Showing posts with label stock picking investing. Show all posts
Showing posts with label stock picking investing. Show all posts

Tuesday 27 July 2010

Stock Picking Strategies of various Gurus

Stock Picking for Noobs

June 11, 2007 20076 12:06 pm | In Finanducation | Comments Off
Who best to learn but from the gurus themselves? Here's a brief list of gurus and their strategies:
1. Benjamin Graham – Value Investing Guru
Strategy: Buy shares at price well below company's intrinsic value!
Indicators:
  • P/E < 15 for average earnings over last 3 fiscal years (or current P/E whichever is higher)
  • No financial/technology stocks
  • Annual Revenue > $340 million
  • Liquidity: Current Assets/Current Liabilites > 2
  • Industrial companies: Long-term debt < Net current assets
  • EPS increases > 30% over 10-year period, must not be negative within last 5 years.
  • (Price-to-book ratio)*(P/E) < 22
Source: NASDAQKiplingerForbes
2. Peter Lynch – P/E Growth Guru
Strategy: Divide attractive stocks into different categories.
Indicators:
a. Fast Growers:
  • Little debt, Debt to Equity Ratio < =1
  • Annual EPS Growth Rate = 20 to 30
  • Current P/E < = 1.75*Annual EPS Growth
b. Slow Growers:
  • High dividend payouts
  • Sales > $1 billion
  • Low yield-adjusted PEG ratio
  • Reasonable debt-to-equity ratio
c. Stalwarts:
  • Moderate earnings growth
  • Potential for 30-50% stock price gains over 2 year period if bought at attractive prices
  • Positive earnings
  • Debt-to-Equity ratio < 0.33
  • Sales rates increasing inline with, or ahead of inventories
  • Low yield-adjusted PEG ratio
3. Martin Zweig – Conservative Growth Investor
Strategy: To be fully invested in the market when the indications are positive and to sell stocks when indications become negative.
Indicators:
  • Quarterly earnings positive and growing faster than:
  • –1 year ago
  • –last 3 quarters
  • –last 3 years
  • Sales growing as fast or faster than earnings
  • P/E > 5; BUT P/E < 3*Market P/E or 43, whichever is lower
  • No high level of debt, below-average for industry
4. Brothers David and Tom Gardner of Motley Fool – Small-Cap Growth Investor
Strategy: Search for stocks of small, fast-growing companies with solid fundamentals.
Indicators:
  • Health profit margins
  • Little debt
  • Ample cash flow
  • Respectable R&D budgets
  • Tight inventory congtrols
Source: NASDAQ
5. Kenneth Fisher – Price-to-Sales Investor
Strategy: The lower a company's stock price is relative to its sales, the more attractive its stock is.
Indicators:
  • Strong balance sheet with little debt
  • Low Price-to-sales ratios
Source: NASDAQ
6. David Dreman – Contrarian
Strategy: Search for deep-discount value stocks.
Indicators:
  • Good earnings growth
  • Low P/E
  • Low P/B Ratio
  • Low Price-to-Cashflow Ratio
Source: NASDAQInvestopedia
7. James P. O'Shaughnessy – Growth/Value Investor
Strategy: 2 investment strategies: "Cornerstone Growth" and "Cornerstone Value"
Indicators:
a. Cornerstone Growth
  • Market value > $150 million
  • Price-to-sales ratio < 1.5
  • Persistent earnings growth, among market's best performers over prior 12 months
b. Cornerstone Value
  • Market cap > $1 billion
  • Revenue > 50% greater than mean of market's 12 month sales
  • Cashflow per share > average publicly-traded company
  • Yield Factor: Company which has highest dividend yield from 50 shortlisted using above criteria.
Source: NASDAQForbes

Monday 21 June 2010

Finding great companies: What you want to see on their financial statements?

If you're committed to finding great companies and investing in them, it is time to state clearly what you should actively seek out on financial statements.  Here now is what you should hope to find when you're studying the report of a company that you're considering for investment.  


What you want to see on a balance sheet?

1.  Lots of Cash

  • Cash-rich companies don't have trouble funding growth, paying down debts, and doing whatever they need to build the business.  
  • Increasing cash and equivalents is good.


2.  A low Flow Ratio


Flow ratio
=  (Current assets - Cash) / (Current Liabilities - Short term Debt)
=  Noncash Current Assets / Noncash Current Liabilities

Ideally, a company's flow ratio is low.  Once cash is removed from current assets, we are dealing almost exclusively with accounts receivable and inventories.  In the very best businesses, these items are held in check.  Inventories should never run high, because they should be constantly rolling out the door.  Receivables should be kept as low as possible, because the company should require up-front payments for its products and services.

So we certainly want the numerator of the equation (current assets minus cash) to be held low.

What about the denominator (current liabilities minus short-term debt)?  Rising payables indicate one of two things:

  • either the company cannot meet its short-term bills and is headed for bankruptcy, or 
  • the company is so strong that its suppliers are willing to give it time before requiring payment.  
You can be sure that companies in the latter category use their advantageous position to hand on to every dollar they can.   Again, think of every unpaid bill as a short-term, low-interest or interest-free loan.  If a company has plenty of cash to pay down current liabilities but doesn't, it is probably managing its money very well.  Those are the companies that we are looking for.

Ideally, we like to see this flow ratio sit low.  The very best companies have:  (1) Plenty of cash  (2)  Noncash current assets dropping (inventories and receivables are kept low) and (3)  Rising current liabilities (unpaid bills for which cash is in hand).

You'll prefer the flow to be below 1.25, which would indicate that the company is aggressively managing its cash flows.

Inventories are down, receivables are down, and payables are up.  This is a perfect mix when a company has loads of cash and no long-term debt.  Why?  Because it indicates that while the company could (1) afford to pay bills today and (2) doesn't have to worry about rising receivables, they are in enough of a position of power to hold off their payments and collect all dues up front.

When the flow ratio is high, another red light whirs on the balance sheet.

It must be noted here, however, that larger companies generally have lower flow ratios due to their ability to negotiate from strength.  Thus, don't penalize your favorite dynamically growing small-cap too much for a higher flow ratio.


3.  Manageable debt and a reasonable debt-to-equity ratio

Investors have very different attitudes toward debt.  Some shun it, choosing to not invest in companies with any or much debt.  This is fine and can result in highly satisfactory investment performance results.  But debt shouldn't be viewed as completely evil.  Used properly and in moderation, it can help a company achieve greater results than if no debt is taken on.

Debt can be good for companies too.  Imagine a firm that has a reliable stream of earnings.  Let's say that it raises $100 million by issuing some corporate bonds that pay 8 percent interest.  If the company knows that it earns about 12 percent on the money it invests in its business, then the arrangement should be a very lucrative one.

Note, though, that the more debt you take on, the greater your interest expense will be.  And this can eat into your profit margins.  At a certain point, a company can have too much debt for its own good.  Another feature of debt (or 'leverage') is that it magnifies gains and losses (just as buying stock on margin means that your gains or losses will be magnified).  Debt, like anything, is best taken in moderation.

To finance their operations, companies need sources of capital.  Some companies can survive and grow simply on the earnings they generate.  Others issue bonds, borrow from banks, issue stock, or sell a chunk of the company to a few significant investors.  The combined ways that a company finances its operations is called its "capital structure."  If you take the time to evaluate a company's debt, it could be worth your while.  Properly managed debt can enhance a company's value.

When you calculate debt-to-equity ratios for your companies, remember that there really isn't a right or wrong number.  You just want to make sure that the company has some assets on which to leverage its debt.  To that end, look for low numbers, ideally.  A debt-to-equity ratio of 0.05 isn't necessarily better than one of 0.15, but 0.65 is probably more appealing than 1.15.  You should also evaluate the quality of the debt and what it's being used for.  If you see debt levels spiking upward, make sure you research why.  Certainly, long-term debt can be used intelligently.  But in our experience, the companies in the very strongest position are those that don't need to borrow to fund the development of their business.  We prefer those companies with a great deal more cash than long-term debt.



Are any of our balance sheet guidelines hard-and-fast rules?  No.

We can imagine reasonable explanations for each.

  • A company can run inventories very high relative to sales in a quarter, as they prepare for the big Christmas rush, for example.  So, inventories may be seasonally inflated (or deflated) in anticipation of great oncoming demand.
  • And accounts receivable may be a tad high simply by virtue of when a company closed out its quarter.  Perhaps, the very next day, 75 percent of those receivables will arrive by wire transfer.  Here, the calendar timing of its quarterly announcement hurt your company.
  • Rising payables can also be a very bad thing.  If the company is avoiding short-term bills because it can't afford to pay them, look out!
  • Finally, flow ratios can run high for all the reasons listed above.


Having qualified our assertions, we still believe that the best businesses
  • have such high ongoing demand that inventories race out the door, 
  • product distributors pay for the merchandise upfront, 
  • the company has enough cash to pay off payables immediately but doesn't, and 
  • future growth hasn't been compromised by present borrowing.  

Look to companies like Coca-Cola and Microsoft to find these qualities fully realised.


What you want to see on the income statement?

1.  High Revenue Growth


You will want to see substantial and consistent top-line growth , indicating that the planet wants more and more of what your company has to offer.  Annual revenue growth in excess of 8 - 10 percent per year for companies with more than $5 billion in yearly sales is ideal.  Smaller companies ought be growing sales by 20 - 30 percent or more annually.

2.  Cost of Sales under wraps


The Cost of sales (goods) figure should be growing no faster than the Revenue line.  Ideally, your company will be meeting increasing demand by supplying products at the same cost as before.  In fact, best of all, if your company can cut the cost of goods sold during periods of rapid growth.  It indicates that the business can get its materials or provide its services cheaper in higher volume.  Where cost of goods sold rose outpacing sales growth, a red light just blinked from the income statement.


3.  Gross margin above 40%


We prefer to invest in companies with extraordinarily high gross margin - again, calculated by (a) subtracting cost of goods sold (cost of sales) from total sales, to get gross profit, then (b) dividing gross profit by total sales.

A gross margin above 40% indicates that there is only moderate material expense to the business.  It is a "light" business.  We like that.

Not all businesses are this light, of course.  Many manufacturing companies have a hard time hitting this target, as do many retailers.  Does that mean you should never invest in them?  No.  Does it mean you should have a slight bias against them in favour of higher-margin companies, all other things being equal?  Yes.

4.  Research and Development costs on the rise

Yes, we actually want our companies to spend more and more on research every year, particularly those in high technology and pharmaceuticals.  This is the biggest investment in the future that a company can make.  And the main reason businesses spend less on R&D one year than the last is that they need the money elsewhere.  Not a desirable situation to be in.  Look for R&D costs rising.  Of course, though, not all companies spend much on R&D.  A kiss is still a kiss, a Coke is still a Coke.

Generally, the best way to go about measuring R&D is as a percentage of sales.  You just divided R&D by revenue.  You want to see this figure trend upward, or at least hold steady.

5.  A 34% plus tax rate


Make sure that the business is paying the full rate to the government (Uncle Sam).  Due to previous earnings losses, some companies can carry forward up to a few years of tax credits.  While this is a wonderful thing for them, it can cause a misrepresentation of the true bottom-line growth.  If companies are paying less than 34% per year in taxes, you should tax their income at that rate, to see through to the real growth.

6.  Net profit margin above 7% and rising.

How much money is your company making for every dollar of sales?  The profit margin - net income dividend by sales - tells you what real merit there is to the business.

We prefer businesses with more than $5 billion in sales to run a profit margin above 7 percent, and those with less than $5 billion to sport a profit margin of above 10 percent.  Why go through all the work of running a business if out of it you can't derive substantial profits for your shareholders?

Another way of thinking about this is that in a capitalistic world, high margins - highly profitable businesses - lure competition.  Others will move in and attempt to undercut a company's prices.  So companies that can post high margins are winning; competition is failing to undercut them.  As with gross profits above, some industries do not lend themselves to a high profit margin.   For example, a certain company is unlikely to ever show high profits, but it remains a wonderful company.


What you want to see on the cash flow statement?

Net cash provided by (used in) operating activities is positive or negative.

If a company is cash flow negative, it means that these guys are burning capital to keep their business going.  This is excusable over short periods of time, but by the time companies make it into the public marketplace, they should be generating profits off their business.

If a company you are studying is cash flow negative, it's critical that you know why that's occurring.
  • Perhaps it has to ramp up  inventories for the quarter, or had a short, not-to-be-repeated struggle with receivables.  
  • Some companies are best off burning capital for a short-term period, while they ramp up for huge business success in the future.  
  • But if the only reason you can find is that their business isn't successful and doesn't look to be gaining momentum, you should steer clear of that investment.


Summary

You now have a fine checklist of things to look for (and hope for) on the balance sheet, income statement, and statement of cash flows.  Few companies are ideal enough to conform to our every wish.

The best businesses show financial statements strengthening from one quarter to the next.

For smaller companies with great promise and for larger companies hitting a single bad bump in the road, shortcomings in the financial statements can be explained away for a brief period.

But when you do accept these explanations, be sure you're getting the facts.  You want to thoroughly understand why there has been a slipup and do your best to assess whether or not it's quickly remediable.

We have, up to until now,  merely outlined the ideal characteristics, without ever putting a price tag on them.  Make sure you've mastered these basic concepts before fishing for some companies.

Do you want to take your knowledge of investing to the next level?

Learning to invest can be an enjoyable pastime for those inclined toward it.  It is not a mystery that has to be left to the professionals.  Do you want to take your knowledge of investing to the next level?

You can do it as successful investing relies primarily on the proper understanding of basic mathematics and basic principles of business.

You want to learn about business.  

You want to learn how to value individual stocks.

You want to determine whether or not to buy more of the stock of your employer.

You want to own the greatest companies on the planet, hold them for decades, and turn a couple of thousand dollars into a couple of million dollars by the time you retire, or your kids retire, or their kids.

To get there, you need only add 6 + 17 successfully (23).  You need only multiply 12 X 2.6 (31.2).  You need only divide 178 by 14 (12.7).

Mostly, you'll just need to keep your eyes and mind open.  

The future of your financial situation rests more on these abilities than on working triple overtime next month or inheriting a whole mess of money from your great-uncle.


So, let's ask again:  is it time for you to step beyond the index fund and start investing in individual stocks?

Why invest in individual stocks?  

Because if you're methodical, you may beat the index funds that beat the majority of managed funds.  

Chances are you won't make much money at all in your first year of investing.

You'll still be learning and you'll probably make plenty of mistakes.

And there certainly are other alternatives to common stock.  Index funds are a great way to begin investing.

With method and resolve, private investors can manage to outperform the market over the long term.

Thursday 11 February 2010

There is no one way to pick stocks. Every stock strategy is a 'best guess' of how to invest.

Stock Picking 101

The Marketer's Manifesto

It’s time for fund managers to “return to their natural stock-picking tendencies,” said Citigroup chief global equity strategist Robert Buckland. “Just when the bear market (and subsequent rebound) has bullied us all into being very macro is the time when a good contrarian should be moving micro.” Over the last few years, the financial advisory business has been playing it close to the vest to protect as much of their clients’ investments as possible. They’re hesitant to move away from safe options because everyone is fearful of market fluctuations these days. However, some analysts say it’s precisely this strategy that’s holding us back. Stock picking is slowly but surely coming back into favor again, offering higher yields and better deals for people who know when to get in and when to get out.

Investors who are interested in stock picking have many different places to learn financial secrets, tips and trends. According to Forbes Magazine, some of these personal financial advisor “hot spots” include

ClearStation (www.clearstation.etrade.com), 
MSN Money (www.moneycentral.com/investor), 
Marketocracy (www.marketocracy.com), 
Reuters Investor (www.reuters.com/investing), 
MarketHistory (www.markethistory.com), 
Morningstar (www.morningstar.com), 
Sector Updates (www.sectorupdates.com), 
Stock Fetcher (www.stockfetcher.com), 
Stock Selector (www.stockselector.com), 
ValuEngine (www.valuengine.com) and 
Wall Street Transcript (www.twst.com). 

Over time, the consumers who watch market activity will begin to develop a fundamental understanding of the markets.

There are many different types of stock picking strategies. Some of the most common include

Fundamental Analysis, 
Qualitative Analysis, 
Value Investing, 
Growth Investing, 
GARP Investing, 
Income Investing, 
CAN SLIM, 
 Dogs of the Dow and 
Technical Analysis.

While there is limited space to delve deeply into these complex strategies here, more information can be found at Investopedia (www.investopedia.com/university/stockpicking/stockpicking1.asp). Even when consumers learn financial investment techniques, there is no guarantee, however. According to Investopedia: “The bottom line is that there is no one way to pick stocks. Better to think of every stock strategy as nothing more than an application of a theory; a ‘best guess’ of how to invest.”

Stock picking can be done by individuals or by professionals. Top financial advisors work to assist clients in selecting a winning stock portfolio. While these individuals are undoubtedly more experienced in watching economic market fluctuations, they are still human and ultimately fallible. One should not simply entrust an enormous sum of money with a financial advisor, without looking over the periodic statements and watching the DOW/NASDAQ activity. All investing is a gamble, so expectations should be clear when getting started. Perhaps the best advice is still “don’t put all of your eggs in one basket!”

Beth Kaminski is the co-author of Curing Your Anxiety And Panic Attacks which detailed anxiety or panic attacks as well as tips on the various anxiety attack medication available at anxietydisordercure.com.


http://www.supermoneymaking.info/home-business-ideas/stock-picking-101-2/4787

Saturday 6 February 2010

How to pick the best stocks to invest

How to pick the best stocks to invest in Part 1 of 2

It takes the best stock market predictions to achieve top stock market results, but choosing the best stocks to invest in is not easy. One approach professional investors and traders use is the fundamental analysis of stocks, where others prefer the technical analysis of stock market trend.

The fundamental analysis of stocks is based on criteria like Earnings per share, Price/Earnings ratio, PEG Ratio, Return on equity and Return on assets.

Whether you are looking for the best penny stocks to buy or any other hot stocks to trade, you will find the following five out 10 fundamental key metrics very useful. They pinpoint the characteristics shared by the top performing stocks before they made huge trading profits in short term.

1. Earnings per share - EPS
Definition:
EPS is the ratio of the company's net income to its number of outstanding shares (all stocks held by investors and the company's insiders).
What it measures:
Earnings-per-share (EPS) serves as an indicator of a company's profitability.
Recommended value:
No less than 80.
Interpretation:
If a company has displayed good growth over the last five- or 10-year period, it is likely to continue doing so in the next five to 10 years.
Observation:
There are many ways to define "earnings" and "shares outstanding". That led to different type of EPS.

2. Price/Earnings Ratio - P/E Ratio
Definition:
Ratio of a company' share price to its earnings per share.
What it measures:
How much investors are willing to pay per dollar of earnings.
Recommended value:
The best stocks to invest in usually have higher P/E compared to the market or industry average.
Interpretation:
If a company has displayed good growth over the last five- or 10-year period, it is likely to continue doing so in the next five to 10 years.
Observation:
There are different types of P/E but the most used is the trailing P/E calculated with the EPS from last four quarters.

3. Price/Earnings To Growth ratio - PEG Ratio
Definition:
PEG Ratio is the price/earnings(P/E) ratio divided by the projected year-over-year earnings growth rate.
What it measures:
How cheap the stock is.
Recommended value:
Less than one (PEG < 1)
Interpretation:
The value of PEG ratio
-below one is an indication of possibly undervalued stock.
-equals one suggests the market is pricing the stock to fully reflect the stock's EPS growth.
-above one means the stock is possibly overvalued or the stock market expects future EPS growth to be greater than what is currently in the street consensus number.
Observation:
PEG ratio cannot be used in isolation.

4. Return on equity - ROE
Definition:
It is the ratio of the company’s 12 month net income to its shareholder equity (book value).
What it measures:
How profitable the company is.
Recommended value:
No Less than one 15%.
Interpretation:
High debt companies have higher return-on-equities(ROEs) than low debt companies.
Observation:
Relying on ROE has a downside. You will end up overweighting your portfolio with high-debt stocks if you go by return-on-equity(ROE) alone.

5. Return on assets - ROA
Definition:
It's the net income divided by total assets.
What it measures:
How profitable the company is in relation to its total assets.
Recommended value:
Return on assets above 20% and higher is better. Avoid company with Return on assets below 5%.
Interpretation:
The lower the debt, the higher the Return on assets. A rising Return on Assets usually foretells a rising stock price.
Observation:
The assets of the company are comprised of both debt and equity. The ROA is some time called ROI.

In Part 2, we will look at the stocks fundamentals like Relative price strength, Cash Flow, Financial leverage ratio, Consencus-earnings-forecast

----

How to pick the best stocks to buy Part 2 of 2

As noted in Part 1 of this two-part article, successful online stock investing is about picking the best stocks to buy. Some professional investors and traders use the fundamental analysis of stocks, other rely on technical analysis of the financial markets.

The fundamental analysis of stocks is based on criteria like Relative price strength, Cash Flow, Financial leverage ratio, Consencus-earnings-forecast.

Whether you are looking for best penny stocks to buy or any other hot stocks to trade, you will find very useful the following 5 out 10 most important fundamental factors shared by the top performing stocks before they made huge stock market profits in short term.

1. Relative Price Strength - RPS
Definition:
Relative price strength( RPS) is the ratio of the price performance of a stock by the price performance of an appropriate index for the same time period.
What it measures:
How stocks have performed compared to the overall market over a particular period.
Recommended value:
Relative price strength(RPS) with a value of at least 70.
Interpretation:
Stocks with relative strength above 70 tend to continue to outperform other stocks.
Observation:
Avoid stocks with 12 month relative strength below 50 or stocks which three-month relative price strength drops 20% from its 12-month relative strength.

2. Cash Flow
Definition:
Amount of money that move into or out of, a company’s bank accounts during the reporting period.
What it measures:
How viable is the company in short-term? What is its ability to pay bills.
Recommended value:
Any positive number is OK, but it’s best if the operating cash flow (i.e.: cash flow attributable to the company’s main business) exceeds the net income for the same period.
Interpretation:
Stock of companies with more cash flow has greater chance to rise more.
Observation:
Stock's price of companies with little cash to support their operations is likely to stagnate or fall.

3. Financial Leverage Ratio - F/L Ratio
Definition:
Financial leverage ratio = total assets divided by shareholders equity.
What it measures:
Level of Company’s debt. Is the company submerged in debt?
Recommended value:
F/L of one means no debt. F/L less than five( 5).
Interpretation:
The higher the F/L ratio, the more the debt.
Observation:
Avoid companies with leverage ratios above 5 which the average of S&P500 index. P.S: Banks and other financial organizations always carry high debt compared to firms in other industry.

4. Consensus Earnings Forecast - CEF
Definition:
Consensus earnings forecast is the average of analysts’ forecasts.
What it measures:
Consensus about the earnings estimated by analysts.
Recommended value:
Avoid stocks where the latest fiscal-year estimates are more than two cents below the 90-days-ago figures.
Interpretation:
The higher the F/L ratio, the more the debt.
Observation:
CEF changes move stock prices. So negative forecast trend warns of future forecast reduction, which will likely pressure the share price.

5. Institutional Ownership
Definition:
Institutional ownership is the percentage of share held by mutual funds, pension plans, banks, and other big holders. Institutional ownership for in-favor of the best stocks to buy is usually between 30% to 60% of shares outstanding, and rarely below 30%.
What it measures:
How many shares are owned by institutions.
Recommended value:
Choose stocks with more than 30% institutional ownership.
Interpretation:
A stock with small % held by institutions is out of favor with investment professionals. That means they don't see the potential of profit. Do not try to outguess the investment experts.
Observation:
Avoid stocks with less than 30% institutional ownership.

These fundamentals indicators should be used in addition to the five other metrics mentioned in the article How to pick the best stocks to invest in part 1 of 2.

http://www.stockonrise.com/stock-trading-information/53-world-stock-exchange/143-how-to-pick-the-best-stocks-to-invest-in-part-1-of-2.html

http://www.stockonrise.com/stock-trading-information/53-world-stock-exchange/145-how-to-pick-the-best-stocks-to-buy-part-2-of-2.html

Tuesday 2 February 2010

Mastering Your Craft at Stock Picking

The pattern of learning anything begins with theoretical understandings initially and practical understanding later. That is, general principles first, and then particular instances of those principles.

The 10,000-hour rule (i.e. one cannot master a subject or skill until he’s practiced it for at least 10,000 hours) is true.

To be good at picking stocks, a further 40,000 hours of studying it will certainly (all else equal) yield a better stock picker!

However, it would be better to attain 10,000 to 20,000 hours of study or practice in several, related fields.

http://prisonproxy.blogspot.com/2010/02/mastering-your-craft.html

Wednesday 27 January 2010

Sometimes stock picking can really work out great.

Stock Picking 101

posted in Bricks and Mortar Business |

It’s time for fund managers to “return to their natural stock-picking tendencies,” said Citigroup chief global equity strategist Robert Buckland. “Just when the bear market (and subsequent rebound) has bullied us all into being very macro is the time when a good contrarian should be moving micro.” Over the last few years, the financial advisory business has been playing it close to the vest to protect as much of their clients’ investments as possible. They’re hesitant to move away from safe options because everyone is fearful of market fluctuations these days. However, some analysts say it’s precisely this strategy that’s holding us back. Stock picking is slowly but surely coming back into favor again, offering higher yields and better deals for people who know when to get in and when to get out.

Sometimes stock picking can really work out great. For instance, financial advisory professionals who advised their clients to put money into MacDonald’s fast food chain in 1992 are now enjoying 25% returns each year. Similarly, insightful investors who sunk $10,000 into Microsoft’s stocks back in 1986 would have earned 35,000% back on their investment over an 18-year period! So by 2004, that initial investment would have become a nice $3.5 million, which would be an ideal retirement cushion!

There are many different types of stock picking strategies. Some of the most common include
  • Fundamental Analysis,
  • Qualitative Analysis,
  • Value Investing,
  • Growth Investing,
  • GARP Investing,
  • Income Investing,
  • CAN SLIM,
  • Dogs of the Dow and
  • Technical Analysis.
While there is limited space to delve deeply into these complex strategies here, more information can be found at Investopedia (www.investopedia.com/university/stockpicking/stockpicking1.asp). Even when consumers learn financial investment techniques, there is no guarantee, however. According to Investopedia: “The bottom line is that there is no one way to pick stocks. Better to think of every stock strategy as nothing more than an application of a theory; a ‘best guess’ of how to invest.”

Stock picking can be done by individuals or by professionals. Top financial advisors work to assist clients in selecting a winning stock portfolio. While these individuals are undoubtedly more experienced in watching economic market fluctuations, they are still human and ultimately fallible. One should not simply entrust an enormous sum of money with a financial advisor, without looking over the periodic statements and watching the DOW/NASDAQ activity. All investing is a gamble, so expectations should be clear when getting started. Perhaps the best advice is still “don’t put all of your eggs in one basket!”

As a leading expert in the field of anxiety disorders and panic attacks, Beth Kaminski is always on the lookout for how to end panic attacks. Visit her site for more information on her treating panic disorder and much more.

http://growthbyaction.com/bricks-and-mortar-business/2145-stock-picking-101

Sunday 24 January 2010

Stock-picking: There are hundred of different ways to skin a cat.

No investor can possibly hope to keep up with the more than 13,000 companies whose stocks are traded on the major exchanges in the US markets today.  That's why amateurs and pros alike are forced to cut down on their options by specializing in one kind of company or another. 
  • For instance, some investors buy stocks only in companies that have a habit of raising their dividends
  • Others look for companies whose earnings are growing by at least 20% a year.
  • You can specialise in a certain industry, such as electric utilities, or restaurants or banks. 
  • You can specialize in small companies or large companies, new companies or old ones. 
  • You can specialise in companies that have fallen on hard times and are trying to make a comeback.  (These are called "turnarounds.")

Looking at the investment world through a stockpicker's eyes (1)

Keep your eyes opened


You can begin to gather information every time you walk into a McDonald's, a Sunglass Hut International, or any other store that's owned by a publicly traded company.  And if you work in the store, so much the better.


You can see for yourself whether the operation is efficient or sloppy, overstaffed or understaffed, well-organized or chaotic.  You can gauge the morale of your fellow employees.  You get a sense of whether management is reckless or careful with money.


If you're out front with the customers, you can size up the crowd. 
  • Are they lining up at the cash register, or does the place look empty? 
  • Are they happy with the merchandise, or do they complain a lot? 
These little details can tell you a great deal about the quality of the parent company itself. 
  • Have you ever seen a messy Gap or an empty McDonald's? 
The employees at any of the Gap outlets or the McDonald's franchises could have noticed long ago how fantastically successful these operations have been and invested their spare cash accordingly.


A store doesn't have to fall apart to lose customers.  It will lose customers when another store comes along that offers better merchandise and better service, for the same prices or lower prices.  Employees are among the first to know when a competitor is luring the clients away.  There's nothing to stop them from investing in the competitors. 


Even if you don't have a job in a publicly traded company, you can see what's going on from the customer angle. 
  • Every time you shop in a store, eat a hamburger, or buy new sunglasses, you're getting valuable input. 
  • By browsing around, you can see what's selling and what isn't. 
  • By watching your friends, you know which computers they're buying, which brand of soda they're drinking, which movies they're watching, whether Reeboks are in or out. 
These are all important clues that can lead you to the right stocks.


You'd be surprised how many adults fail to follow up on such clues.  Millions of people work in industries where they come in daily contact with potential investments and never take advantage of their front-row seat. 
  • Doctors know which drug companies make the best drugs, but they don't always buy the drug stocks. 
  • Bankiers know which banks are the strongest and have the lowest expenses and make the smartest loans, but they don't necessarily buy the bank stocks. 
  • Store manangers and the people who run malls have access to the monthly sales figures, so they know for sure which retailers are selling the most merchandise.  But how many mall managers have enriched themselves by investing in specialty retail stocks.


Once you start looking at the world through a stockpicker's eyes, where everything is a potential investment, you begin to notice the companies that do business with the companies that got your attention in the first place.
  • If you work in a hospital, you come into contact with companies that make sutures, surgical gowns, sysringes, beds and bed pans, X-ray equipment, EKG machines; companies that help the hospital keep its costs down; companies that write the health insurance; companies that handle the billing. 
  • The grocery store is another hotbed of companies; dozens of them are represented in each aisle.
You also begin to notice when a competitor is doing a better job than the company that hired you. 
  • When people were lining up to buy Chrysler minivans, it wasn't just the Chrysler salesmen who realized Chrysler was on its way to making record profits. 
  • It was also the Buick salesmen down the block, who sat around their empty showroom and realized that a lot of Buick customers must have switched to Chrysler.

Doing your own research - the highest form of stock-picking

This is the highest form of stock-picking. 

You choose the stock because you like the company, and you like the company because you've studied it inside and out.

The more you learn about investing in companies, the less you have to rely on other people's opinions, and the better you can evaluate other people's tips.  You can decide for yourself what stocks to buy and when to buy them.

You'll need 2 kinds of information:

  1. the kind you get by keeping your eyes peeled, and,
  2. the kind you get by studying the numbers.
The first kind, you can begin to gather every time you walk into a McDonald's, a Sunglass Hut International, or any other store that's owned by a publicly traded company.  And if you work in the store, so much the better.

You can see for yourself whether the operation is efficeint or sloppy, overstaffed or understaffed, well-organized, or chaotic.  You can gauge the morale of your fellow employees.  You get a sense of whether management is reckless or careful with money.

Tuesday 17 November 2009

Stocks Pickers Vs Index Funds: The Debate Rages On

Stocks Pickers Vs Index Funds: The Debate Rages On

Published: Wednesday, 28 Oct 2009 | 11:19 AM ET Text Size
By: Chris Taylor,
Special to CNBC.com

In the investing world, the rivalry is akin to the Capulets and the Montagues. In one corner, active stockpickers and their belief in talented fund managers who can outperform the market; in the other, passive investors who prefer less-risky portfolios of low-cost broad market indices.

It’s a question that will be debated forever on trading-room floors and investor chat rooms, but what investors want to know: Who has the best approach for right now, after a quick post-collapse runup that has the Dow Jones Industrial Average breaking the magical 10,000 level?

The answer might be different than you expect. Conventional wisdom holds that active management performs best in a declining market, when stockpickers can sidestep the dogs like a Lehman Brothers or an AIG [AIG 35.75 -0.64 (-1.76%) ]. But here’s a secret: It’s a total myth.

“Everyone believes that active investors do well in bad markets,” says Srikant Dash, global head of research and design for S&P Index Services. “But when we looked at the bad markets of 2002 and 2008, we showed conclusively that it’s not true.”

What Dash found in his SPIVA scorecard that compares active and passive investing: Then—and over any five-year time horizon you’d care to mention—about two-thirds of fund managers underperform the stock market. In other words, over the long term, plain-vanilla index funds clobber many of the best minds in the business.

Complete Stock Market Coverage
For right now, though, there’s some evidence that active investors could be coming into their moment. After all, the Dow was up an eye-popping 15 percent last quarter, as investors regained their confidence and money rushed back in from the sidelines. That’s the Dow’s best performance since 1998, rebounding smartly from a low of around 6,500.

If one assumes that such a rapid ascent won’t be replicated in the near-term, and that we can expect a relatively flat, range-bound market in coming months, then broad indices won’t be going anywhere. Active managers, on the other hand, could thrive with their more judicious stockpicking.



Just ask George Athanassakos. The chair of the Ben Graham Centre for Value Investing in London, Ontario, Athanassakos ran a study comparing a stockpicking approach to the performance of market indexes. He discovered that in straight bull markets, when a rising tide lifted all boats, his value-oriented stock selections were almost exactly aligned with the broader market.


But in flat or zig-zag markets, his active style destroyed the indices, beating them by almost 50 percent. If that’s the kind of market we’re entering, then active investors should take heart.

“When the market goes up, then everyone is doing well,” says Athanassakos, a finance professor and author of the book "Equity Valuation." “It’s hard to buy low and sell high when there’s a straight line up. So active management becomes especially important when the market moves within a band.”

Moreover, it’s usually in the aftermath of a big market move, like the one we’ve just experienced, that you discover a few glaring market inefficiencies.

“When prices have all moved in one direction, there’s more opportunity for mispricing to emerge,” says Josh Peters, an equities analyst with Chicago-based research firm Morningstar.

And a continued bull run looks unlikely, Peters suggests, since underlying fundamentals like corporate revenues and abysmal employment figures mean the economy’s not out of the woods yet.

If that’s the case—that the general market takes a breather, and some relative values begin to stick out—then where should stockpickers place their bets? Active investors would do well to focus on yields, Peters advises.

After all, if stock prices remain range-bound, then it’s dividend payouts that will largely be determining your returns. High-yielding, blue-chip firms tend to be resilient, without a huge downside, because investors are attracted to the stability and income they provide.

Sector Watch Performance
They’ve also been lagging the broader market recently, as the hottest stars have been previously left-for-dead firms like MGM. That discrepancy makes for some juicy values. Some of Peters’ picks: Johnson & Johnson [JNJ 62.19 0.76 (+1.24%) ], Abbott Labs [ABT 53.63 0.68 (+1.28%) ], and Altria [MO 19.34 0.08 (+0.42%) ], all overlooked giants that continue to throw off cash.

“They’re not trading at unreasonable valuations, those stocks don’t need a quick V-shaped recovery,' he says. "And you don’t need a whole lot to go right for those investments to work.”

© 2009 CNBC.com

http://www.cnbc.com/id/33289460

Thursday 24 September 2009

Biggest Market Opportunity: Cash? (No, I'm Not Insane)

Biggest Market Opportunity: Cash? (No, I'm Not Insane)
By Alex Dumortier, CFA
September 23, 2009
What sort of insanity is this? How could cash be an opportunity at a time when three-month T-bills yield less than 10 basis points? No one gets excited earning virtually nothing on their cash balances, but stock investors should consider future opportunities in addition to existing choices: It's not about what you're not earning on the cash today, it's about earning premium returns on the investments you'll be able to make with that cash tomorrow.

Cash needn't be an anchor
In the words of super-investor Seth Klarman: "Why should the immediate opportunity set be the only one considered, when tomorrow's may well be considerably more fertile than today's?" At the head of the Baupost Group, a multi-billion dollar investment partnership, Klarman employs a value-oriented strategy, achieving exceptional performance in spite of -- or rather, because of -- the fact that he frequently holds significant amounts of cash. For example, on October 31, 1999, a few months before the tech bubble began to collapse, his Baupost Fund was approximately one third in cash.

Over the "lost decade" spanning 1999 through 2008, Klarman smashed the market with a 15.9% average annualized return net of fees and incentives versus a (1.4%) annualized loss for the S&P 500.

Don't go all in (cash or equities)
Let me be quite clear: I'm not advocating that you liquidate all your stocks and go all into cash; the market's current valuation simply does not warrant that sort of drastic action. Conversely, it shouldn't compel you to raise your broad equity exposure, either.

As I noted last week, the market doesn't look cheap right now: Based on data compiled by Professor Robert Shiller of Yale, at yesterday's closing value of 1,071.66, the S&P 500 is valued at over 19 times its cyclically adjusted earnings, compared to a long-term historical average of 16.3. Based on average inflation-adjusted earnings, the cyclically adjusted P/E ratio is one of the only consistently useful market valuation indicators.

As prices increase, so does your risk
All other things equal, as share prices rise, stocks will represent a larger percentage of your assets; however, logic dictates you should actually seek to ratchet down your equity exposure under those circumstances. As stock prices rise, expected future returns decline (again, all other factors remaining constant), making stocks relatively less attractive. Another way to express this is that as stock prices increase, so does the risk associated with owning stocks.

That risk may simply be earning sub-par returns or, in the worst case, suffering capital losses. Extremes in market valuations offer the best illustration of this principle: Owning a basket of Nasdaq stocks in March 2000: a high-risk or low-risk strategy? How about buying Japanese stocks in December 1989, with the Nikkei Index nearing 39,000 (nearly 20 years on, the same index trades at less than 10,500).

Don't misinterpret Buffett's words
So what are we to make of Berkshire Hathaway (BRK-B) CEO Warren Buffett's words when he told CNBC on July 24th: "I would much rather own equities at 9,000 on the Dow than have a long investment in government bonds or a continuously rolling investment in short-term money"? (Investors must have concluded the same thing, sending the Dow 8% higher since then.)

First, with just 30 component stocks, the Dow isn't a broad-market index; it's a blue-chip index. The stocks of high-quality companies have underperformed the broader market in the rally from the March market low, which has left them relatively undervalued. This is reflected in the Dow's 14 price-to-earnings multiple, against 17 for the wider S&P 500.

Buying pieces of businesses vs. owning the market
Second, keep in mind that Buffett likes to own pieces of high-quality businesses, not the whole market. As I mentioned above, there is reason to believe that there is still opportunity left in the higher-quality segment of the market. The following table contains six companies that trade with a free-cash-flow yield above 10% -- i.e., they're priced at less than 10 times trailing free cash flow (these are not investment recommendations):

Company Sector
Free-Cash-Flow Yield*

General Electric (NYSE: GE)
Conglomerates
47.3%

UnitedHealth Group (NYSE: UNH)
Health care
11.7%

Bristol-Myers Squibb (NYSE: BMY)
Health care
10.6%

Raytheon (NYSE: RTN)
Industrial goods
10.5%

Altria Group (NYSE: MO)
Consumer goods
11.5%

Time Warner (NYSE: TWX)
Services
25.9%


*Based on TTM free cash flow and closing stock prices on September 21, 2009.
Source: Capital IQ, a division of Standard & Poor's, Yahoo! Finance.


Summing up: What to do from here
To sum up:

If, like Buffett, you have identified high-quality businesses that are undervalued, there is nothing wrong with buying them now.

However, if you are mainly an index investor, it is probably ill-conceived to increase your exposure to stocks right now.

Either way, whether you are a stockpicker or an index investor, there is nothing wrong with holding on to some cash right now -- not for its own sake -- but to take advantage of better stock prices at a later date.

Morgan Housel has identified three high-quality companies that are still cheap.


http://www.fool.com/investing/value/2009/09/23/biggest-market-opportunity-cash-no-im-not-insane.aspx