Cody Kiss & Tell: The best Q&A we’ve ever had

All rightie folks, let’s meet for our weekly 1-hour Q&A. Ask me anything.

Q. Hi Cody, can you recommend any investment/trading conferences and shows you like. I signed up for optionMonster conference July 26-27 in Chicago. Looking for other ideas. Thanks!
A. Good question, which leads me to have a question for you and the rest of my subscribers. Should we do a TradingWithCody conference? I’d be game to do a West Coast TradingWithCody Conference here in the lovely mountain resort town of Ruidoso, NM and I’d be game to do an East Coast TradingWithCody Conference in NYC, both of them before year end. We’d do the conference over two days and I’d give a speech each morning and then in the afternoons we’ll meet and go through each of our stocks and answer your questions live. We’d charge $1000 per head. Let us know your interest ( and if we garner enough, I’ll get my peeps to get to work on it and let you know the dates.

Q. Hello Cody, I want to know how do you come up with many of your ideas that you invest in both on the long or short side. For example, the short the dollar store companies is a great idea. Did you just read one article and went from there? Or did someone suggest it to you? I look at myself as more of a technician but I’m always fascinated by how you come up with your long/short ideas. Basically what I’m asking is how does it usually start?
A. Wow, what a great question! I’ll give you two examples of how I come up with my ideas for trades because there are two primary ways I do it. The Dollar Stores as a short idea is a “top down” idea, meaning that I looked at the industry from the top down and then I had my team drill down and gather a ton of research and analysis for any Dollar Stores-related play. In this specific example, the idea of shorting the Dollar Stores came to me when I was walking to my garden (which survived the Little Bear Forest Fire, by the way!) with my girlfriend and her assistant who were talking about how they couldn’t believe that our town was about to get a bunch more new Dollar Discount Stores even though we already had a bunch here. I’ve seen the retail sector cycle play out many times and the key to trading/investing in retail is to catch these chains when they are in expansion mode and to sell them when they get to saturation mode.

So my brain started turning because I knew that these Dollar Stores stocks are all up 500-1000% in the last few years as they were in the perfect storm for them to grow — a massive consumer “trade-down” in looking to pay less to save money as the unemployment rate skyrocketed and the average household net worth collapsed 40% just as these guys were getting into the cookie-cutter expansion mode. So my brain started telling me maybe we’ve got a great storm of our own here to try to catch the top of this classic retail sector cycle. So I sent my guys to work and started doing my analysis and holy cow — the more I worked on the set up, the more excited I got. So by the time I’d spoken to every retail analyst and money manager I know and they all, even the most bearish of them, thought my analysis made tons of sense but that they still thought these Dollar Stores are going to go through the roof from these levels, I started writing for you guys and picking the two best plays to bet against the Dollar Store boom. Now to be clear, I could still be wrong on this trade, but that is what we’re here to find out.

Another example I’ll give you is called “bottom up” analysis and I used it when buying Apple back in the spring of 2003. After spending years analyzing stocks, I’ve memorized a lot of company’s balance sheets and earnings multiples and things like that. I knew that Apple had a huge pile of cash in the bank, $8 per share to be exact at the time. And I have thousands of stock tickers blinking in front of me and I saw Apple drop 10% or so two or three days in a row as rumors circulated around the tech world that Apple was going to be buying Warner Music Group. I thought that sounded absolutely nuts and so I called around to my Apple sources (which at the time were MUCH more forthcoming with what the company was about to do) and they also thought that sounded absolutely nuts.

So when Apple got to $7 a share — meaning that I was buying the company essentially for free and that any future earnings would simply be gravy…I started buying Apple. As the company rolled out the iPod and its other iOS platforms soon thereafter, I saw the potential for Apple to change the way we were consuming music and I started telling my subscribers that within a couple years that Apple would be the world’s largest music retailer. At the time, they had less than 5% of the market. They were indeed the world’s largest music retailer just a couple years later. And as Steve Jobs started rolling out better and more functional iPods, I started telling everybody that the company would in a couple years start selling “iMiniMacBookPros For Your Pocket” — the iPhone as it turned out. So I stuck with my Apple because my “bottom up” analysis, meaning I found the stock individually based on analysis for it and it alone, and not necessarily for the entire sector. “Top Down” means you start with a sector or an economic concept and then drill down. “Bottom Up” means you start with an individual company and then move up to analyze its place in that sector and the broader economy. I use both Top Down and Bottom Up all the time. FIO is another Bottom Up analysis example. LPS is another Top Down analysis example.
Thanks for the awesome answers Cody. This service is incredible. I think you’re analysis is correct. Give a man a fish and he can eat for a day. Teach him how to fish and he can eat for a lifetime, anyway thanks and keep up the great work!

Q. I am going to retire soon and will need to do some short term trades to make up my income, any suggestions who to follow for short term trades? I am following you for longer term trades which have been fabulous, thanks!
A. Oh no! I’m not joking when I tell people that I think trading for income is always a bad idea. I think it’s a truly awful idea for somebody who’s leaving the labor force to retire. Trading profitably is hard enough over time. But trading profitably and trying to live off that income is going to prove to be as impossible for you as it has been for everybody I’ve ever seen try it. Think of it this way — you know that even the world’s best trader is going to get cold sometimes. I’ve seen guys who made 1000% per year for five years lose 30% in six months. And then lose another 30% over the next six months because their system/method/analysis/thought-process/whatever missed a nuanced change in the markets. Those guys got wiped out, despite all those years of gains, because they were dependent upon income from that same trading that just went cold to the tune 60% loss. How will you know when it’s time to take money out of the portfolio? And if you have a few weeks or months or not making money — and worse — losing money, will you be okay? Will you want to add more money to the portfolio or take bigger risks to get the money you need back out? It is impossible to consistently, month after month, make enough profitable and few enough losing trades to ensure you have income from trading. I don’t mean to stress you out, but I am adamant that trading for income will eventually put you out of the game.

Q. In following your stocks, I noticed you don’t use stop orders on common or option positions. It that your policy?
A. I don’t use true “stop loss orders” as a means of stopping myself out of a position, but I do sometimes draw an informal line in the sand on a position and will sell it out if it crosses that threshold.

Q. My question is with regards to FB. Your big idea was FB under $30. Do you feel the same at $32.50? I’m guessing so. Also, I’m heavy on AAPL…about 25% of my portfolio. Would you consider trimming AAPL to buy FB at this moment? Thanks should you choose to reply.
A. Unless you’ve owned Apple for a very long time and that’s the reason it’s such a large part of your portfolio (and even if that is the case) I would consider selling some of the AAPL just to diversify the stock portfolio a little bit more. 25% in any single stock would leave you crushed if AAPL were to suddenly come under fire for tax evasion or overstating their numbers or anything of that sort — not that I expect that to happen, but it’s always a risk in trusting 25% of your portfolio to one single company’s honesty. I’ve written before about the Nortel/Lucent shocking overstatements that crushed me a few years ago when I was overweight the telecom sector…and I didn’t have more than 5% of my portfolio in any single stock at that time. Regardless of the FB opportunity at $32, I’d probably consider selling down some of that AAPL til it’s at least less than 20% of your overall portfolio. Then again, if you happen to be making 2-3x per year (or more) in income as you have in your stock portfolio right now, then 25% of your stock portfolio isn’t going to crush you no matter what would happen with one stock you have 25% of that stock portfolio in…that’s why I’m always leery about giving advice and/or trying to guesstimate how much I happen to have in any single stock as a percentage of my overall portfolio. There are lots of theories about how diversified you should be and how you should go about it anyway, but having more than 10% of your stock portfolio exposed to any single position should definitely make you worry about needing to get more diversified.
As for FB at $32, no I don’t like it as much up here as I did when it was below $30. I definitely think the risk/reward over the next few months and years is very favorable for FB longs and I haven’t sold a share or any of the call options I was loading up on when it was down near $26. Who knows if it will pull back below $30, but I’d look to scale into FB on down days like today to build up a good-sized core position for the mid and long terms.

Q. Any insight into the new iphone 5 features / design / shape?
A. I think the new iPhone won’t be called iPhone 5. I think the new iPhone will have a mind-blowing HD display. I think the new iPhone will have an updated, revamped and much-improved voice assistant SIRI, which is already an awesome app. I think the new iPhone will tie into the Apple Cloud in new and innovative ways that will synch your life much better than it has been, which is already pretty great for Apple iPhone/Cloud users. I think the new iPhone will have a 2-3x as much memory as a comparably priced Android does. And I think the new iPhone will have a battery life that’s even better than the current version which has a darn good battery life.

Q. Hi Cody, did you sell completely out of your CSCO positions? Or are you still holding the longer term, higher priced calls? Thanks.
A. I still have a few of those higher priced CSCO calls, but I’d sold down and taken big profits on most my CSCO calls back when it was above $20, as I’d noted here in real-time. The remainder of the CSCO calls is a tiny, tiny position and I’ll probably sell it out completely and take the last of the position off for a small loss if CSCO were to rally at all.
I’m selling all of my CSCO common and freeing up that cash for now.

Q. I started buying netsuite (N) it is in the cloud space as well. Anything to say about it?
A. Netsuite is an older established company that has somehow caught fire on cloud hype/hope. I don’t get the N suite rally from $5 to $50 and its trading at 100x 2014’s earnings estimates — two years out. It would have to blow away every estimate for the next two years and that 2014 EPS would have to come in at a $1 per share, at least twice what it currently is at (50 cents per share) for that stock to even hold its current valuation. I’m leery of that one, but it’s been running from $20 to $50 while I’ve been leery.

Q. Cody, what a great short on DLTR, and I have shorted it this morning. Down $2. I know you are also looking for adding some long dated puts. Could you give us some specific on which puts you are looking for? Thanks.
A. I’ll be looking at Dollar Stores puts dated out 12-18 months and with strike prices 10-20% lower than the current quote for each.

Q. Hi Cody. I hope you’re doing well in light of the very difficult situation out there. Quick thoughts on SSYS and TDC? Thank you for considering my question and please don’t ever leave the investment advice arena.
A. I love the 3D printing space and am actively working on picking the best name or two in the bunch. SSYS is definitely in the consideration. TDC hasn’t been on my radar, so I’ve got no edge or even good analysis for you on that one.

Q. Adding to the 3D Printing Space question…3D Printing looks to be an up and coming, big, disruptive, revolutionary Industry. SSYS and DDD seem to be leading the pack. Have you given this Industry any thought/research?
A. Yes, I typed my answer to that prior question before I read yours. I am actively working on the 3D printing space and you can search the archiveshere on the site for my analysis so far. DDD and SSYS are both winners, but I’m still trying to get my arms around each of their place and potential upside over the next five years.

Okay folks, my foreman is outside cutting down 40-70′ tall burnt trees and I need to go check on things out there and get away from my computer for the first time today since I got up at 6am. Thanks for the best discussion we’ve ever had in the weekly Q&A (great questions throughout today!) and I’ll see you guys later.