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Earnings and Sales Leaders

August 14, 2007 By 2 Comments

If this market has another leg up, these six stocks will continue to lead the way based on their impressive three year sales and earnings numbers.

I know they look extended and have come a long way but stocks that are accustomed to making new highs typically continue to make higher highs in a bull run. Remember, what seems high to one investor may still be low to another. Look for the stocks to establish support along moving averages or key areas prior to entering a position.

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Stocks are traded based on perception and if the smart money crowd perceives these stocks to go higher, they will jump in and push them higher. Besides, additional buys will only support the large cash positions that institutions have already established in these stocks throughout 2007. Take a look at the institutional numbers below to determine if smart money is pouring in or out.

As you can see, the latest numbers are telling us that institutional money has been leaving both CROX and BIDU while it has been pouring into PRXI, STP and ARD. Don’t use these statistics as your sole reason for buying or selling because they do lag the market but understand that they can confirm trends on the charts.

*All data from latest reporting periods*

Crocs (CROX) Institutional Analysis:
Total Institutions: 535
Money Market: 220
Mutual Fund: 304
Other: 11

Shares Held: 116.8 mil
Shares Held Previous Period: 118.3 mil

Shares Bought: 28.4 mil
Shares Sold: 29.9 mil
Value of Shares Bought: $1.43 Bil
Value of Shares Sold: $1.5 Bil

081407_crox_wkly.png

Baidu.com (BIDU) Institutional Analysis:
Total Institutions: 238
Money Market: 117
Mutual Fund: 119
Other: 2

Shares Held: 19.5 mil
Shares Held Previous Period: 22.0 mil

Shares Bought: 6.5 mil
Shares Sold: 9.0 mil
Value of Shares Bought: $1.36 Bil
Value of Shares Sold: $1.89 Bil

081407_bidu_wkly.png

Premier Exhibitions (PRXI) Institutional Analysis:
Total Institutions: 69
Money Market: 42
Mutual Fund: 26
Other: 1

Shares Held: 11.7 mil
Shares Held Previous Period: 2.8 mil

Shares Bought: 9.5 mil
Shares Sold: 0.6 mil
Value of Shares Bought: $160.2 Mil
Value of Shares Sold: $9.8 Mil

081407_prxi_wkly.png
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Filed Under: Fundamental Analysis, Stocks

Fundamental Screens and Scans

June 6, 2007 By 32 Comments

I have been asked numerous times to shed some light on the actual fundamental screens I use to come up with the stocks I research on a daily basis. As promised in a post in April, How to Create a Successful Stock Watch List, I will now give you further detail on my fundamental screens.

As many of you know, my main tool is the Daily Graphs Custom Screen Wizard which is owned by William O’Neil & Co. Incorporated. You can get a trial subscription for 7-days on their main site but I would wait until they offer the trial for free (they do this several times per year). The screener does cost $45 per month which may sound high for one tool but it does the job for the stocks I am seeking.

I also use several screens though my brokerage account and the scan engine through stockcharts.com. It has a basic user interface and an advanced user interface for investors that can handle some basic programming. These screens locate stocks based on specific technical patterns which help me from time to time but I prefer fundamental screens to find the stocks I would like to view with my own eyes. I perform my own technical research as it allows me stay in-tune with the market on a daily and weekly basis. I can flow with the market by scanning hundreds of charts every night after the close.

Now I will disclose the top fundamental screens I use on the Custom Screen Wizard. EPS and RS ratings are based on a fundamental system created by IBD that I trust. To learn more about the EPS and RS ratings, please visit investors.com.

Please understand that I am always actively scanning these screens and some come-into favor and then fall-out of favor as time moves on. For example, the screen that locates quality stocks making new 52-week highs is best used when a market has just completed a bottom and a new bull-run or up-trend is starting to develop. This screen is less important near the end of a strong bull run as many of the stocks making new highs at this point in time are exhausted. We will see more failed breakout attempts, reversals and late stage bases so the odds are no longer in favor of this screen.

When scanning these screens, I will present the stocks in descending order starting with the day’s largest price change and occasionally starting with the day’s largest volume change versus 50-day moving average.

1. Quality Stocks within 10% of the 200-day Moving Average
The first screen I will present has been my most successful over the past six to twelve months and has been responsible for finding some of my best risk-to-reward setups:

  • Earnings Per Share (EPS) Rating: From 70 to 99
  • Relative Price Strength (RS) Rating: From 70 to 99
  • Current 50-Day Average Volume (1000): Greater than or equal to: 100
  • Current Price % Above or Below 200-Day Moving Average: From -5 to 10

2. Quality Stocks that are trading within 15% of 52-week Highs
This screen is great for finding high quality winners that are currently consolidating from recent highs and are now offering entry points for accumulating shares:

  • Earnings Per Share (EPS) Rating: From 60 to 99
  • Relative Price Strength (RS) Rating: From 60 to 99
  • Percentage price is below 52-Week High: From 1% to 15%
  • Current 50-Day Average Volume (1000): Greater than or equal to: 100
  • % Increase in Volume (Current Day) vs. 50-Day Average Volume: Greater than or equal to: 50

3. Institutional Sponsorship Increasing
This next screen looks for high quality stocks that have increasing institutional fund sponsorship from one quarter to the next. As you know, this is very important for any stocks I cover and then buy. Every case study on this blog includes detailed institutional sponsorship analysis.

  • Earnings Per Share (EPS) Rating: From 60 to 99
  • Relative Price Strength (RS) Rating: From 60 to 99
  • % of the number of Mutual Funds Owning for Current Quarter vs. Prior Quarter: Greater than or equal to: 10%
  • Stocks trading at new 52-Week High and Percentage price is below 52-Week High: From 0 to 15
  • Current 50-Day Average Volume (1000): Greater than or equal to: 100

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Filed Under: CANSLIM, Fundamental Analysis

How to Create a Successful Stock Watch List

April 5, 2007 By 19 Comments

Follow these steps and you can create a powerful stock watch list in the matter of minutes to an hour each night. I work longer than that but it can be done in less time if need be. This watch list will generate opportunities for trend buying, swing trading and even shorter-term trading. I guess the occasional buy and hold investor could even benefit from this very simple procedure if they purchase at the right time.

I encourage all investors in all time frames to evaluate stocks for investment using both fundamental and technical analysis. A day trader and even a swing trader can get away with avoiding fundamental analysis but I highly recommend both methods of analysis for intermediate and longer term trend traders. Both tools are equally important in making serious decisions with your hard earned CASH!

If you wish to invest in stocks, treat it like a business, NOT A HOBBY. You need rules and you need to follow these rules or money WILL be LOST. Once proven rules have been established, they cannot be broke or you will lose money. Everyone loses money in investing but we must learn to cut losses quick and allow gains to develop. Small losses are acceptable because they teach us lessons that allow us to win big. Think of losses as part of doing business and focus on the long term success of the system and not each individual trade. As long as you have a positive expectancy, the winners and losers will equal out over time to make you consistently profitable.

Now to the watch list method:

  • Determine if overall market is in a specific trend (up, down or sideways).
  • Use a computerized screener to find stocks with superior fundamentals
  • Evaluate sister stocks or stocks within the same industry group (strength travels in groups so the probability of success rises when buying into a strong industry).
  • Study the technical aspects of the charts for each possible opportunity

Simple Fundamental Screener Criteria:
The criteria listed in this section can be used together or arranged in a variety of ways to generate multiple lists containing all possible opportunities. Get a feel for specific screens and determine which are the most successful during certain market conditions.

  • Increasing Earnings (current, past: quarterly, yearly and future estimates)
  • Increasing Sales (current, past: quarterly, yearly and future estimates)
  • Stocks making New Highs
  • Stocks within 15% of New Highs
  • Stocks within 10% of the 200-day moving average
  • Increasing Return on Equity (ROE)
  • Price/Earnings Growth (PEG) – Less than 1 is preferable
  • Accumulation/Distribution ratio
  • Up/Down Volume over past several months
  • Increasing Institutional Sponsorship

Simple Technical Analysis Scans (with your own eyes):

  • Study the one year weekly chart (preferably candlesticks)
  • Study the six month daily chart (preferably candlesticks)
  • Look for increasing accumulation days (stock up on above average volume)
  • Evaluate the Point & Figure chart for support and resistance levels
  • Look for basic chart patterns such as flat bases, cup bases, saucer bases, triangle breakouts, obvious trends along a moving average, etc…

That is all one needs to develop a quality list of opportunities night in and night out. Trading opportunities will appear once you see a particular stock make multiple screens on a consistent basis. This is the basic foundation I use to pinpoint my opportunities in the market and the general guidelines I used while running MSW.

I use the custom screen wizard from Daily Graphs (Investor’s Business Daily sister company) for my fundamental analysis because I love CANSLIM type stocks but many tools exist on the web. Some are free and some cost a pretty penny to use. My screener costs $45 per month which is nothing to me but maybe too much for others.

Please leave a comment on what screener you use and why. Leave a link to the screener that you use to give the site or business credit. I am very curious to hear what other trader use. As great as the wizard is for me, I am always looking to find something better.

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Filed Under: CANSLIM, Education, Fundamental Analysis, General Market, Stock Screens

Use PEG Ratio instead of P/E Ratio

January 25, 2007 By 10 Comments

PEG Ratio
A PEG ratio cannot be used alone but is a very powerful tool when integrated with the basics (price, volume and technical analysis). You must enjoy crunching numbers and have a calculator or spreadsheet handy to estimate your own PEG ratio. Access to quality statistical information from the web such as past earnings and future earning estimates is essential to calculate this fundamental indicator. A variety of websites produce a PEG ratio but I have not found one site that has a reliable PEG ratio that I can use for my own research, so I calculate it myself, ensuring accuracy with the final number. Besides, I don’t know what earnings numbers these sites are using to determine growth rates and price-to-earnings ratios.

Investopedia.com:
“The PEG ratio compares a stock’s price/earnings (“P/E”) ratio to its expected EPS growth rate. If the PEG ratio is equal to one, it means that the market is pricing the stock to fully reflect the stock’s EPS growth. This is “normal” in theory because, in a rational and efficient market, the P/E is supposed to reflect a stock’s future earnings growth.

If the PEG ratio is greater than one, it indicates that the stock is possibly overvalued or that the market expects future EPS growth to be greater than what is currently in the Street consensus number. Growth stocks typically have a PEG ratio greater than one because investors are willing to pay more for a stock that is expected to grow rapidly (otherwise known as “growth at any price”). It could also be that the earnings forecasts have been lowered while the stock price remains relatively stable for other reasons.

If the PEG ratio is less than one, it is a sign of a possibly undervalued stock or that the market does not expect the company to achieve the earnings growth that is reflected in the estimates. Value stocks usually have a PEG ratio less than one because the stock’s earnings expectations have risen and the market has not yet recognized the growth potential. On the other hand, it could also indicate that earnings expectations have fallen faster than the Street could issue new forecasts.”

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PEG Ratio Example:
TAM S.A. (TAM)
Yahoo Company Profile: TAM S.A., through its subsidiaries, provides scheduled air transportation services in Brazil and internationally. The company engages in the transportation of passengers and cargo within Brazil and on international routes. It offers flights serving various destinations in Brazil, as well as operates scheduled passenger and cargo air transport routes to 46 cities, in addition to a further 27 domestic destinations that the company serves through regional alliances with other airlines.

First, you will need to gather the past earnings numbers; going back a couple years and going forward a couple years. Keep in mind that the numbers going forward are only estimates and that is why this is only a secondary tool to help predict a future price or target.

TAM Earnings:
2005: 1.30
2006: 2.58
2007: 2.86
2008: 3.14

We need to calculate the growth from year to year.
Subtract the earnings of 2006 by 2005 and then divide by 2005.
Repeat the process to determine the growth rate for the following years:

2006: (2.58-1.30)/1.30 x 100 = 98% growth rate

2007: (2.86-2.58)/2.58 x 100 = 11% growth rate

2008: (3.14-2.86)/2.86 x 100 = 10% growth rate

Take the current price (we will use the close from Wednesday, January 24, 2007: $32.62) and divide it by 2006 earnings and then by the 2006 growth rate:
2006: 32.62/ 2.58 / 98 = 0.12 PEG Ratio
2007: 32.62/ 2.86 / 11 = 1.03 PEG Ratio
2008: 32.62/ 3.14 / 10 = 1.04 PEG Ratio

Using the definition from above, Investopedia states that a stock is evenly valued at a PEG ratio of 1 in a rational and efficient market. Please note that the stock market is not very rational or efficient so we only use this number as a secondary indicator and tool, after our fundamental and technical analysis is complete.

Once you determine the PEG ratio of the stock you are looking to buy, take the time to calculate the PEG ratio for the “sister stocks” in the industry group to see if they have higher or lower PEG ratios. Keep in mind, PEG ratios don’t work for companies with negative or non-existent earnings numbers.

Do you want to implement a PEG strategy into your fundamental arsenal; then think about this very basic example?

Let’s say we are looking at two stocks to purchase with these similar characteristics:
They are both trading near $20 per share.
Both stocks have a P/E ratio of 20 (they are trading at 20x’s their earnings)
The first stock grows earnings at a 10% annual rate
The second stock grows earnings at a 20% annual rate

Watch how the price will change in the future assuming that the P/E ratio remains unchanged:

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Stock ABC:
Starting Price: $20
Annual Earnings: 1.00
P/E: 20
PEG: 2.0

Stock XYZ:
Starting Price: $20
Annual Earnings: 1.00
P/E: 20
PEG: 1.0

Price in One Year:
Stock ABC: $22
Stock XYZ: $24

Potential Price in Three Years (based on Growth Ratios):
Stock ABC: $26.62
Stock XYZ: $34.56

* Using this very basic example, we can see that stock XYZ with the 1.0 PEG ratio should outperform the stock with the 2.0 PEG ratio due to the earnings growth rate. This is not guaranteed but can help when looking to make a purchase between two similar stocks.

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Filed Under: Education, Fundamental Analysis

Can you TRUST Talking Heads, I mean analysts?

January 17, 2007 By 2 Comments

I mention the phrase “Talking Heads” on this blog from time to time and I am serious. Most large investment houses get it wrong when it comes to timely stock selections (at least outside of their institutional research departments). When using the phrase “talking heads”, I am referring to analysts and firms on the retail side of the fence.

011707_enron.gif

I have preached that these firms are only looking out for their best interests, not yours. They don’t care about anything but your money; they never look out for the small investor (in my opinion of course)! I wrote a post on my old blog about the coverage of Enron and thought it would be great to update the entry and focus on the “Talking Heads”.

Look below to see how multiple major firms kept sending out buy signals for Enron based purely on fundamental analysis. If they looked at the charts, they would have noticed several breakdowns among every type of chart available (intraday, daily, weekly, monthly, etc…). It didn’t matter what chart you viewed, they all had red flags at every corner and even a novice could have located the correction coming. I am not saying that anyone saw the collapse but simple sell rules should have taken all technical investors out of the stock (I never owned Enron and I am glad).

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I have included a condensed summary of the case study based from the Dorsey Wright analysis of the Enron collapse (all research was performed by Dorsey Wright – www.dorseywright.com)
I have no affiliation with Dorsey Wright:

View the entire breakdown through this PDF:
Anatomy of a Collapse – Enron

CBS Market Watch Also provides an excellent long term chart though this Timeline

ENE – Enron

Merrill Lynch:
March 21, 2001: $55.89 Reiterated Near-term “Buy” at Merrill
April 17, 2001: $60.00 Reiterated Near-Term “Buy” at Merrill
August 15, 2001: $40.25 Cut to Near-Term “Neutral” at Merrill
Oct 9, 2001: $33.39 Raised to Long-term “Buy” at Merrill Lynch
Oct 16, 2001: $32.84 Raised to Near-term “Accumulate” at Merrill Lynch
Nov 1, 2001: $11.99 Cut to Near-Term “Neutral” at Merrill
(finally cut after 79% loss – not cut to sell)

Banc of America:
August 15, 2001: $40.25 Reiterated “Strong Buy” at Banc of America
August 28, 2001: $38.16 Reiterated “Strong Buy” at Banc of America
Oct 25, 2001: $16.35 Cut to “Market Perform” at Banc of America
(finally cut after 59% loss – still market perform)

Commerzbank:
March 14, 2001: $62.75 Raised to “Accumulate” at Commerzbank
March 22, 2001: $55.02 Reiterated “Accumulate” at Commerzbank Capital
April 18, 2001: $61.62 Reiterated “Accumulate” at Commerzbank Capital
Nov 9, 2001: $ 8.63 Cut to “Hold” at Commerzbank
Nov 28, 2001: $ .61 Cut to “Sell” at Commerzbank Capital
(finally cut to “SELL” after 99% loss)

Lehman:
March 12, 2001: $61.27 Reiterated “Strong Buy” at Lehman
Oct 24, 2001: $16.41 Reiterated “Strong Buy” at Lehman; “the stock is attractively priced)
(still a strong buy after 73% loss)

**Click to Enlarge Point and Figure Chart of ENE**
012305_ene_pnf_sm.jpg

The Lesson: Use both Fundamental and Technical Analysis!
And always cut your losers, no matter what anybody says, especially the broker making money from your commissions!

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Filed Under: Education, Fundamental Analysis, Misc.
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