I observe market sentiment is not where it was, but we called for an advance of gargantuan proportio...
Is Any Stock a 20-Year Buy and Hold?
04/07/2015 10:20 am EST
What are the challenges an investor might face following a 20-year buy and hold strategy? To answer this, MoneyShow’s Tom Aspray takes a technical look at four stocks that could’ve been 20-year buy and hold recommendations in 1995.
Once again, the stock market confounded the majority by recording a very strong performance in Monday’s session. Apparently, the weak jobs report has been discounted by investors as a weather related aberration that will not derail the positive path of the economy or stock market.
The A/D numbers were strong as the NYSE Advance/Decline line has moved to another new all time high while the S&P 500 A/D has moved above its prior swing high. The volume has still been low and a strong close this week is needed to further support the bullish case. A close in the Spyder Trust (SPY) above $209.40 would be bullish.
It will also be an important week for those major sector ETFs that closed last week below their quarterly pivot levels. In particular, the Sector Select Technology (XLK), which was up almost 1% on Monday and is now back above its quarterly pivot.
A regular reader recently asked me as a technical analyst if, in my opinion, any stock would ever be a 20-year buy and hold. This was in reference to a recent article that recommended Celgene Corp. (CELG) as a biotech stock that should be bought and held for the next twenty years.
This column is not meant to denigrate any other analyst’s opinion, since, over the years I have made my share of incorrect stock recommendations. The point of today’s column is to address what I see as the challenges that any investor might face following this strategy.
In addition to Celgene Corp. (CELG), I will also take a look at three other stocks that could have been 20-year buy and hold recommendations in 1995.
Chart Analysis: The quarterly chart of Celgene Corp. (CELG) shows that it traded under $1 per share from 1991 through 1999 as it spiked to $9.50 in September 2000.
- This range, line a, stayed intact until the 2nd quarter of 2005 when it closed at $10.18.
- This began a run that lasted until the 3rd quarter of 2008 when it hit a high of $38.70.
- CELG had a marginal close above this resistance in the 1st quarter of 2012.
- It was a year later before CELG accelerated to the upside as it ran to a high of $129.06 in the 1st quarterly of 2015.
- A drop below the quarterly support at $109.46 would be the first sign of a deeper correction.
- CELG is currently over 16% above its 20-month EMA at $94.63.
- The 20-quarter EMA is mush lower at $69.58.
If you think back to the market in 1995, one stock you would have wanted to own now is Apple, Inc. (AAPL). Some were smart enough to do so, but I was not. Nevertheless, it would be at the top of many lists.
- The chart shows that AAPL had a quarterly high of $5.07 in the first quarter of 2000.
- This resistance, line c, was not overcome until the 2nd quarter of 2005.
- Over the next eleven quarters, AAPL rallied up to a high of $27.35 peaking in the last quarter of 2007.
- Five quarters later, AAPL had dropped over 61% as it reached a low of $10.54.
- Two years after its high, AAPL closed at $28.40 and above the resistance at line d.
- The meteoric rise of APPL stock after the breakout took AAPL to a high of $95.42 in the 3rd quarter of 2012.
- On the following correction, AAPL came close to its 20-quarter EMA as it lost 44.8% of its value.
- AAPL has made a new high in 2015 of $133.60 as the technical studies gave a buy signal in late January.
- AAPL is currently 38.6% above its 20-quarter EMA that was tested during the 2013 pullback.
Next: Two More Likely Long-Term Stock Picks|pagebreak|
Microsoft Corp. (MSFT) had its initial IPO in March 1986 and by the middle of 1994 was in a clear quarterly uptrend. It was also a likely pick as a long-term winner.
- From the opening price in 1995 of $2.74, it rose to a late 1999 high of $42.67.
- Just four quarters after the high, it had hit a low of $14.34, which was a drop of 66.4%.
- A further low of $12.74 was made in the fist quarter of 2009, line b.
- The quarterly downtrend, line a, was not overcome until the first quarter of 2012.
- The 2007 high of $31.22 was not surpassed until the middle of 2013.
- In the 4th quarter of 2014, MSFT hit a high of $49.37.
- MSFT is now 15.8% below its 2014 high.
- The 20-quarter EMA is at $33.93, which is still 18.3% below current levels.
Cisco Systems (CSCO) went public in February 1990 and was listed by Forbes as one of the best IPOs of the 1990s. Its leading role in networking would have made it a likely top pick in 1995.
- By the middle of 1995, CSCO had broken out to a new quarterly high (see arrow) closing at $2.53.
- The stock went almost straight up for the next five years peaking at $73.76 in the first quarter of 2000.
- By the end of 2002, CSCO made a low of $7.30, which was a drop of over 90%.
- Since then, CSCO has been in a broad trading range making a 2007 high of $30.80.
- The 2011 low of $12.11 is now the lower boundary of the trading range, lines c and d.
- CSCO is still well above its rising 20-quarter EMA at $22.21.
What it Means: The wide swings in these four stocks would not be tolerated by today’s investor. Very few have the ability to withstand a 25% drop, much less a drop of 50% or more. That sort of decline is also not a good way to manage your portfolio as it is likely to take many years before the stock regains such a loss, and in the interim, it is dead money in your portfolio.
In the 1950s and 1960s such a buy and hold approach was more the norm as I had a great-aunt who bought American Express in the 50s and held onto it until her death 35 years later.
Therefore, I think that for the majority of investors, holding a stock for twenty years is not practical strategy in today’s market as it is rare to see a stock that has a bull market run of more than two or three years before it has a major correction.
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