A Winning Stock Picking Strategy
A Winning Stock Picking Strategy
By: www.StovkAdvisorGroup.com
When fundamental and technical factors coincide in a hot sector,
the demand for the stock increases exponentially.
Stock Advisor Group has a proven strategy for picking quality
stocks by combining technical and fundamental analysis. First,
our revolutionary software generates buy signals by processing
the real-time, daily data of individual stocks. Next, our
experts sift through those stocks and pick the ones that are
inthe fastest-growing sectors and that also are fundamentally
strong. Finally, we alert you to buy the stock when the price is
at its perfect entry point.
In order to pick such quality stocks, we have developed special
software. The software searches thousands of stocks in various
markets in real time and selects a set of stocks that are ready
to start an uptrend. To speed up the stock-picking process, the
software performs technical analysis. Afterward, our experts
step in, narrowing down the list to the one or two best stock
picks for that day. When the conditions for a perfect entry
arise, we send you an e-mail suggesting that you buy the stock.
Our timing and entry points are so accurate that the price of
the picked stock will start rising from the moment you buy it.
For this reason, our stock-picking service is a perfect solution
for short term trading such as swing trading, day trading, and
intermediate trading.
Checking the following criteria for each stock pick is one of
the most important steps in our stock-picking service.
Earning Per Share
Cash Flow
Annual Growth
Relative Price Strength
Profitability
Industry Leader
Financial Health
Debt
Management
P/E Ratio
Competitive Advantage
Institutional Sponsorship
Direction of the Market Averages
Insiders trading
Industry/Sector
Psychology of Trading
Technical Indicators: Support & Resistance
Earning Per Share (EPS): Current quarterly earning per share.
Earning per share is calculated by dividing a company's total
after-tax profit by the number of common shares outstanding. The
percentage change in earning per share is one of the most
important factors in stock selection. The higher the percentage
increase, the better. Always compare a company's earning per
share to the same quarter a year earlier not to the prior
quarter, to avoid any misrepresentation due to seasonality.
Earning Per Share alone can not be the true measure of a
company's financial performance. For a number of reasons,
accounting-based earnings per share can be made to say just
about whatever a company's management wants them to, but there
are other valuation data that are much harder to swindle with.
Cash Flow: The amount of cash a company generates and uses
during a time period. Cash flow is calculated by adding non-cash
charges to the net income after taxes. Cash flow can be used as
an indication of a company's financial strength. Cash flow is
critical to companies, having plenty of cash available will
guarantee that employees, creditors, and others can get paid on
time.
The Statement of cash flows records all the cash that comes into
a company and all that goes out. It can yield a ton of
information about the true health of a business, and you can
spot a lot of blowups relative to earnings. For example, if
operating cash flow declines or disappears even as earnings
grow, it's likely that something is not right.
The cash flow statement is divided into three elements: cash
flows from operating activities, from investing activities, and
from financing activities. Annual Growth: Annual earning
increase of a company. The growth of earning in the past few
years confirms the financial strength and stability of a
company. The higher the growth, the better. When you compare two
different companies the company with higher growth percentage
and lower P/E ratio would be a better selection.
Concentrate on stocks with established records of considerable
earnings growth in each of the recent years plus strong
quarterly progress. Remember to find out what is the source of
the growth. You can't just look at a chain of past growth rates
and believe that they'll predict the future. If investing were
that easy, money managers would be paid much less. There are
four sources that cause healthy growth for a company: selling
more products or services, raising prices, selling new products
or services, and buying another company.
Relative Price Strength: Relative price strength is a benchmark
in which you can compare the price performance of different
stocks. In order for a stock to be a leader in a particular
industry its price action should outperform other stocks in that
industry. When selecting a stock as a momentum play you should
look for companies with high relative price strength. The
absolute number one market leader is not the biggest company or
the one with the most known brand name; it's the one with the
best quarterly and annual growth and price action. In a bull
market, strong stocks with higher RS usually decline the least
in the market corrections.
Profitability: profitability is theamount of profit that a
company is generating relative to the amount of money invested
in the business. This is the best way of separating great
companies from average ones. Return on assets (ROA) and return
on equity (ROE) are two tools that can be used to asses how
efficient a company is.
Industry Leader: The top two or three stocks in a strong
industry group can have incredible growth, while others in the
group may barely move. You should buy the best companies, the
ones that lead their sectors and are number one in their
particular field. The number one market leader is not the
biggest one. It is the one with the highest annual growth,
earning per share, and price relative strength. It's a company
that has competitive advantage over its competitors. A company
that is offering the best product.
Financial Health (Company's Debt): Once you figure out how fast
a company is growing and how profitable it is then you need to
find out about its financial health. The bottom line about a
company's financial health is its debt. If the company's debt is
increasing and company is growing fast at the same time, the
extremely high earning of the company is high enough to cover
the fixed cost of debt repayments. When business is bad,
however, the cost of debt pushes earnings even lower.
You should asses the financial health of a company before buying
its stock especially if the interest rate is increasing.
Financial statements of a company provide the information about
the amount of company's in comparison with the earlier
quarters/years.
Management: Great management can make a difference between an
average business and an extraordinary one. Your goal as an
investor is to find management teams that think like
shareholders; executives who treat the company as if they own a
piece of it. One way to find out about the management and how
much they really care about share holders is to check the top
executive's compensation plans. We review the compensation
detail in a document called proxy statement. Big bonuses are
always better than big base salaries. Bonuses mean a chunk of
the income is always at risk and depends on the performance of
the management.
P/E Ratio (Price/Earning): Most popular valuation ratio, which
can take you pretty far as long as you're aware of its
boundaries. An easy way to use P/E is to compare it with a
benchmark, like another company in the same industry, the entire
sector, or the same company at a different point in time. A
company that is trading at a lower P/E than its industry peers
could be a good value, but remember that even companies in the
same industry can have very different money structures, risk
levels, and growth rates, all of which affect the P/E ratio.
If a company has a P/E higher than the market or industry
average, this means the market big expectation from the company
over the next few months or years. A company with a high P/E
ratio will eventually have to live up to the high rating by
considerably increasing its earnings, or the stock price will
need to fall.
Competitive Advantage: Success attracts competition and
eventually laggard companies come into competition and cause the
stock price of a company that has been a leader for a while to
drop. Generally, there are different ways that a company can
create sustainable competitive advantage:
1. Creating a real different product (Apple iPod)
2. Creating a strong brand (Tiffany)
3. Keeping costs down (Dell)
4. Lockingin customers by creating high switching cost (Cisco)
5. Locking out competitors (Using patent for drug companies)
Institutional Sponsorship: The key to know about the
institutional sponsorship is the number of financial
institutions that have bought or sold the stock in the recent
months. Technically, it considered to be a good sign if a
company has increasing number of institutional owners over
several recent months. Financial institutions can not hide since
they usually trade huge number of shares. By following the buy
and sell volume in a daily chart you can notice if mutual funds
and banks are buying a stock.
Market Trend: Detecting the current trend of the market is the
first and most important part of our stock pick system. More
than 75% of your trades will end up in a loss if you fight the
trend. As part of our stock pick strategy we constantly review
the conditions of the market averages.
Insiders Trading: It is always good if you monitor insider's
transaction when you are picking a stock. You don't want to buy
a stock when insiders of the company are selling a significant
amount of the company's stocks. Insiders usually sell their
shares for various reasons but when the number of shares and the
frequency of unloading them are unusual you should be more
careful. On the other hand, there can be only one reason when
they buy their company's shares, they want to make money.
Insider trading is a term that most investors have heard and
usually relate with unlawful conduct. But the term actually
includes both legal and illegal conduct. The legal version is
when corporate insiders such asofficers, directors, and
employees buy and sell stocks in their own companies. When
corporate insiders trade in their own securities, they must
report their trades to the SEC.
Since insider trading weakens investor confidence in the
fairness and integrity of the stock markets, the SEC has treated
the detection and prosecution of insider trading violations as
one of its enforcement priorities.
Industry: Industry is a grouping used to describe a company's
main business activity. It is generally determined by the major
source of a company's income. A hot sector is a sector of the
economy experiencing a higher than regular growth rate. If
companies across an industry show solid earnings and revenue
figures, that industry may be showing signs that it is in its
growth phase. Our goal is to select securities that are a leader
in a hot industry. (Sector's graphs)
Psychology of Trading: By studying the psychology of the
individual, as well as the psychology of the group, we can
understand how educated traders can profit by investing against
the crowd or by not following the crowd. A visionary trader
should also look for a number of psychological reasons that can
pushthe price of a stock higher in the future prior to buying
it. Support Resistance: The price action of a
stock over a period of time will create strength at certain
price levels. These levels are recognized as resistance at the
top and support at the bottom end of the trading range. This
trading range may develop different time frames; it can take
from weeks to years or a support and resistance level to
develop.
As the price of a stock breaks through the resistance level and
moves to a higher level, the level of resistance now becomes the
level of support. A new level of resistance will then be formed
at some point in the future. On the other hand, as the price
range falls below the support level, that level then becomes the
new resistance level.
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