When the going gets tough, the tough write updates

I’m not going to mince words. The current market is acting very strangely, and I don’t think it’s a great time to be buying stocks.

So what will the official waving of the white flag bring for the markets? I don’t know. But a big old rally and a quick return to a healthy economy seems unlikely. Because, like it or not, the US economy was hurting before Bush started beating the war drums, and it’ll be hurting after the shooting stops.

And for that reason, I’m not in a stock-buying mood. In fact, I feel more like taking some profits right now. While it’s possible that stocks are headed higher over the next six months, summer is not a historically good time for them. So lessening one’s exposure to the market at the present time seems prudent.

Number one on my sell list is Brilliance China Automotive (CBA:NYSE). For one, it’s up 40% from my recommended entry price of US$18. And two, this stock has taken us on such a wild ride, it’s a relief to be able to take a profit.

But perhaps most important for us is the current strength in the stock price. If you’re holding this stock, you’re undoubtedly aware that it’s pretty thinly traded. The average daily volume for CBA is just 15 thousand shares. That’s it. So long as the outlook for the stock remains positive, there should be enough buyers to allow us to exit our positions without driving the stock down too much.

However, if we wait until there’s bad news to try and get out, we would undoubtedly drive the share price significantly lower in a very short period of time. So we’ll take advantage of the current strength and sell CBA above US$25. And please, use a limit order when you go to sell. A market order on a thinly traded stock is practically a written invitation to the floor traders to screw you.

Workin’ on the Cheney gang

In the February issue of Taipan, I recommended Halliburton (HAL:NYSE) as a play on postwar Iraq. The stock was trading between US$19 and US$20 at the time. During the brief war, Halliburton stock did virtually nothing in response to news, good or bad.

There was a slight pop in price when Halliburton won the contract to put out any oil well fires in Iraq. And there was a slight decline when it was announced that Halliburton was out of the running for reconstruction contracts.

But, all in all, the stock is essentially right where I recommended it. And I think I know why. It’s asbestos. It seems that any good news will be tempered by the potential multimillion-dollar overhang created by asbestos-related claims. And any bad news is tempered by the fact that the stock trades at a pretty attractive valuation.

All this puts us in a bit of a pickle. Why hold a stock when the main catalyst for a move higher could take years to manifest itself? That’s a good question, and I’m not sure I have a good answer for it. Because the simple fact is, it may take a while before we see any nice gains on this stock.

So, I’m going to lower my rating on Halliburton from “buy” to “hold.”

When I call something a “hold,” I mean exactly that. I don’t think there’s a lot of downside risk for Halliburton. But, now that the Iraq war is basically over, there’s no near-term catalyst for the stock price. And that means it’s a “hold.”

King for a day

You may recall from my recommendation of King Pharmaceuticals last month that I felt the recent announcement by King of an SEC investigation into some pricing practices looked like a good opportunity to enter a position in the stock.

And when the stock began recovering shortly after that issue of Taipan hit your mailbox, I was feeling pretty confident that it was ready to make a recovery back to the US$14-15 range.

Unfortunately, that has not been the case. Since clearing US$12 in mid to late March, the stock has steadily drifted lower toward current levels just below US$11. Even the announcement that King was backing out of the Elan deal failed to lift the stock.

I thought this was odd, because stocks usually rally if a planned acquisition is called off. In this case, King had actually seen its debt downgraded due to the uncertainty created by this bold acquisition. With the uncertainty removed, I expected to see King’s debt re-rated to reflect its pre-acquisition status. That has yet to happen. And I’m starting to wonder why.

I haven’t been able to dig up anything on why the stock’s been drifting lower. I speculate that the SEC investigation has put potential buyers on the sidelines. The floor traders then have to keep lowering the price to attract buyers looking for a bargain. The result is a steady drift lower on no news. And that always looks worse than it is.

For now, I’m content to hold this position. But I am going to reiterate that our stop-loss is at US$9.60 (assuming a US$12 entry). There should be strong support for King Pharmaceuticals at US$10 a share. I don’t anticipate the stock trading down to US$10, but the market has a funny way of doing exactly what we don’t expect.

I want to make sure everyone is watching the stop-loss. Because if King Pharmaceuticals does break below US$10, that’s going to be a big red flag that says there’s something more wrong with the stock and we’d be better off selling. •