MIAMI (MarketWatch) — When I interviewed famed mutual fund manager Peter Lynch a few years ago, he told me his winning stock-picking strategy: Go to the mall and observe what people are buying.
Then, he added, do basic research on companies before you buy, closely monitor the company, and understand the reason why you originally bought the stock.
“You have to keep checking the story and the fundamentals,” Lynch said. “It’s called doing research. This doesn’t mean checking the stock price each day. You can sit in a room and look at a stock all day and it won’t help you out one bit.”
Forget about trying to predict the future. As Lynch told me: “I’d love to know what will happen in the future. In fact, I’ve been trying to get next year’s Wall Street Journal for 40 years. I’d even pay an extra dollar for it.”
Bear markets and corrections are a normal part of the stock market cycle. Lynch told me that if you plan to sell your stock in a panic because the market falls by 10% or 20 %, maybe you shouldn’t be in stocks at all.
I thought of Lynch’s ideas when I went to Orlando last week. The theme parks were crowded, the hotels packed, the restaurants full, and the airlines booked to capacity. New York and Chicago hotels are also full, and conventioneers have returned. I know that many Americans are still hurting, but it seems that many in the middle class have opened their wallets.
Airline stocks delayed
Amy Smith, author of “How to Make Money in Stocks Success Stories” and market expert at Investor’s Business Daily (IBD), noticed that travel and leisure stocks had been zooming higher in the most recent quarter. A recent stock idea, Lumber Liquidators Holdings has had a phenomenal run. This stock has done well because the housing market is recovering and homebuilders are doing well.
Smith uses the CAN SLIM® investment strategy, created by IBD founder William J. O’Neil. Based on the strategy, Smith found three airline stocks that have performed well: Alaska Air Group, U.S. Airways Group and SkyWest.
“Alaska Airlines has been amazing,” Smith says, “although it did have a 7% drop on April 2nd. The key is to watch the market carefully. If you had bought Alaska Airlines and it dropped 7% below what you paid for it, the CAN SLIM sell rule would kick in. It’s your insurance against heavy losses.” Smith also says that most growth stocks tend to follow the overall direction of the market.
Should you buy these stocks now? No, Smith says. “Alaska Airlines has made such a strong move it could be ready to take a break and digest its gains.” Smith says it is a little late for these stocks right now but to remember that most big winners give investors multiple opportunities to participate during a price run.
“All of these companies are due to report earnings soon — Alaska Airlines on April 19th, U.S Airways on April 23rd, and Sky West on May 2nd,” she says, “so it’s risky to buy now.” These are examples of how you have to catch an uptrend early, she adds.
Managing a downturn
The strength in the airline stocks and cyclical companies such as Lumber Liquidators is good for the economy. It shows that people are spending money again, as I observed in Orlando. There will be a correction one day, of course, but fear is not a productive strategy.
If the airline stocks have great earnings, and volume increases, then they will continue to do well. Often, strong stocks that have made big moves pull back a bit and digest their gains before moving higher.
Unfortunately, if oil prices spike, all bets are off. Then a correction could turn into a bear market. If you are concerned, you can protect yourself with put options, diversification, or hedging strategies.
On one hand, you may want to sell your stocks if they drop 7% to 8% below your purchase price. On the other hand, Lynch says if you understand what stocks you own, you won’t panic.
During the next correction, only you can decide whether to sell at a 7% loss or continue holding until the worst is over.
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