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Subject: VectorVest - How to Pick Stocks
Date: Fri, 06 Feb 1998 16:39:40 -0800
From: macho1 <macho1@xxxxxxx>
To: maui@xxxxxxxxx
http://www.vectorvest.com/htpstock.htm
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by Dr. Bart A. DiLiddo
Visit the business section of any decent library. You'll find shelves
full
of books on how to pick stocks. I've read most of them over the last
thirty
years, and some are pretty good. Most are not. It isn't easy, but
sorting
the good stuff from the not-so-good is absolutely necessary. Anyone who
has
read John Rothchild's "A Fool and His Money," knows what I mean.
The biggest obstacle to finding a winning stock picking system is that
no
system works all the time. Even the great Peter Lynch picked bummers
once in
a while. Nevertheless, there are some simple, common sense rules that
can
improve anyone's stock picking skills. Here they are:
Rule I: Favor Undervalued Stocks.
The first step in picking stocks is to favor stocks of companies that
are
making money, lots of money. Study stocks of companies with rapidly
growing
earnings, and choose stocks of companies which consistently make more
money
than they did the year before.
Even if you do the above, the question of price arises. Profitable, high
growth stocks usually sell at very high prices. How high a price is too
high? The only way to answer this question is to know what a stock is
really
worth. I answer this question by calculating a stock's value from its
earnings, earnings growth rate, profitability and other fundamentals. My
formulas for calculating value are described in Chapter 3, "How to Value
Stocks," of my book, "Stocks, Strategies & Common Sense."
If a stock's Value is more than its Price, the stock is undervalued.
It's a
candidate for selection. Undervalued stocks offer the potential for
achieving very large gains, and a higher probability of achieving gains
with
lower risk. In other words, undervalued stocks not only increase the
rewards
and odds of winning, but also decrease the risk of losing compared to
overvalued stocks. So, favor undervalued stocks.
Rule II: Favor Safe Stocks.
Have you ever noticed that the prices of stocks like McDonalds never
seem to
cause any excitement yet go up after year? Stocks like Chrysler are
always
in the news, and go up and down like a yo yo. There's a very simple
reason
for this contrast. The former stock has a track record of steady
earnings
performance while the latter has an erratic earnings record. Price
volatility is a reflection of fear and uncertainty.
Price volatility and risk arise from many sources...rumors, political
turmoil, natural-disasters and so on. Shareholders with little
confidence in
their company tend to overreact to bad news. Consequently, the stock
prices
of companies with erratic earnings performance suffer more when
unfortunate
things happen. Stocks of companies with steady, predictable earnings can
weather nearly any storm.
Obviously, there's less risk in holding stocks of financially stable
companies. Consequently, I analyze the risk factors of stocks very
carefully
before buying. A discussion of how I assess risk is given in Chapter 7,
"Stock Safety: The Missing Link," of my book, "Stocks, Strategies &
Common
Sense." The second key factor in picking stocks is to favor safe stocks.
Rule III: Favor Stocks with Rising Prices.
The hardest thing for most investors to do is buy a stock while it's
price
is rising. Most of us have been taught to wait for a stock to go down
before
buying it. The idea of buying a stock at a lower price makes a lot of
sense,
but is fallacious.
First of all, you'll miss a lot of good opportunities. Really good
stocks
usually don't look back once they have started moving upward. Witness
the
thousands of stocks that have doubled and tripled over the last few
years
with nary a downturn.
Even more importantly, when buying a stock whose price is falling, you
never
know where the bottom is. Remember when IBM went from 175 7/8 to 37 5/8.
Who'd a believed it? I did because VectorVest did not reflect IBM as
being
undervalued or safe as it was going down. However, when things started
turning around and IBM's price started rising again, we gave it a buy
rating. Buying stocks on the way down lessens your chances of winning.
Most of us dream of buying a stock at its low, and riding it to the
moon.
It's a great dream, but the chances of doing so are virtually nil. The
low
points on good stocks don't last long. You have to be very lucky to bag
a
bottom.
Picking stocks with rising prices not only obviates the above problems,
but
offers several advantages. First, a stock that is rising in price is
already
doing what you want it to do. (It's a little like training a pet. You
don't
have to break rising stock of a bad habit).
Buying stocks with rising prices does not preclude the idea of buying
them
right after they hit bottom. Bottom Fishing is a great sport, and I
discuss
it in Chapter 15 of my book, "Stocks, Strategies & Common Sense." You
just
have to know when the price trend has gone from down to up. I tell you
how
to know what a stock's price is doing in Chapter 9, "Timing: The
Ultimate
Weapon."
Finally, a stock that is hitting new highs, has essentially no overhead
resistance. There are no unhappy buyers waiting to get their money back.
I
especially like to buy stocks hitting their very first 52 week high.
These
stocks have had plenty of time to consolidate, and are showing new signs
of
life. It's fun to own stocks with rising prices. So pick stocks with
rising
prices.
Rule of Rules: Pick Safe, Undervalued Stocks with Rising Prices.
That's easy to say, but how does one find safe,undervalued stocks rising
in
price? Try following these steps:
1. Look at the financial section of your local paper, the Wall
Street
Journal, Investors Business Daily, Barrons, the internet or whatever.
Find
the list stocks that have just hit new 52 week highs. All of these
stocks
are definitely rising in price.
2. Rank these stocks in ascending order of Price to Earnings ratio,
i.e,
P/E ratio. This may take some work, but the low P/E ratio stocks should,
of
course, be undervalued.
3. Assess each stock for safety. Since the subject of safety is not
touched upon in the papers, you'll have to turn to other sources. Take a
look at Value Line, for example, or Standard & Poor's Stock Guide.
4. Now put all the information together in a logical, unemotional
way,
and rank them in order of the the ones you think are the safest, most
undervalued and rising in price the fastest.
Once you have prepared your list of stocks, check them out using
VectorVest
ProGraphics. VectorVest ProGraphics stock analysis and graphics software
analyzes over 6,000 stocks every day for Value, Safety and Timing. It
unifies these factors into a comprehensive indicator called VST-Vector.
Stocks with the highest VST-Vector ratings have the best combinations of
Value, Safety and Timing. There's no need to spend hours and hours doing
what a computer can do. You can obtain a complete, rank analysis of any
list
of stocks with VectorVest ProGraphics in just a few minutes. Our records
show that stocks with the highest VST-Vector ratings outperform the
market
over the long-term. This comes as no surprise. Common sense and simple
logic
dictate that picking safe, undervalued stocks rising in price should
result
in above average performance.
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Last modified: Friday December 19, 1997.
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