During last quarter’s downturn, Wayne Himelsein (my top quant manager) advised us to invest in stocks that can do well even in a down market. Every Sunday since then, Wayne has updated us on his thinking. Fortinet, perhaps Wayne’s most confident recommendation, has been running up faster than even this strong market. Verisign is his next pick.
Ken Kam: Congratulations, your Fortinet recommendation gained another 3.4% on the week, while the S&P 500 was up just 0.47%. You were quite confident about that name, having recommended it three times recently. Is there another stock that you have similar confidence you can recommend this week?
Wayne Himelsein: The next stock I’d like to recommend is Verisign. But that said, I can’t say that I could have as much confidence for this one until I see what transpires over the coming days and weeks. Said differently, I need to see it do as I expect after my initial view.
This is a topic I’ve touched on before, and want to do so again given its importance. The topic is the idea of follow through decisions as opposed to investing and sitting still. People seem to worry way too much about picking the perfect time to buy a stock, instead of managing the position once we are in a stock.
Kam: So you are confident about Verisign today, but you’re not pounding the table as hard as you did for Fortinet; can you provide more detail around that distinction?
Himelsein: Exactly. Think of dating, where all of us have experienced meeting someone who we think is wonderful, whether at first glance, or at the first dinner date. But then we get to know them better over time, and our interest either expands or contracts, dependent on the new experiences we have with them, and whether those experiences confirm our initial take, or sadly, completely unwind all that we thought we saw initially. We use our experience to update our prior assumptions.
So it is with stocks. I like Verisign, I like it a lot. But as I get to know it better, I may like it more, or else less. Better yet, if I like it more, I can buy more; akin to if we like the person more, we start spending more time with them, and perhaps, get engaged and marry them. I can’t say that there are too many stocks I’ve gotten married to, but certainly a bunch that I’ve had long term relationships with!
Alternatively, you break up with them, i.e. sell that stock and move on.
Kam: What it is you like about Verisign right now?
Himelsein: I like it right here and right now for what it’s done in the past; and for a very long past. Stepping out with a wide angle lens, since its bottom at the end of the credit crisis, around early to mid-2009, Verisign has climbed and climbed, and then climbed and climbed – literally. It is one of the longest and most consistent trends I have come across. I love strong trends, they vehemently express strength and follow through. Power begets power.
Changing the lens to a closer and higher resolution view, I see some additionally beautiful behavior during 2018, a challenging year for many stocks. Beginning around June of 2018, Verisign exploded to the upside, taking off at a steeper rate than it had been previously climbing. It went for the gold.
Kam: How did it do in the 4th quarter?
Himelsein: When it then hit the October market turbulence, it certainly corrected aggressively, but stopping, amazingly, at a higher level than its June breakout. Unlike many others that made lows for the year during the correction, Verisign wouldn’t even retrace to a previous breakout. Moreover, the end of December lower low in the market, on the 24th, was even higher for Verisign. It wouldn’t even retrace to its October low. It’s been unrelenting.
Kam: I understand what you like about it now. It has not only been strong for ten years, it kept getting stronger as the market imploded around it. What might increase or decrease your interest in it as time moves forward?
Himelsein: With Verisign, it’s quite straightforward; does relentless relent? In other words, so long as it continues this remarkable trending behavior, including aspects like each next retracement stopping at a higher point then the previous one, there is no reason it does not continue climbing and climbing, and then climbing and climbing.
The high level reasoning is quite clear; when picking a stock for a chosen characteristic, it needs to follow through on that chosen characteristic! Even if you have a different stock selection philosophy, be it a company expanding a certain number of stores per quarter, or management putting a given amount into R&D each year, or whatever it may be, if the premise changes, then the position needs to be re-evaluated.
Accordingly, in the case of Verisign, so long as it continues its methodical climb, we stay with it, and perhaps even add every time it has a nice dip. But if it ever breaks its own style, if it ever relents, we break up with it.
My Take: I often hear people agonize when they buy a stock because they want to end the day with a gain. I’ve also heard many eloquent arguments for why people have held onto stocks for years after the reasons for the initial purchase have played out for good or bad.
Wayne’s approach takes the focus off the profitability of the trade on day one, and puts it where it should be — managing the position as our experience with the stock reveals new information.
Wayne Himelsein’s Logica Focus Fund (LFF) has an 18+ year track record that extends through 2 market crashes, numerous corrections, and sector rotations. Over that period, Wayne’s model averaged 11.77% a year which compares well to the S&P 500’s 5.74% return for the same period.
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