Trading Strategies

Trading on Volatility:
Case Study # 4 - Loewen Group

	Other Links of Interest
	Case Study # 1: Barrick Gold Case Study # 2: Microsoft Case Study # 3: Tecsys Inc. Canadian Internet Index Movers & Shakers Report
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	Trading Vs. Buy & Hold Joe writes "I got in around 49 (on SFE). Should I cut my losses or sell?". Your thoughts?

In days of yore, it's said that Sir Lancelot once went out on a special mission for King Arthur that took him far afield from Camelot. He rode all day and into the evening when night fell and his horse gave out. He desperately needed a new steed to continue his journey so he knocked at the door of a house on a hillside to ask to borrow a horse. An old woman answered and told him she had no horse.

"Well, perhaps a donkey, then? Anything?" asked Lancelot.

"All I have is my hound," said the woman. "A giant mastiff."

"Well I can ride him," Lancelot, replied. "Bring it hither."

Calling the mutt over, the old woman pointed at it and said, "Look at him! He's mangy, hair falling out in clumps, ferocious mad eyes, and horrible breath. You can't have him."

"He's perfect," said Lancelot. "Why can't I have him?"

"Good sir," the crone replied, "I wouldn't think of sending a knight out on a dog like this!" Kaboom!

Okay. Awful joke. But's it's my segue! Speaking of...

A Dog Like This

If ever there was a dog of a stock in recent years, it has to be Loewen Group, the cemetery company.

This was a high flyer for several years, rising from a split adjusted price of $3 in December 1987 to a high of $55.50 by the end of September 1995. The Burnaby-based company grew largely on heavily financed acquisitions, mostly in the US. Its fast pace set it on track to overtake SCI as North America's largest cemetery and funeral service business.

But its debt-powered growth came at a price - it overextended itself. It ruffled the feathers of smaller companies it took over. It became the target of numerous lawsuits. The company promptly went from high flyer to basket case.

After fluttering around for a few years in the $30 to $57 range, it settled at $40 in the spring of 1998 where it sat for a couple of months before its financial woes finally caught up to it in spades. The stock plunged from $41 on June 9, 1998 to $0.35 on June 14, 1999, an incredible loss of 99.15%.

You'll recall that in my first three case studies of active trading (see links in box above), I tried to determine whether one could mitigate risk and even increase profits by selling a stock you had bought for the long run when it dips 10% from a recent high and buying it back when it climbs 10% from its subsequent low. In two cases, Barrick Gold and Tecsys Inc., following this plan increased profits five fold.

In the other case, Microsoft, there was no difference between buying and holding the stock for the period studied or actively trading per our formula. But a Microsoft shareholder may have had greater peace of mind following this plan by being in cash during market downturns.

So I wondered what the results would be using this trading formula on a stock in long run decline. Naturally I thought of Loewen Group. If Loewen from June 1998 to June 1999 wasn't a dog, then fetch me some more milkbone!

The results amazed me. I fully expected that an investor would lose money hand over fist on this turkey, even with this active trading plan. The table below shows the results if an investor had bought around $10,000 of Loewen on June 1, 1998 at $39.45 a share and traded it per our formula through to June 14, 1999.

Now isn't that amazing? Of course, we were helped along by a tremendous dead cat bounce in March 1999 when the stock soared from $1.23 to $2.84 in one week.

Now here's the kicker. In January 1999, the company appointed turnaround specialist John S. Lacey as Chairman of its board of directors. His tutelage did not stem the decline from $7.50 in January to $0.35 in June, but the company's fortunes are definitely on the mend. Since that low point, the stock has soared to $2.40 in July 1999, dropped back to $0.60 in December, and climbed again to over $2 in February 2000. It closed on May 19, 2000 at $0.90. If an investor had continued trading this "loser", she would have increased her stake to well over $200,000 by now. (I haven't done the math, but a look at Loewen's chart would make that a fairly good estimate.)

Now I wouldn't recommend going out and looking for a loser to try this on! Loewen damn nearly went bankrupt, and, in fact, had to seek bankruptcy protection to stave off its creditors. There is certainly a great deal of risk involved in playing this game.

And, of course, my studies are predicated on being able to actually sell the stock at exactly 10% below its recent highs and buying back at exactly 10% above its recent lows. Declines of more than 10% in a day, opening gaps on the next trading day, and other factors would make it difficult to get those same results. But it does indicate a pattern and a possibility.

I'll have to follow up with further studies on more stocks to establish anything definite. But I am hesitantly considering applying this method to at least some of the stocks in my own account. If I had applied it before, it would have saved me a bundle in the tech wipeout of March and April.

Comments? Suggestions? Why not post them on our Bulletin Board or email me.

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