All-Time High Stocks: Trend following Heartware International (HTWR)

Heartware International (HTWR) had its initial public offering last year and has performed exceptionally well since then. It was first highlighted on this blog last September when it reached a new all-time high. I've been cautious about HTWR because of its low Piotroski score, negative insider transactions, and lack of profit, but from a purely trend-following standpoint this has been a real winner. This stock has more than doubled since September.

When I put on my trend-following hat I want to see (i) a clear uptrend, and (ii) no overhead resistance. This stock had those attributes last September for sure. Looking at the guppy chart below, you can see that when HTWR hit an all-time high in Sept 2009 it had two positive signs showing in the guppy chart: (i) all short-term (red) averages above long-term averages (black), (ii) an upward sloping 200-day average. A good course of action at that time would be to establish an initial position of 20 to 25% of the amount I would assign to any one stock and establish a mental stop-loss at two average true ranges below the entry price (2-ATR). Then, if the stock drops sell for a small loss, if it rises by a predefined amount (say, 2-ATR) then I add another 25% to the position and relax the stop to 3-ATR. This approach allows you to scale into a winning position and take a small loss if the main trend changes. Also, the scale-in approach with stop loss adjustment should be calculated so that by the time you are adding to the position there is almost no chance of taking a loss, except if there was a huge gap-decline (I would plan for uncontrolled losses due to gaps to occur ~3% of the time). The goal, as always, is to stick to buying and selling rules that create a positively skewed distribution of returns so that profits will exceed losses.

As you can see below, HTWR has recently gone parabolic which usually means a sharp pullback will ensue. In the meantime, however, large profits can be made. Tighten your stops if you are so inclined.