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Trading Lessons: Company Management Can Make All the Difference


Every day, there's a stock that loses a "surprising" 50% as a result of incompetent management.

On Thursday morning, I awoke to Intuitive Surgical (ISRG) launching like a space shuttle at Cape Canaveral. These are the moments of which investing dreams are made!

Did I: a) Get lucky; b) Take a random walk down Wall Street; or c) Use a blend of fundamental, technical, and management analysis to make myself prone to having a profitable accident?

The answer to this pop quiz is (c). Although I first learned about Intuitive Surgical in 2004, I became a huge fan again last quarter after the company announced impressive earnings and business activity. When a popular stock in an exciting sector reports solid fundamental news, I categorize them as "accident prone" for profits. In other words, when a company is accomplishing the mission of growth and earnings, I'm more probable to experience an upside surprise in the stock price.

However, fundamentals alone don't make a winning trade. Unfortunately, other variables can prevent strong companies from becoming strong stocks. Therefore, the next prong of my framework involves technical analysis. In this case, Intuitive Surgical held price support at the $140 level.

Click to enlarge

Also note how all pullbacks occurred on lighter volume (red bars) than buying activity (green bars). This is a classic indicator that demand to buy shares is greater than supply to sell. And, my friends, stock prices are nothing more than the reflection of supply and demand for shares.

Many investors who use a blended fundamental and technical approach tend to stop at this point and pull the trigger. However, I have one more secret ingredient in my recipe: management analysis. This prong of the framework requires no knowledge of math or charts. It's simply a common-sensical thumbs up or down judgement like Commodus (Joaquin Phoenix) used to determine the fate of slaves at the Coliseum in the movie Gladiator.

In the case of Intuitive Surgical, I happen to know management is world-class. One of my trusted contacts once worked on a project with the C-level executives and relayed the opinion: "These guys are more brilliant, savvy, and shareholder-focused than a Fortune 50 company I recently worked with."

At this point, you're probably saying, "Great. How am I supposed to know that by reading the 10Q?" Although you can't glean such knowledge from a company's marketing materials, you can attend shareholder meetings, attempt to contact other employees, request contact with executives through Investor Relations, speak with top analysts covering the company, and take cues from trusted professors at Minyanville who do have superior access.

If you're a day trader, fundamental and technical analysis should suffice. However, if you hold stocks or options overnight, I strongly recommend you evaluate management. Otherwise, you're playing Russian Roulette with your hard-earned money, because every day, there's another stock that loses a "surprising" 20-50% as a result of incompetent management.

As I write this, ISRG is up 45% since I bought it in May, and 10% more than when I was eating breakfast yesterday. I've shed some profits and raised my stop-loss to guarantee a minimum level of gains. But so long as my 3-pronged framework spits out better results than HAL in 2001: A Space Odyssey, I'll continue to ride this shuttle to the next level.
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No positions in stocks mentioned.
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