Stock Picking Basics
Stock picking strategies don’t come around everyday. I give more detailed stock picking strategies and advice on my homepage at wsss.com. But before you walk, you have to learn to obtain proper stock picking strategies. Here are a few for now:
1.) Make sure the stock is cheap. Even if a stock price has fallen to all-time lows or is trading below $10 per share, that does not mean its cheap. Make sure the p/e multiple (found in the “snapshot” page of E-trade or Yahoo Finance for ex.) is less than the growth rate (also found in Yahoo Finance under “key statistics” or “competitor page” on the left- hand column). The rule is, the growth rate needs to be at least half as much of the p/e. You would like growth to be as much or twice the p/e if possible. (If p/e of AAPL is 20, then you would like the growth rate for AAPL to be from 10%-40% to know if it is still cheap), despite having a huge run to 600!
2.) Must have a healthy balance sheet. The rule of thumb here is, make sure the assets are as much as the liabilities, preferably twice as much as liabilities. This ensures the company can finance its business operations at a healthy interest rate. (Or perhaps would not need financing at all). (Balance Sheet found on Yahoo Finance as well in left column).
3.) The stock would like to have lots of free cash flow. (All of this information on stock picking strategies that I state above and below is on Yahoo Finance in left-hand column on stock a quote page.- Go to enter symbol on home page and enter any stock ticker symbol like appl- and it is free). With healthy cash flow, a company can buy back their own stock placing floors beneath a stock. It can also issue dividends to shareholders, or be a takeover candidate- which can make you rich overnight if that happens.
4.) Make sure the stock does not have too many analysts. Too many analysts for a stock equals rotten teeth. You cannot avoid a lot of analysts being on Caterpillar, for example, however if the estimates get too high because of it- you don’t want to touch it.
5.) If a breakout occurs in the stock and you want in, make sure the volume is abnormally high. You typically want volume low because that means that there is room for more buyers. But on the breakout, that means all the supply has been chewed through and new demand will drive the stock higher. (Simple supply and demand).
6.) Echoing rule #5, when buying a stock either on a breakout or in general, it needs to have catalysts– a new reason for people wanting to buy it.
7.) On the technical side of things, please buy a stock near support so that your downside is minimal and your stop-loss is well defined. Ideally, if you could buy a stock above all moving averages- 13 20 50 150 & 200, on good new volume, with a catalyst- then all systems are a go.
8.) Find the right sectors that are working and for a good reason. First identify if the stock fits into energy, finance, technology, retail, etc.. If other competitors in the sector seem to be doing well, then you know you have the right idea. Now it comes down to buying the best one (based on our rules above in part).
9.) Hence rule #9. Of course, make sure your stock has an edge over competitors. Maybe it is cheaper, has superior technology/ products, has patent protection over its pipeline, better track record etc…
10.) I love this stuff and could go on forever. More is to follow but these will help tremendously. With all of this being said, when your ducks are in a row- your chances of success greatly increase. So, make sure all of these parameters line up as a group when buying a stock.
Go to http://stockpickr.com/pro/portfolio/ken-fisher-fisher-investments/ if you want their ideas. We try to organize the site in a more understandable, organized format for our readers. http://www.thestreet.com has some commendable strategies. Here is one of their pieces:
“The rationale for this strategy is simple: If support and resistance levels act as barriers to share price movement, then the breach of a previous support or resistance level should leave shares free to make a larger move.
That’s a fairly pragmatic approach to trading. After all, if a resistance level represents a glut of supply for shares of a stock at a particular overhead price, then a breakout above that price level should mean that those sellers are adjusting their ask prices to higher levels (or opting not to sell at all), clearing the way for shares to get bid up to higher prices.”