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Stock Picking Putting the Odds in Your Favor
Ticker Tape Digest - By Leo Fasciocco - In many endeavors, the follow through or the finish is often the key to success or failure.
In golf there is an old saying: “You drive for show, but put for dough.”
The same can be said for stock investing. It is exciting to initiate a trade. However, the decision as to when to sell often separates the good investor from the struggling one.
The recent bear market - one of the longest in the past 100 years - has tested many investors, especially those who favor the long side. The ability to sell for defensive purposes, or to sell to take a profit are the keys to making good money in the market and preserving capital.
In the well done book, Market Wizards - Interviews of Top Traders by Jack D. Schwager, Paul Tudor Jones was asked what is the most important advice you would give the average trader.
His answer: “Don’t focus on making money; focus on protecting what you have.”
Jones went on to say that an important rule of trading is play great defense, not great offensive. And again, he says watch your losses and your profits will take care of themselves.
That principle is echoed by many top-notch top traders.
So, how can one set up an effective sell strategy. Well interestingly it goes back to the original buy. If you buy “right,” you’ve made the first step to sell right. Three golden rules to remember about buying.
A cardinal rule to remember is that after buying a stock you must set a stop price that you will sell in case it unexpectedly declines. Some people try to use a “mental stop” That is they write down or try to remember the price they will sell if the stock declines. That often doesn’t work well unless you are extremely disciplined and vigilant.
It is better to just put a stop sell order into the market. Many times a person with a mental stop will say to themselves: ah, I’ll just give it a little bit more room. That often leads to a trap with a stock selection falling further, sometime down the road.
If you initiated your buying in a stock that was moving out of a base at the same time the market is beginning to rally, you have momentum going for you. Of course, it would be good that the stock is that of a company with great fundamentals. With that said, one can set the defensive stop price very tight. It is a case of “up or out.”
Where exactly should you set a protective sell it? Well, there are a variety of choices based on the amount of risk you want to accept on the downside. One could set a stop 0.25 of a point under the low of the breakout day from a base, or just below an intraday support level. Some may prefer a percentage amount below their buy price. In any case, put the stop sell in the market.
Selling to take a profit brings with it more flexibility. It may depend on your view of the intermediate or long-term prospects for the stock and the general market. In a market that has shown a choppy tendency taking profits after a modest gain may be best.
However, if one sizes up the situation as the early stages of a new bull market, holding for a lot more could well be the right course. In general, a stock that “works right” will often advance 20% to 30% from the top of its base within three months.
One can take a partial profit there and hold the rest of the position for more. A good idea is to put a stop just above your original buy point with the rest of the position and give it plenty of room to move higher. If it is able to hold above a rising 50-day moving average line for some time, say six months, the stock can often double, or even go higher.
Stocks that turn into big winners are the ones you want. However, they need time to make their move. Also, they will go through some bumps such as broker downgrades based on valuation considerations and times of profit taking from institutions exiting, especially those with a lid on the percent of a portfolio they can keep in a stock.
A general guideline is that a stock in an up trend, especially in a bull market, can often surprise. Those that move higher in a bear market need to be in a special sector doing well to have a significant gain.
Housing is one group that has bucked the recent bear. Many issues in that sector have done very well. They include KB Home (KBH), Lennar Corp. (LEN) and Ryland Group (RYL)
In summary, Esignal subscribers need to remember (1) always set a protective stop sell after and initial buy. When a stock works for you, think of taking a partial profit and let the rest run.
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Mr. Fasciocco’s articles appear at www.tickertapedigest.com. He is an independent contributing writer for several national publications. He is also president of Corona Investment Management. To get a free trial subscription to the Ticker Tape Digest Pro Report which comes out daily on the web with midday updates email freetrial@tickertapedigest.com. Mr. Fasciocco can be reached at leo@tickertapedigest.com.)
Ticker Tape Digest -- The past several months have been very difficult for most investors. As the stock market works through a prolonged bear market, picking stocks for the longside has tested the skill of most investors.
Yet, there is simple and disciplined method one can use to select buy candidates. It doesn’t need to be a rollercoaster ride. Obviously in a “soft market” there will be less buy plays that turn into significant winners.
One of the best ways to latch on to a potential winner is to look for stocks that are first, in an up trend and secondly, breaking out of a consolidation pattern.
Secondly, One should check the technicals and fundamentals. Going through a simple but efficient check list (see below) will stack the odds in your favor. Not every play will be winner, but many will do well.
Some recent winners that broke out of a base and clicked include WMS Industries Inc. (WMS). The maker of slot machines will show a 30% rise in net for this fiscal year ending June 30. The stock broke out of a base at 21 May 14. It quickly raced to 32.59 by June 11 - a gain of 55%
Diagnostic Products Corp., a producer of medical test kits, emerged from a base at 56 April 25. It climbed quickly to 84 by June 6. That’s a return of 50%. Earnings should rise 17% this year.
Generally, about 70% of leading stocks that breakout of a base will achieve a 20% to 25% gain with two or three months. That means 30% will not. The key is to weed out those stocks breaking of a base that most likely will not work.
To do that on the initial day of the breakout you should look for these positive technicals and fundaments.
For technicals, you can use this list and check either yes or no. Is the stock:
If the stock scores, say a 9 or 10, that’s great.
Next, check and score the company on this list of fundamentals
(1) Earnings growth positive for past five years.
(2) Annual net to rise over 20%
(3) Quarterly net to be up over 20%
(4) Quarterly earnings gains accelerating
(5) Showing positive earnings surprises
(6) EPS rating from IBD over 80
(7) Earnings projections next two quarters strong.
(8) Industry group showing strong earnings.
If the stock scores,7 or 8, that’s very good.
There are other key variable one could add to this list but this is the nut of it. Buy a stock with a high rating and you have stacked the odds in your favor.
So, are there any stocks that match up? One is Elan Corp. (ELN), the Irish drug firm that specializes in drug delivery systems. The stock broke out of a three-month base at 57 on May 29. It has since moved to 61.
Elan scored a 10 out of 10 on technicals. So far the stock has followed through on its breakout and is working well. There are three top funds holding big positions who were recent buyers. They are Oppenheimer Global Fund, Fidelity Aggressive Fund and American Fundamental Fund.
On fundamentals, Elan scored a perfect 8. Earnings this year should climb 23% to $1.91 a share from $1.46 a year ago. Earnings growth the past three quarters accelerated from 13% to 22% to 71%. The company has a 96 EPS rating from IBD. That shows profit growth is better than 96% of all companies.
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Copyrighted - Ticker Tape Digest - 2010