Syntex made a move of 450% in about six months, and the drug stock was one of my best winners. After several years of making mistakes, and coming up with rules to fix those mistakes, this is where I finally put all the pieces together.
This stock idea came from a colleague. It's OK to get some ideas from other people, but always do your own research to make sure it has the fundamental characteristics you're looking for, plus a proper basing pattern.
After buying out of a sound high-tight flag, the stock immediately had a 14% shakeout in the fourth week.
I had learned my lesson with CertainTeed a couple years earlier and came up with the rule that you must hold a stock for eight full weeks if it goes up 20% or more in the first three weeks of a breakout. I had been shaken out of CertainTeed, but I learned my lesson and applied my new rule to Syntex.
After eight weeks, I now had a profit cushion of about 40%.
Holding On To This Drug Stock
At the time, the long-term capital-gains tax rate applied after six months. The tax rate for short-term capital gains was as high as 90%. So, given the cushion I had, I decided to hold the stock for six months and one day from my buy point.
I don't put as much weight on the capital-gains selling now, with rates significantly lower, but you will often see profit-taking 12 months after the big-volume buying entered the stock.
There were some more pretty dramatic shakeouts. But having a good cushion allows you to give a stock more room and sit through them. The drug stock ended up going through a climax top. I sold it six months and one day after buying it.
Having rules and following them made all the difference.
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.
(Editor's Note: Syntex pioneered the birth control pill in the 1950s and later patented the popular arthritis pain medication, Naproxen, in the 1970s. Syntex was sold in 1994 to Roche Holding.)
