Xerox Disappoints - Time to Buy?

AAA

When I started this article last Friday, Xerox had just announced negative guidance for the coming quarter and the stock took a hit. Following the announcement, the share price moved from $13.15 at Thursdays closing to as low as $11.46 in early Friday trading.

I watched it for a while and decided there was definitely an opportunity here as company traders worked to shore the stock back up. I wondered if it was a good time to buy and set it aside while I worked a bit more on my new trading strategy.

I know quite a bit about the company having lived near corporate headquarters in Norwalk, CT and in Rochester, NY where the company was founded. I have watched them closely over the years and seen them consistently recover from one setback after another so suspect they will recover from this one. One of my criteria for entering a trade is that I must be willing to hold for a while if the stock goes flat on me.

So, Who Pops XRX in the News and in My Newly Developed Screen?

Xerox of course! Not only did the stock get my attention with the negative earnings report and stock slide, it also showed up in my new screening process. I took that as a definite sign to dig deeper and do it fairly quickly.

I was about ready to pull the trigger but decided to take a closer look at historical charts to confirm my suspicion that they will more than likely recover from the recent hit.

I follow a disciplined approach to anything I buy that includes investigating the latest news, looking at charts, checking company management, looking at financials, etc. even though my goal is to get in and out quickly. Again, I want to be comfortable holding for a while if it goes dormant.

More on the Process

So I ask myself, am I familiar with the company and based on what I know would I be willing to hold it for a while?  Yes, they created the entire xerographic industry and have weathered storms in the past but I also do a little gut check to compare them to a couple of other companies that I knew well who did not make it through hard times (Eastman Kodak and Digital Equipment to name just a couple). This is a bit of a glimpse into my heart fighting with my mind, fear and greed at work.

I then look at how the price moved in the past.  Are there predictable patterns following earnings announcements? How long does a recover take? What happens in the day or two after a down turn? If I like what I see, I continue my research.  If I don’t like what I see, I move on to the next one on my short list.

In the case of XRX, everything looked favorable so I pulled the trigger.  Unlike many technical traders, I don’t like to get too sophisticated or get bogged down in details. I was encouraged by both Wilder and Hillie who advise keeping things simple. So KISS (Keep it Simple Stupid) is definitely one of my rules of engagement. If it gets so complicated I don’t understand it, then it’s not for me.

Background on ATR and 108% Annualized Returns

In my last article I introduced my modified swing/day trading strategy and process. As mentioned, I constantly look to refine it and make it easier to pick the stocks I want to actively trade. J. Welles Wilder, one of the most successful technical traders of all time introduced three very popular technical strategies:

  • Relative Strength Index (RSI) including the Failure Swing Point
  • Average Directional Index (ADX)
  • Average True Range (ATR)

At the time I developed my strategy I had no idea who Wilder was or what the Average True Range was all about.  I now see it as the foundation of my strategy even though I did know it at the time. One of Wilder’s protégés, Oli Hillie of Trading Book reportedly used these technical strategies to produce annualized returns of over 108% in 2008 and 2009. 

FinViz Provides Average True Range Screening

That certainly got my attention and I am now working to perfect my model. My early screens using the Average True Range (ATR) at FinViz revealed a starter list of about 200 stocks that deserved further exploration. I narrowed that list down to a target list of about 50 upon which I did some initial checking and then selected 5 to take a serious look at.

The five stocks from the most recent screen that I decided to really drill down on were:  

  • Xerox (XRX)
  • Voltari (VLTC)
  • Xilinx (XLNX)
  • Jumei International (JMEI) – reported on in my last article
  • Oasis Petroleum (OAS)

I selected this group from several different preliminary screens where I tweaked the ATR from greater than .75 to 1.5.  The ATR is a moving 14 day average of the difference between the opening price and the closing price. The higher the percentage range, the more volatile the stock and hence the more opportunity to enter and exit while the volatility moves the stock back and forth.

As stated previously this can definitely be a dangerous strategy and you need to make sure you understand the downside risk if a stock suddenly moves against you. Use firm stop limits and never add on to a losing position. If you guess wrong and the stocks runs against you, bail and bail fast.

The Trade

All the above work actually took less time that it took to report on the process and the trade! I was in and out in less than two hours and have a nice gain to show for my due diligence.  

I entered in mid-morning when things settled down a bit, put in an automatic sell order for a 2% gain and sat back to watch the action. I entered at $11.74 and exited about 1 ½ hours later at $11.97 for the 2 % gain which was my stated goal.

As mentioned previously I am very happy (at least for now) with a 2% gain on this type of trade and will explore moving the target exit price up as I gain more confidence in the strategy.

What really intrigued me was that XRX also showed up with my modified screening process, so it was a double signal that it was time to make the trade.  Here is more on the modified swing/day trading strategy that I will talk more about in future articles.

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