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A market order is not the only type of stock trade available. Another common type of order is a “Stop-Loss.” With a stop-loss, the trader instructs their broker to sell a particular stock as a market order if its’ share price falls below a particular value.

Say for instance you own 100 shares of Washington Mutual (WM), which is currently trading at $11.89. You are afraid that some negative news may be coming out and would like to minimize your losses. In order to do this, you set a stop-loss trade to sell at $10/share. If the price of WM falls below $10/share, the stop-loss will trigger a market order for the shares. This will help to ensure that you liquidate your positions and avoid a major downturn.

While stop-loss orders may seem like a worry free solution, Jonathan Burton of Marketwatch.com has a differing opinion. He feels that they really aren’t all they are cracked up to be. While they do offer great downside protection, they can come back to haunt you as well. Going back to the Washington Mutual example, let’s say that WM drops to $9.85/share. Suddenly a market order for your shares take place and you no longer hold WM. Now let’s imagine that after it hits $9.85/share the stock bounces back up to $12/share over the next few days. Now you are stuck having sold out at $9.85, while you could still be holding on at $12/share.

According to the article, “Stop-loss orders are geared to traders and investment professionals who buy and sell shares frequently. They might lose 10% in a stock one day and make 25% the next. The stop-loss is a way to avoid a beating if they’re wrong.” Short term traders can easily just walk away from a stock and move on to the next. Longer term traders tend to have more of an emotional attachment to the company. This can be in part because of the amount of time spent trying to find the company, or financial roller coaster that the company has put them through. Long term traders are more likely to keep watching the stock after they sell and beat themselves up mentally saying, “if only I hadn’t…”

In an interesting statement, the article points out that “things often rebound very quickly and it’s very hard to recapture the stock at a good cost basis. It’s almost like ensuring that you will sell in irrational market panics.”  The market is not always right and is often subject to major corrections in times of volatility.

Jonathan does suggest an alternative to the stop-loss method. “The trailing stop is a stop-loss order that you adjust upward as a stock moves higher. If a stock rises 10%, raise your stop by 10% and so protect your profits. You still run the risk of being sold out earlier than you might like, but at least you’ll have something to show for it.”

As a final bit of wisdom, Jonathan states that “if you’re a long-term investor it doesn’t make a lot of sense (to use a stop loss), and if you’re a short-term trader you’d be better off watching the stock. Long-term investors should simply monitor the stock’s fundamentals.”

A few days ago I mentioned that I was going to purchase Host Hotels and Resorts (HST). This company operates hotels such as the Marriott, Ritz-Carlton, Hyatt, Four Seasons, Fairmont, Hilton, and Westin. Well this morning I made the purchase on the stock. When I first put the order in a few days ago, the stock was trading at $16.53/share. I put a $.47 trailing stop loss on it. Since I put that order in, the stop price dropped down to just above $16.50. This means that once the share price reached $16.50 my trade would be executed. This morning it was trading in the low $16s and I felt that it would be a good idea to just get in now instead of waiting for it to rise to the stop price. I put in a market order that was completed at a price of $16.11/share. After commissions were factored in, the weighted average cost was $16.31/share. At market close today it is sitting at $17.01/share. That is a 5.59% increase off the initial price, and a 4.29% increase off the weighted average price.

In order for me to break even on this trade, I must sell above $16.51/share. The reason for this $.40 increase in price above the initial buy price is because of commissions on the buy and sell. I am thinking about creating a trailing stop loss that starts at $15/share so that the most I can lose on the trade is 9%. As it stands now, I have made a 2.93% return for one day (1054% annualized) after all commissions have been factored in. According to Bankrate.com, the average one-year CD is yielding 2.90%. Looks like I beat the one-year national average in one day. Too bad I can trade like this everyday. Of course now that I have written this, the stock will tank down to $14 over the next week. Let’s hope not.

So why was the price up today? There are two reasons for this. The first reason is fairly obvious. The Dow was up 3.19% today, so one can say that the stock was just trending with the market today. That is a pretty easy statement to agree with. The other reason that may have caused the stock to rise today is that the company announced the date of their earnings call. They announced that they will be reporting on April 23rd. Perhaps the market is expecting better than expected news. I know I am. According to Yahoo! Finance, “The company has elected to be taxed as a REIT under the Internal Revenue Code. As a REIT, it would not be subject to federal income tax provided it distributes at least 90% of its taxable income to its shareholders.” What this means is that the higher the income, the higher the dividend. Typically the higher the dividend the higher the share price is. This move could be in anticipation of higher dividends. I guess we will all find out here in a few months.

There are many different investment services out there to choose from. Most tend to be geared towards the experienced trader who wants to use limits and stops in their trades. Well Sharebuilder.com is one of the few sites that is geared to a more novice audience. Sharebuilder, which I believe has recently joined forces with ING Direct offers investors to set up up automatic investments that allow them to purchase stocks in whole dollar amounts instead of individual shares. By doing this, beginning investors can invest in partial shares of Google or Apple instead of having to throw down a bunch of cash for a single share.

Through the program, you schedule Sharebuilder to make regular investments in a given stock on a certain day each month or week. One negative thing about this system is that you cannot specify an exact time to initiate a trade. At some point in time during the trading day, Sharebuilder will acquire the shares for you. A good thing about this plan though is that it allows you to make regular investments in a given security. This will allow you to be able to smooth out price fluctuations since you will be investing over a wide range of times.

Sharebuilder also offers some standard brokerage features as well. For an additional price you can make trades in real time just like you would with a more “full-service” broker. They also offer options trading and margin accounts as well.

Don’t you hate it when you find this great stock to invest in only to find out that your available cash balance is too low to make the trade worth it? Well Sharebuilder has a great feature that will easily solve this problem. What they have created is called Express Funding. With Express Funding, you can “place Real-time Trade orders with cash directly from your checking/savings account, eliminating the wait to process your deposit.” It costs $5 to do this, but if you have an Electric Orange account set up through ING Direct the fee is waived.

Sharebuilder has set up three different account types depending on what kind of trader you are:

As you can see, with the advantage plan you are essentially getting trades at $1/trade assuming that you make 20 investments per month. To my knowledge that tops most other brokers out there.

If trading at regular intervals for a cheap price sounds good to you, I would highly advise you to give Sharebuilder a closer look. For a direct link to the site, click here.

Now that I have sold my stake in MakeMusic (MMUS), I am on the search for my next investment. After doing a few screens through Fidelity I came across a company that could be poised to make some nice gains. The company is Host Hotels and Resorts (HST). In the past year the stock has seen about a 35% drop in share price from around $26/share to its current rate of $16/share. Since the first of the year it has been trading in a solid consolidation pattern between $17.30 and $15.50/share. I think that if the price gains 5% above or below these two benchmarks then it has reached a breakout stage and will post large gains or losses.

One thing that I really like about the company is that their profit margin has continued to expand each year since FY 2003.

Even as the company has continued to grow sales, they have also increased their efficiency. This is always a good sign that things are going well for a company. Another good sign for a company is the payment of dividends. Currently the company boasts a $.20/share quarterly dividend. At current prices, and assuming that the dividend will remain at $.20/share the company will be paying a 4.86% dividend. Try finding a CD that will pay you that much these days! A final positive indicator for the stock is that it’s P/E is only at 16.3 right now. In comparison, it’s TTM 5-year P/E average is right around 40. Given historical P/E levels, this stock should really be trading in the high 30s and low 40s.Another convincing factor is that 3 accurate analysts rate HST as a buy, one as an outperform, and one as a neutral. Analysts can’t necessarily predict the future, but given the fact that none rate it as a sell makes me feel even more confident in the company.

Also, compared to other companies in its industry, it is doing much better. Its net margin is 13.4% compared to the industry average of only 3.8%. Return on equity is sitting at 13.1% compared to 7.1% in its industry. Finally, it has a debt to capital ratio of 51% compared to the industry average of 62.9%. In this statistic more is not better.

With all the fundamentals going right for this company, I feel comfortable making this stock a buy. This morning I placed a $.50 stop loss on the security. If it hit’s $16 I may play the $16-17 game for as long as I can and hopefully rack up a few profits while I’m at it. One thing that troubles me is that since the US economy is starting to head in the wrong direction, it might mean that people will be taking fewer vacations, and therefore using hotels much less.

Now that I have suffered through Jones Soda’s terrible earnings report I now get to look forward to Gigamedia’s (GIGM) earnings report. They will also be reporting their Q4 2007 and FY 2007 financials. Oh and by the way, I do own shares in this company. I am actually looking forward to this report though. GIGM has been a solid company for me, and I have owned their stock for almost two years now.

Many people may not have heard of this company, and that is understandable. They are an ISP (Internet Service Provider) and web portal over in Tiawan, China and Hong Kong. The official description from Reuters reads, “GigaMedia Limited (GigaMedia) is a holding company that develops and licenses entertainment software and provides application services, owns and operates an online games portal and provides broadband Internet access services through its subsidiaries.”

One of the big things the company has going for it right now is their gambling applications. Many people may want to shy away from a company that makes revenues off of gambling, thinking that it is illegal. Well, Gigamedia does not operate in the United States and is therefore not subject to the online gambling rules and restrictions of the United States. They are free to operate as they please, and their site has caught on. Everest Poker and Mahjong have been some of their top performers recently. They have also struck some deals through Electronic Arts to operate some of their online games. Such popular titles include Warhammer and Hellgate London. Most of the games that Gigamedia offers are through its subsidiary Funtown. Take a look at the Funtown site. It looks pretty interesting, although I can’t make out any of it since it is all written in Chinese.

Analysts are expecting an EPS of $.17 for Q4 2007 and $.65 for FY 2007. EPS for Q4 2006 was $.19 and .$51 for FY 2006. So, analysts are expecting lower earnings for the quarter, but higher overall for the year. I think that the stock is priced perfectly right now, especially since it has been trading in a fairly narrow range over the last three months. Personally, I am expecting them to do better than analyst predictions. Their current P/E is at 28.96 based off an EPS of $.64. If they hit the EPS of .$65 that is being predicted, we could expect the stock to climb from its’ current position at $18.50 to $18.82.

Irregardless of the outcome of this quarters/years earnings, I plan on holding my shares for some time longer, as I see this company having a lot of potential to do good things.

Update 3/17/2008: So I am pretty bummed out over what has happened with this stock over the past week. I have watched it sink from $18.50 to $14.24, a decline of about 23%. The P/E has also fallen from 28.96 to 21.98. I think that the price of this stock has been unfairly punished by the market and is due for an increase in the near future. I feel that this is an excellent buying opportunity, since price levels for this company haven’t been this low since early September. I believe that $12.75 will be the approximate bottom. This price prediction is based purely on a hunch. Based on their earnings report and the guidance that was given, I feel that their P/E should be back up where it was before, which would put the stock at the mid to high 18s.

Here is a brief technical analysis chart that I created for the stock over the past month:

I believe that the line that will be the most helpful of the three is the middle line. The most negatively sloping line is far too unattainable and measured over such a short period of time for it to be much help at all. The stock will be ready for a rebound when it crosses over the middle line by 8%. I will try to keep this chart up to date so that we can test my prediction.

As a stock holder of Jones Soda (JSDA) I can’t help but be worried about what their annual report for the year 2007 ended December 31st will look like. Around this time of year last year things were looking great. You couldn’t say a bad word about the company. I rode the stock from $9.41 when I bought it on 9/25/2006 all the way up to $27.82 when I sold it on April 20th, 2007. I bought back in when it was trading in the high $7s, and have been disappointed since. To check out some of my other holdings, click here.

Unfortunately this company has been facing bad news and more bad news over the past year. First off, insiders were accused of dumping their shares right around its peak when the stock started to plummet. This definitely put a negative vibe on the company that until recently could do no wrong. Secondly they had issues making money. You know a company is doing something wrong when the interest that they earn from their free cash is making more money than the company itself. This was largely due to supply issues. The company had solid deals with stores, but they could not keep their shelves stocked. If a customer comes into a store looking for Jones Soda and there is none, then they are going grab whatever else is on sale. Another big issue with the company was that their CEO Peter Van Stolk stepped down from the company leaving them searching for a replacement to run the company.

During the year Jones increased their visibility with a stadium deal with the Seattle Seahawks. They paid a decent chunk of change for these official rights and it will be interesting to see how much the deal contributed to their revenues. One must take note that the Seahawks play only eight home games per year. Being an official soft drink provider is great, but for only eight games a year doesn’t seem to make a whole lot of sense especially for a company the size of Jones. They also inked a stadium deal with the New Jersey Nets basketball team. They have yet to sell there because of pending issues with the NBA. I also believe that the deal is only good for the Nets new stadium which has yet to be completed. On the plus side though, the Nets play 41 home games per year there.

Currently the average consensus of investment firms is that Jones Soda (JSDA) is a sell or an underperform. For the 4th quarter of 2007, analysts predict JSDA to have an earnings per share of $-.03. In comparison, 4th quarter 2006 had an EPS of $.08. JSDA also seems grossly overvalued with a P/E ratio for the trailing twelve months of $230.50 compared to the industry average of a modest 21.56 P/E. If Jones’ P/E were to be at the industry average right now, they would have to be trading at $.43 per share. Ouch! As a current shareholder that does not make me very optimistic. I also have a hard time seeing Jones beat $-.03 per share as well. Personally I think this stock is doomed for the next six months until 3rd quarter 2008 earnings come out sometime in October or November. The other thing that made me nervous was that Jones postponed their earnings announcement by almost a week. I don’t take that for a very good sign.

It will be interesting to see what happens tomorrow when they release their annual report. I will give my opinion of it after I have had the time to read through and digest the report.

Update 3/10/2008: I was expecting them to do bad this quarter, but they did horrible! I think that they will eventually turn things around because they seem like they are a good and legitimate company, but things are really not looking so hot right now. Let’s take a look at some of the awesome financials they reported this fiscal year shall we?

Here is the kicker. Analysts were predicting a loss of only $.03 per share. The reported loss for the quarter was -$.39 per share. Just a slight difference. It is no wonder the stock dropped 25.12% in after hours trading.

One interesting factoid I found was that JSDA’s earnings for Q4 2007 was -$10.204M, while their earnings for the fiscal year 2007 was -$11.629M meaning that the majority of their losses took place during the fourth quarter. Interesting…

On my way home on the bus from work today I was reading the Technical Analysis book that I  had picked up at the library earlier this week. About 3/4 of the way home this guy sitting near me asks what I am reading. I tell him that I am reading the book “How Technical Analysis Works” by Bruce M. Kamich. He tells me that he is really into charting and whatnot and from what he said it sounded like he was some sort of researcher for an investment firm.

We get to talking, and he goes on to tell me that he is doing some research on Berkshire Hathaway’s holdings. For those of you who are unfamiliar with the company, it is an investment company that is run by Warren Buffet who is one of the richest people in the world. What he was looking for was a common theme between all of the stocks that the company had invested in.

Here is what he found:

• Companies had a P/E ratio that was either in the low 20s or in the teens.
• Companies tended to be established and well known firms (with a few exceptions)
• The companies had a dividend rate between 1% and 5%.

As a summarization of his findings, Buffet seems to like well established companies that are underpriced and pay a decent dividend. So there you have it…if you want to trade like Buffet, follow these three easy criteria. Ah yes, if it were only that easy. It does give us a bit of insight on the thought process of one of the world’s greatest investors.

Overview: Target (TGT) is a large nationwide discount retailer. As of the end of the third quarter 2007 they had 1,591 stores nation wide. Of these stores, 210 were Super Targets. Since third quarter 2006, the company has built 97 new stores, an increase of 6.5%. Target has also had an increase of 34 Super Targets since Q3 of 2006. This is an increase of 19.3%. The Target corporation sells just about any type of household product imaginable from clothing to food to electronics. They have also supplemented their income with a strong credit card program. The company’s main competitor is Wal-Mart (WMT).

Review:

The Good: Target is a large well known company that is not going anywhere. They have a strong balance sheet and provide quality products to consumers. Target is a brand that consumers have come to know and trust for their everyday shopping needs.

Although Target competes with Wal-Mart, there are many people who despise Wal-Mart and have no problem paying a tiny bit more at a company that they feel has a better image. Many people feel that Wal-Mart exploits their workers and have other questionable business practices. Target makes a natural option for those who are opposed to shopping at Wal-Mart.

Their credit card program has been growing. Target currently offers a Target card through Visa. In comparing the 9 months ended for 2006 with 2007, the credit card contribution to earnings before taxes grew from $374 million to $463 million, a 23.8% gain. The company’s earnings before taxes as a whole for 9 months ended 2007 was $2,959 million. This means their credit card operations attribute to 15.6% of their total earnings. In contrast, credit card contributions to earnings before taxes were only 13.9% of total earnings. A strong credit card program like this means that they don’t need to rely solely on selling a ton of thinly margined items to turn a profit.

Within the company’s credit card business they have been highly effective in receiving their payments. As of Q3 2007, only 3.8% of accounts were over 60 days past due, and only 2.6% were over 90 days past due.

The company has had a share repurchase program in place since 2004. This is good for shareholders, because when the company retires shares of stock, they own a larger portion of the company. This will also help to boost earnings per share. In 2004 they initially declared they were going to repurchase $3 billion worth of shares. This number has grown to $8 billion in stock. To date they have repurchased $90.7 million shares of their stock for a total of $4.646 billion. This leaves about $3.3 billion left in repurchases.

Target pays a decent dividend which is currently yielding 1.05%. The past three quarters they have paid out $.14 per share.

The stock has slid from a recent high of $67.57 on October 5th, 2007 to its’ current price of $53.40. This is likely due largely in part to the fact that the economy didn’t have the strongest holiday quarter and investors have factored that into the stock’s price. Wal-Mart recently reported better than expected sales data which helped to push Target’s price up $1.18/share today. This good news from Wal-Mart comes at a convenient time for Target. Their Fiscal year for 2007 ends February 3rd, 2008. This means that that company should be releasing their annual report somewhat soon. Over the past few months the company has reaffirmed to investors that they should be meeting analyst expectations.

The Bad: The economy will play a large part in how Target performs over the long haul. They appear to have weathered the economic downturn fairly well, holding their stock price within the $60 - $65 range in 9 of the last 12 months, although the stock definitely took a turn for the worse when a lot of the negative economic news was starting to come out.

Although their credit card business has provided them with a boost in income, their net write offs as a percentage of average receivables increased from 4.8% for the 9 months ended 2006 to 5.7% for the 9 months ended 2007. The total net write-offs for each period increased from $215 million to $296 million, an increase of 37.8%.

A continued decline in the economy could create potential problems for their credit card program. If more and more people cannot repay their debts, then the company may have to write off even more bad accounts.

Rising costs of producing goods may cause the company to decrease margins in order to stay competitive with other companies, or increase prices to a point that consumers no longer want to buy their goods, or buy in less quantities.

Opinion: The main hindrances to Target’s growth are its’ increase in write-offs through its credit card program, and the fact that the economy has been going down the drain lately. They can’t really do a whole lot to turn the economy around, but they can affect bad debts and write-offs to a degree. If the economy is bad, they should make qualifying for their card a bit more difficult. If people with low credit scores typically have iffy payment history in a good economy, imagine what they will be like during the not so good times. If they are going to give credit to a barely qualified applicant, they should give a very low initial limit to therefore reduce the amount that these risky borrowers can default.

With Wal-Mart’s recent earnings surprise, it is possible that Target could follow suit, although they have been stating all along that they should be meeting and not exceeding analyst expectations. Either way this is good though considering the state of the economy. Now might be a good time for the company to reduce their rapid expansion. The economy is probably not ready for additional Target stores.

Rating:

Market Sector: The retail sector has been fairly weak as of late. I don’t really foresee that changing any time soon. Wal-Mart reported an earnings surprise, so that gives me a bit more confidence for this sector, but I am still a bit sketchy about how it will fare in the slower upcoming months.

Potential: This company is not going to be your four-bagger stock. Their price has tailed off over the past few months, but it could be due for a resurgence if good news is reported. Based on past trading history, it appears that it has hit a bottom of $50/share. Their lowest close was $48.08 on 1/4/2008. During that period, it spent a total of six trading days closing below $50. It closed below $50 three additional times, with the last being on 1/17/2008 at $49.94. Since its’ low on 1/4/08, the stock has gained 11%. $55 would be the next hurdle for it to get over, which I don’t really see happening in the near future, but this discounted price could be an excellent time to get in on this solid company. A return to $60 would be a nice 11% gain in addition to the dividends received.

Risk: There is a high risk that the economy could continue to fall and the company may not continue to grow as fast as investor expectations. This could lead to a sell-off and a reduction in price. It is fairly likely that this could happen over the course of the next few months. This could create excellent buying opportunities for this company at a discounted price. At a P/E of 15.64, which is slightly lower than Wal-Marts, I feel that anything below $50 is a great bargain.

Conclusion: 3.2 Target is a solid and sound company with a loyal customer base. The company has continued to expand operations, as well as participate in a large stock repurchase program. They also have a decent dividend to boot. The only thing keeping me from giving this company a higher rating right now is the fact that the economy is in such a worrisome condition. Poor economy = reduced consumer spending = reduced earnings for Target = depreciation in stock price. The short term outlook for this company might not be blue skies and rainbows, but over the long term an investor should benefit nicely with this stock in their portfolio.