I’ve recently been following an online marketing company for my Emerging Trends Trader advisory service. You’ve probably never heard of this company, but it competes with Google Inc. (Nasdaq: GOOG), Yahoo Inc. (Nasdaq: YHOO) and other online advertisers.
It trades differently from those companies for a very specific reason. And at first glance, it doesn’t look like a very good investment.
But if you understand how this company’s shares trade, it can be a huge winner.
‘Tis the Season
We’re heading into the holiday shopping season right now. That’s true for brick-and-mortar stores, of course, but it’s also the best time of the year for many Internet marketers.
More people are on the Internet…
More consumers are using mobile devices…
More digital content and advertisements are being created…
And that plays right into this company’s wheelhouse.
But shares have not done very well… for most investors. Year-to-date, shares of this company are down about 2.5%.
It’s not the end of the world, but the broader markets are approaching returns near 20% year-to-date.
Over the past year, shares of this company are up just under 10%… And over the past two years, shares are up just shy of 13%…
That’s pretty tepid. Those returns are way behind the broader-market performances.
So, even though this company has been demonstrating some seriously strong growth numbers, it has not provided a great return to its long-term investors.
In fact, all in all, it’s been a difficult play if you wanted to earn any significant return.
But, here’s the catch…
There has been a way to earn double-digit gains trading this company… including gains approaching 90%.
A Different Way to Play
It has nothing to do with holding the shares long term. It’s about investing in the Prime Period for shares. That means following my principle of holding shares for only the most profitable times of the company.
And when we approach shares in that light, we see a stark contrast in how these shares trade within a 12-month period: At one point in May shares traded at $31.72. Today, those same shares trade below $20.
That’s a loss of more than 38%. Most of those losses came during one horrendous day in May, when the company lost almost 21% after it released its first quarter earnings.
A lot of long-term shareholders are angry. They’ve watched their gains slip away.
But if those investors had just understood the established pattern of the company’s share price, they would have avoided the bloodbath and been richly rewarded.
Seasonal patterns affect the prices of many companies’ shares – and in very predictable ways, for those who know how to look for them. Unfortunately, most investors are unaware of them.
But consider how it affected our Internet company.
An Established Pattern
There hasn’t been much reason to hold this company’s shares following its first quarter results in recent years.
For example, in 2012, shares lost 19.26% overnight following its first quarter release…
But remember, annual revenue continues to head higher. And something started happening in 2006 that has changed the Internet retail space dramatically… It also changed the way this particular company’s shares trade.
Since 2006, retail sales on Cyber Monday – the online shopping day that follows Black Friday – have more than doubled. It has become one of the most important days of the holiday shopping season, and this year is expected to be even bigger.
That’s why this company’s big quarter is the fourth. And because the fourth quarter has become so momentous for this company, it doesn’t trade like a technology or a publishing stock.
It trades like a retail stock.
And e-commerce has emerged as a major revenue stream for retailers. Last year, in the first 26 days of the holiday shopping season, consumers spent $16.4 billion online. This was an increase of 16% compared to the same period in 2011.
That’s our company’s sweet spot. When we look at its revenue, we see a similar impact… In the fourth quarter of 2012, its revenue increased 14% over the fourth quarter of 2011.
Perfect for Prime
And that’s how we approach this investment with our Prime System trade.
We buy shares in early to mid-November, before Cyber Monday. And then sell them on the day the company reports first quarter earnings – about the end of April/beginning of May.
Doing this has resulted in some impressive returns.
As I mentioned earlier, shares as a whole are up just 13% during the last two years.
But by doing this trade, since 2006, the average gain has been 31.22%… Last year, Prime System traders pocketed nearly 90% on this one trade.
But when we look at how shares perform during the Non-Prime period – the stretch following its first quarter release to the beginning of November - they’ve averaged a loss of 14.02%.
But if you know when to invest – if you understand the trading patterns that govern the prices of some particular stocks – you can rack up huge gains.
View original at: Investment U
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