Precision Castparts manufactures castings, forgings and fasteners for the aerospace, industrial and automotive markets. At one point, aerospace behemoth General Electric accounted for 11% of Precision's revenue.
Here is a case where the stock was bought correctly at around 40 and the first sell was based on the rule to sell when a stock closes for the week below the 10-week moving average in big volume. It traded with 72% higher volume than average that week.
The profit when sold was close to 20%. It was not bought back, as you can see on the chart, because it showed continued adverse action weeks later.
Finally, after 11 months, during another market correction in the S&P 500 index, the stock built a classic 20-week cup-with-handle base. It was bought back at 61.45 with additional follow-on buys and ultimately sold at 138 the first week of August.
Precision Castparts: Selling When Shares Stall
It was sold because after a long price run-up, the stock made new highs for three weeks and stalled on heavier volume.
From a money management point of view, you must realize the initial sell gave you 11 months to use the dollars from the short-term profit to find another proper new base to buy over the next five to 50 weeks.
And many months later, when Precision Castparts went through a 24% correction and built a perfect cup with handle, you could then sell the new stock or its replacement to buy back Precision, which then proceeded to double over the next 46 weeks.
It's called the time utilization of money. To do this you need both good buy and sell rules.
Editor's Note: Precision Castparts was acquired by Berkshire Hathaway in 2016.
This column originally ran in Investor's Business Daily as part of a 2012-14 series on America's greatest stock opportunities written by IBD's founder, the late William J. O'Neil. See more stories in this series.
