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Friday, May 1st, 2009

Green Mountain Coffee has the big mo — momentum

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In the last post I spoke about waiting for stocks with momentum.

Green Mountain Coffee Roasters (GMCR), which is in the news at the moment after a big earnings result, is a classic example of what I was talking about.

While I don’t trade the US market, I still analyse it because it is usually correlated closely with the Australian market. (Though at the moment the US markets are outperforming the Aussies and seem to be throwing up much better momentum opportunities)

GMCR came up on my US momentum screen, but I first noticed it because it was Driehaus Capital’s Small Cap Growth Fund’s biggest holding. As mentioned, looking at what the best performing aggressive-growth stocks own is a good screen.

Looking at the chart above, by February/March, GMCR had put in a big 100%-plus move since October last year — a period of around six months.

This is where people find momentum trading difficult. Looking at the chart at the start of March, it’s natural to think - ‘how on earth could this go up any more?’

But it’s probably only then that I would get interested because the 50-week moving average is starting to tick up, which can be seen in the weekly chart below. The stock was also close to its 52-week high of $45.

It had all the classic tells of a momentum stock: a huge prior move over six months, a rising 50-week moving average, and close to, or at, its 52-week high.

It also had surging earnings and sales growth.

The sideways or consolidation period in price from February to mid-March provides what I call a “defendable position”.

I’ve given up on being too fussy about specific chart patterns (though a text-book one is always nice). What I want to see is a consolidation pattern below which I can put a stop.

The consolidation represents accumulation of stock by big funds and if the price falls below that I know something has changed and those guys are bailing and I want to as well.

But risk/reward is also important. The main characteristic I want in the consolidation is tight price action which indicates institutions are absorbing stock. If the pattern and daily price action is too big and volatile — or sloppy — it means the stop has to be too far away from my buy point which is a move above the consolidation.

The buy point for GMCR would have been when the stock broke above the high reached at the start of February this year.

What would I do if I owned GMCR now after the big move. Start fretting!!! Is it a climax top? I don’t know. Ahhhhh.

I hate when this happens. You get a big move up, but it’s a long way down for the next ‘defendable position’.

My system calls for me to move stops up after the price moves above each defendable position (as explained in The Only Profit-Taking Rule You’ll Need). But sometimes it’s not clear cut.

This is where I tell myself I’m ‘earning my keep’: when a stock makes a big move it requires a ‘leap of faith’ and courage to let it retreat and build another basing/consolidation pattern. But you have to do that to ride the big trends.

Some choose to take partial profits after a big move, which is another good option, but I’ve never done that. Basically, there is no easy answer.

I suspect I would move my stop up to just under $50 and let the stock play out. I know you’re giving up all that profit, but that’s the risk you take to get the big gains.

I know this post could appear as a ‘coulda, shoulda, wouda’ post if I traded the US market. But GMCR is a nice illustration of a momentum stock.

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Word Count: 624. This entry was posted on Friday, May 1st, 2009 at 1:32 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.