share growth (excluding one-time items) in the fourth quarter and recently raised its earnings targets for 2008. How does a company in a cyclical industry such as chemicals buck a U.S. recession? Almost two-thirds of sales come from overseas, where they are growing up to 20% a year in countries such as Brazil, China and India.

The hottest part of DuPont's business has been agricultural products, boosted by rising food prices and demand for ethanol. That division, which accounts for almost a quarter of sales, is growing twice as fast as the rest of the company. As an added bonus, DuPont shares yield a very healthy 3.8%, making them a great choice for retirees.

Fortune Brands (FO, Fortune 500) is a conglomerate with top-name consumer brands, including Jim Beam bourbon and Titleist golf balls. The company also has a home and hardware division, which consists of product lines like Moen faucets. Those businesses have been suffering because of the bad housing market. As a result, the stock has fallen close to a 52-week low of $66, down from a high of $90. That looks like too much punishment for limited housing exposure. Besides, Fortune is restructuring to trim costs, downsizing its home and hardware division and selling its wine business. As a result, the company took a large write-down in the fourth quarter.

But long-term growth has averaged 9% annually and is projected to continue at that rate over the next five years. Add in the stock's solid 2.6% yield, and you have double-digit return potential.

IBM (IBM, Fortune 500) reported terrific fourth-quarter results. Earnings per share were up more than 20% on a 10% rise in sales. A third of the increase in per-share profits was the result of 2007 stock buybacks totaling almost $19 billion. The rest of the profit gain was mostly from IBM's extensive business outside the U.S., which now accounts for almost two-thirds of total sales.

The company is enjoying especially strong growth in Asia and some developing markets. Bookings for service contracts in 2008 are also several billion dollars above expectations, and IBM has raised earnings projections for 2008. As Big Blue goes global, seems like it would deserve a market-beating multiple.

Goldman Sachs not hit by mortgage melt down. Rather they are profitted.
Best Buy, RIMM {Research in Motion} profit are mind bogling.
Buy wii game make Nintendo as the wii consoles are not available in the shop for X-mas 2007.
Oracle profit is good too.

Stansberry & Associates Top 10 Open Recommendations

Stock Sym Buy Date Total Return Pub Editor
Seabridge SA 7/6/2005 987.5% Sjug Conf. Sjuggerud
Icahn Enterprises IEP 6/10/2004 585.7% Extreme Val Ferris
Exelon EXC 10/1/2002 329.0% PSIA Stansberry
EnCana ECA 5/14/2004 319.3% Extreme Val Ferris
Humboldt Wedag KHD 8/8/2003 246.3% Extreme Val Ferris
Posco PKX 4/8/2005 207.1% Extreme Val Ferris
Alexander & Baldwin ALEX 10/11/2002 175.7% Extreme Val Ferris
Nokia NOK 7/1/2004 174.6% PSIA Stansberry
Consolidated Tomoka CTO 9/12/2003 146.01% Extreme Val Ferris
Sangamo SGMO 3/10/2004 144.1% Phase 1 Fannon

Bespoke Investment's blog on best performing stocks in 2007

Dec 27, 2007
Top 5 mid-cap stocks
Woodward Governor Company (WGOV)
Designing, manufacturing, and servicing electrical components and equipment for aircraft and industrial engine.

Amphenol APH
Heico HEI
Flowserve FLS
Ametek AME

Don’t Lose Money: The Most Important Law of Lasting Wealth
By Dr. Steve Sjuggerud
December 29, 2006

Let’s face it – most people don’t know when to sell a falling stock. So they’re frozen into inactivity, saying, “Should I just keep holding and hoping, or should I cut my losses now?”

This state of indecision is usually permanent, and often continues until you hear the all too familiar phrase, “well, it’s too late to sell now.”

One of my good friends lost it all following the “it’s too late to sell now” principle. He bought a ton of shares in a cable company based on his friend’s recommendation that it was supposed to take over the world. The shares soon tumbled in half, and his friend, who knows about the cable business, told him to buy more, so he did. The shares tumbled in half again, and he bought even more. He finally stopped buying when the shares hit a dollar a share. The shares eventually traded for pennies.

After you’ve read today’s essay, if you follow the advice in here, your constant state of indecision will be gone. You’ll never lose another night’s sleep worrying about which way your investments will go tomorrow. Because, unlike most investors, you’ll have a plan – knowing when to get out, and when to stay in for the biggest possible profits.

Buying stocks is easy. There are thousands of theories out there for why and when to buy. But buying is only the first half of the equation when it comes to making money.

Nobody ever talks about the hard part – knowing when to sell.

In order to invest successfully, you need to put as much thought into planning your exit strategy as you put into the research that motivates you to buy the investment in the first place. So please read closely here, and think about each point...

How Do You Evaluate Businesses?

In business and in stocks, you’ve got to have a plan and an exit strategy. When you have one, you know in advance exactly when you’re going to buy and sell. The strategy I’m going to show you will allow you to ride your winners all the way up, while minimizing the damage your losers can do. But before I get into the specific strategy, consider this business example...

Let’s say you’re in the tee-shirt business. You’ve made a ton of money on a tee-shirt business in the States, and you’re now in the Bahamas looking for new opportunities. You size up the market, and you figure you can make money in two markets: in golf shirts, geared at the businessman, and in muscle-tees, geared toward the vacationing beach-goers. These are two products clearly aimed at two different markets.

You invest $100,000 in each of these businesses. At the end of the first year, your golf shirts are already showing a profit of $20,000. But the muscle-tees haven’t caught on yet, and you’ve got a loss of $20,000. There are numerous reasons why this is possible, so you make some changes in your designs and marketing and continue for another year.

In the second year the same thing happens – you make another $20,000 on your golf shirts, and you lose another $20,000 on your muscle-tees. After two years, the golf shirt business is clearly succeeding, and the muscle shirt business is clearly failing.

Now let’s say you’re ready to invest another $100,000 in one of these businesses. Which one business do you put your money into? The answer should be obvious. You, as a business owner, put more money toward your successful businesses. But as you’ll see, this is the opposite of what 99% of individual investors in America do...

How Do You Evaluate Stocks?

Let me start by asking you a question – what does “owning shares of stock” actually mean? This isn’t a trick question – as you know, it means you’re a partial owner of the company, just like you’re the owner of the tee-shirt company in this example.

Owning your own business isn’t fundamentally any different than owning a share of a business through stock. However, most people treat them exactly the opposite...

Let’s say the shares of your two tee-shirt companies trade on the stock exchange.

They both start trading at $10 a share. At the end of the first year, the profitable golf-shirt company is trading for $12 a share, and the unprofitable muscle-shirt company is trading for $8 a share. At the end of the second year, the golf shirt company is trading at $14, while the muscle shirt company is trading at $6 a share.

Which shares would you rather own?

Even though you know you should buy the winning concept based on the business example, most investors don’t do so in their stock investments. They keep throwing good money after bad hoping for a turnaround. They buy the loser.

The Trailing Stop Strategy

In stocks (and in business, I believe), you must have and use an exit strategy – one that makes you methodically cut your losses and let your winners ride. If you follow this rule, you have the best chance of outperforming the markets. If you don’t, your retirement is in trouble.

The exit strategy I advocate is simple. I ride my stocks as high as I can, but if they head for a crash, I have my exit strategy in place to protect me from damage. Though I have many reasons I could sell a stock, if my reasons don’t appear before the crash, the Trailing Stop Strategy is my last ditch measure to save my hard-earned dollars. And it works.

The main element to the Trailing Stop Strategy is the 25% rule. This is where I will sell any and all positions at 25% off their highs. For example, if I buy a stock at $50, and it rises to $100, when do I sell it? If it closes below $75 – no matter what.

Don’t Let Your Losers Become Big Losers

So with my Trailing Stop Strategy, when would I have gotten out of the failing muscle-shirt business? You already know the answer.

Remember, the shares started at $10 and fell immediately. Instead of waiting around until they fell to $6 as the business faltered, using my 25% Trailing Stop, I would have sold out at $7.50. And think of it this way – if the shares fall to $8, you’re only asking for a 25% gain to get back to where they started. But if the shares fell to $5, you’re asking for a dog of a stock to rise 100%. This only happens once in a blue moon – not good odds!

Take a look at how hard it is to get back to break even after a big loss...

You’ll Never Recover
Percent fall in share price
Percent gain required to get you back to even

10%
11%

20%
25%

25%
33%

50%
100%

75%
300%

90%
900%


So what’s so magical about the 25% number? Nothing in particular – it’s the discipline that matters. Many professional traders actually use much tighter stops.

Ultimately, the point is that you never want to be in the position where a stock has fallen by 50% or more. This means that stock has to rise by 100% or more just to get you back to where it was when you bought it. By using this Trailing Stop Strategy, chances are you’ll never be in this position again.

10 stocks that could outperform in 2007

By Leslie Wines, MarketWatch
Last Update: 12:01 AM ET Dec 19, 2006



NEW YORK (MarketWatch) -- Investors seeking outperforming stocks in 2007 will likely focus on factors such as exposure to the booming China market, unjustifiably low valuations, promising products under development and the most lucrative locations for drilling rigs, according to some noted stock pickers and fund managers.


DAVID CALLAWAY
Next year's news
Never doubt the market’s ability to focus on something completely opposite from what Wall Street thinks is important. So Dave's predicting a big-cap rally and commodities slowdown in 2007.
• Best & worst stocks of 2006
• 10 stock picks for 2007
• Commodities: Sweeter in 2007?
• Our top news stories of 2006
• Loeb: Slowdown, not meltdown
• Winners & losers
• Dvorak: Top tech trends in 2007
• The stock-option surprise
• Tech sequels: Big stories go on
• See the full special report
Coming up this week: The outlook for real estate, the economy, more.





Though forecasting price performance remains a slippery art, the stock pickers at least have come up with plausible theories as to why these stocks could break into higher ranges next year. Here follow their choices in no particular order:
United Technologies
United Technologies Corp. (UTXUnited Technologies Corporation
News , chart, profile, more

Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
UTX ) . This old standard was chosen by Daniel Manion, who manages a large-cap blend fund of growth and value stocks for Sentinel Asset Management, as a new twist on a China play.
United Technologies' product list of elevators, escalators, moving walkways, residential and industrial heating systems and air conditioners has positioned it to take advantage of the construction surge in China and elsewhere, according to Manion.
General Electric
Another old-line company General Electric Corp. (GEGeneral Electric Company
News , chart, profile, more

Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:

GE ) was the top 2007 choice of Mike Holland, who manages the Holland Balanced Fund which consists entirely of large-cap blue-chip stocks.
GE Chief Executive Jeff Immelt has generated generally strong earnings growth in recent years, but the stock price has languished in a dull range. In Holland's view, GE should have benefited more from the recent large-cap equities rally and investors are likely to recognize this and send the stock higher next year.
Southwest Airlines
Another stock chosen because it largely missed this year's rally was Southwest Airlines Co. (LUVSouthwest Airlines Co.
News , chart, profile, more

Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
LUV ) . Don Hodges, co-manager of the multi-cap Hodges Fund, pointed out that Southwest did not rally as much as some other airline stocks in 2006 but thinks the situation will turn around in 2007.
"Southwest still has the best business model in the industry and is picking up some new routes," Hodges said. This year, Congress removed the Wright Amendment which had limited Southwest's direct flights to states contiguous or near Texas, greatly expanding the number of direct flights the airline can offer.
Transocean
Provider of offshore drilling equipment Transocean Inc. (RIGtransocean inc ord
News , chart, profile, more

Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
RIG ) also was put forward by Hodges. The maker of drilling equipment should perform well next year, irrespective of whether energy prices rise or fall, as rigs are very expensive and take a long time to produce, while supply lags demand, he said.
Rowan Companies
Another oil rig play, suggested by Kevin Shacknofsky, co-portfolio manager of the Alpine Dynamic Dividend Fund, was Rowan Companies Inc. (RDCRowan Companies, Inc
News , chart, profile, more

Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
RDC ) .
The stock bears a low 1% dividend, but Shacknofsky believes it is poised to report strong earnings next year. In addition to the favorable supply-demand ratio in the industry, Rowan Companies has been diversifying its fleet locations, sending some rigs out of the Gulf of Mexico to other international waters that offer more lucrative rig day rates.
Gatehouse Media
Gatehouse Media Inc. (GHSgatehouse media inc com
News , chart, profile, more

Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
GHS ) , an owner of rural newspapers which the Fortress Investment Group hedge fund brought to market in October, was another Shacknofsky pick. The stock bears a 6% dividend. Gatehouse also is in acquisition mode and should raise its dividend if it makes more cash flow accretive purchases, he said. In addition, the company's online strategy should allow it to capitalize on internet-based advertising as the field extends to smaller papers, in his view.
Gilead Sciences
Gilead Sciences Inc. (GILDGilead Sciences Inc
News , chart, profile, more

Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
GILD ) , a leading developer of treatments for HIV and other diseases, was the top larger-cap pick of Jason Kantor, the leading biotechnology analyst at RBC Capital Markets.
There should be positive developments next year with the integrase inhibitor HIV treatment Gilead is now developing, which should send the stock higher, he thinks.
In addition, the company sells its products directly around the world, giving it an advantage over domestically-focused biotech companies, according to Kantor.
Alexza Pharmaceuticals
Alexza Pharmaceuticals Inc. (ALXAalexza pharmaceuticals inc com
News , chart, profile, more

Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
ALXA ) , a small-cap manufacturer of drug inhalers to treat such varied maladies as schizophrenia and migraines, is another of Kantor's picks. Data from development projects for new Alexza drugs should benefit the company's stock price next year, Kantor said.
Goodrich
Goodrich Corp. (GRGoodrich Corp
News , chart, profile, more

Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
GR ) was the choice of Jeff Kleintop, Chief Investment Strategist at PNC Wealth Management. The former tire maker has transformed itself into a manufacturer of airframe, engine and electronic parts for aircraft. New routes to help serve Asia and other developing regions, and an upsurge in orders for aircraft manufacturers Boeing Co. (BABoeing Co.
News , chart, profile, more

Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
BA ) and EADS (FR:005730: news, chart, profile) division Airbus, spell higher demand for jet components in 2007, according to Kleintop.
Krispy Kreme
Last is Krispy Kreme (KKDkrispy kreme doughnuts inc com
News , chart, profile, more

Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
KKD ) , which was put forward by Don Hodges, who admitted the stock is "a somewhat speculative bet."
However, Hodges thinks Krispy Kreme might be a good play for investors willing to accept some risk.
The doughnut maker remains mired in legal and regulatory issues, but Hodges thinks it will sort many of these out as 2007 wears on and that the stock price could improve late in the year. In addition, Krispy Kreme outlets increasingly are operated as franchises and franchisees tend to do a better job as operators, he said.

Markfn articles

Stop Loss and Stop Limit Orders -- by Bill Kraft
Bill Kraft
Editor
This weekend my Stockmarket Weapons and Tactics Class is underway. The classes are full of valuable information, and some of the things we really emphasize are risk tolerance, risk aversion and risk of particular strategies. Apropos of the emphasis on risk, a subscriber recently wrote asking about avoiding risk in a stock purchase. The risk in a stock purchase is actually quite high. It is the price paid for the stock. Absent any other action, whatever a trader pays for a stock is what is at risk. The stock could suffer a huge drop, even to zero and, in the latter case, the whole investment would be gone. Of course, it is relatively rare that a stock goes to zero but it does happen. More often, stocks take a big fast dive and that, too, can lead to large losses. What kinds of things can a trader do to avoid or limit losses? There are a number of possibilities to try to limit losses, and, as we shall see, none may afford complete protection.

In this article, I'll discuss the stop loss and stop limit orders as ways to attempt to limit losses. The "stop loss" or "sell stop" order is an instruction to the broker to sell the stock if it hits a certain price. Suppose I buy 100 shares of XYZ stock at $50.50 a share as it bounces off support. I will have invested $50.50 (plus commission, of course). The support is at $50 so I might place a stop loss at $49.90. That means that if the stock goes down and the price touches $49.90, my stop will have been hit and my order to sell the stock will go to the floor as a market order. As my order hits the floor, let's say the stock is down some more to $49.75. My stock is sold at that amount and my loss is fixed at 75 cents a share. Not too bad, a loss of $.75 plus commission and the stock is still falling in my example. Now, let's look at the same stock that I bought for $50.50 and placed a stop loss at the same $49.90. In this instance, however, let's say the stock closed last night for $51 and this morning, after some really bad news overnight, the stock gaps down $21 and opens this morning at $30. What happens? Well, the stock went through my stop so the stop loss order at $49.90 was activated and my order now goes to the floor as a market order and I am filled at $30. I've now lost $21 a share. Not so good, but at least I'm out and not trying to hold onto this now rabid dog.

It is important to know that a stop loss order does not offer complete protection. Even with a stop in place, the trader can still lose very significant amounts in the event of a gap down as I discussed above. On the other hand, I think that having a stop loss order in place does help to get out of many positions with relatively small losses when the trader might otherwise be tempted to hold on because he thinks "it'll come back." Placing a stop loss can help to remove emotion. If the trader decides beforehand where the stop will be placed and under what circumstances it will be moved up (never down for the stock owner), there is a lesser liklihood of staying in too long or jumping out too quickly. The stop loss is then a tool that can enhance a trader's discipline. As the stock moves up, the stop can also be moved up thereby attempting to protect profits (though the problem of a gap down always exists).

Generally, brokers do not charge to have the stop placed. A commission is charged only when the actual trade is completed. However, stop loss orders are visible to the floor and I have heard many people complain over the years that "my stop got hit and then the stock moved right up." What can a trader do about that predicament? If a trader has a broker or chart service that allows him to place alerts, he can place an alert that will be sent when the chosen price is hit. Of course, the trader needs to act then or the purpose of setting the alert is defeated.

A stop limit (as opposed to a stop loss) order is essentially a two part order. The "stop" part is the same as the stop loss in that the trader sets an amount at which an order will be sent to the floor. However, by adding the "limit" part, the trader is saying sell my stock but only if it is at the limit I set or better. Going back to the earlier example where I bought XYZ at $50.50, suppose I set a stop limit with a stop at $49.90, limit $45. That means if the stock hits $49.90 or less, I want to sell my stock at $45 or better. If the stock is above $45, all is well and good, but what if the stock did gap down to $30? In that instance, the stop would have been hit, but since I added the limit of sell at $45 or better, I will own the stock since it is trading below $45. The order did me no good in that situation. Fact is, on a drop like that, I probably just want to be out of the position. For that reason I just do not use stop limit orders though there are many times when I use stop loss orders.

10 come back kids