If you think the market looks like it may have bottomed out for a while, it may be a good time to consider adding some stocks to your portfolio. Even as the market has slid in recent years, many stocks gained 5% or more a month in value and every day stocks hit 52-Week highs. If you don't have a few of these in your portfolio, then read on...
What's the difference between winner stocks and the not-so-good stocks that might have passed through your portfolio?
First of all, things change... A strong stock today may be a loser tomorrow. There are few stocks that you can just buy and forget about. The trick is to find stocks you can add to your portfolio, let them run up in price for a few quarters or years and sell them to collect your profit. Then look for some new winners to add to your portfolio.
No one has a foolproof method for identifying stocks that will always jump up in price. There are a variety of risks involved when you buy stocks, but if you use the six-point Winners checklist below on stock options trading strategy, you will be well ahead in the game of picking winning stocks.
There are over 15,000 stocks available on the various US Stock exchanges, so if you find one that does not meet all the requirements below, you should remove it from your potential buy list and move on to another stock until you find one that fits the six criteria below.
The Winners checklist will also provide convenient web links to free investment resources than can help find needed information on the stocks you are considering. These six checklist items may not represent complete exhaustive research on a stock but at least it will help you eliminate those that you should probably not spend any more time considering.
NOTE: For some of the links below, I have fed in AOL. This is to save you a few clicks and get to the link faster so you can view the information for your own stock.
Is the company making money?
This may sound pretty basic, but just because a company has a great product and strong advertising doesn't mean they are making money. Revenues, profits, and a strong balance sheet are the foundation of any company in which you would consider investing.
To do a quick check on the current revenue, profit, and balance sheet of a stock you are considering, go to http://finance.yahoo.com/ and enter the stock symbol and submit. From here you can use the links on the bottom left of the page for the company's income statement and balance sheet.
Be relentless on this one. A nice level of profit for a company is at least 0.10 times the revenues. Profits less than this may signal problems with the company's fundamental business model.
Click the Balance Sheet tab to view the balance sheet. Study the balance sheet... How much money does the company owe others? (the Total Liabilities line is bold) How do their assets look? (the Total Assets line is in bold) High debt can strap a company for decades.
Is the P/E much higher or lower than other companies in the same sector?
The P/E (Price Earning Ratio) compares the stocks price to its earnings. A high number here means the stock price may be high for the amount of earnings the company is actually throwing off. A low number does not necessarily mean the stock is undervalued. It may point to some other problems.
The important thing is to compare the P/E for a company to others in the same industry.
Go to http://biz.yahoo.com/p/industries.html and enter the stock symbol then click on the [View Industry] button. An industry and sector summary will appear along with information on the stocks in the same industry. Look for the P/E column heading. Note the industry average then scroll down to the company you entered.
If the stock's P/E is 20% higher or lower than the industry average, you might want to take this one off your list.
Does the chart point to a rising stock price?
Some investors are religious about chart watching. They live and die by complex chart patterns, calculations, and esoteric cues. This level of analysis would be nice but is probably not needed for longer-term investors.
Go to http://www.bigcharts.com/ and enter a stock symbol then click on the [Quick Chart Button] for the one year chart.
Eyeball the chart and look for any trends. If the stock price looks like it's on the downside of the roller coaster then find another stock. If the stock is on the upside of the coaster, great. But if the stock is really hitting some new highs not seen for the last year, then there better be a good reason. The worst thing is to buy a stock after it has hit a new high then watching it drop down.
There are all kinds of good patterns and bad patterns to look for and those are great for the chart fanatics. But here's the easy way:
Go to https://www.barchart.com/stocks/quotes/AOL/opinion and enter a stock symbol then click on the arrow at the right of the entry box. Buy or Sell statistics based on the stock's chart patterns will appear. Scroll down and you will see an overall buy and sell percentage. The higher the buy percentage the better. If your stock has a high sell percentage (over 35%) or low buy percentage (under 50%) you probably want to take it off your list.
At the bottom of the display you will see numbers for the stock's Support and Resistance. Support is the historical stock price the stock has not fallen below for a while. Resistance is the historical stock price the stock has had a hard time rising above. If the current price is at or even just below the Resistance level, you probably should take it off your list.
Has all the recent news been good?
Bad news can kill a stock's price and keep it down for a long time. Unfortunately good news does not seem to have the same kind of lasting effect on a stock. Good news may give the stock a short-term pop but it seems like investors remember bad news for a long time. Much longer than they remember good news.
Some news sites will filter stories (i.e. Bloomberg, Yahoo, Wall Street Journal) because they seem to favor their own internal resources. To do a good news search you need to use a source that shows most everything on a company.
To check the news on a stock go to http://www.newsalert.com/ and enter a stock symbol then click on the [GO] button. Headlines for recent news stories will appear in the lower part of the display. Look for bad news. Click More Stories... and go back a few months to see if there was any bad news as much as two or three months back.
Wouldn't it be great if this site had a search forward feature. You could check your stock's next earnings report a few months away. But that would probably not be a free service.
Are company insiders holding onto their stock?
Company executives and board members usually receive large stock grants. What they do with that stock can be very telling. No one knows more about a company's prospects than the CEO, CFO and board members. Is there a hot new product on the horizon or a pending accounting scandal? These people will know long before the general public.
Normally these insiders are smart people who know the worth of a dollar. If they think the company's stock will value over the coming years, they will hold that stock no matter what. If they think the stock is headed down, they will dump it. Why should you buy the stock if insiders are tripping over each other to sell theirs?
Go to http://www.moneycentral.msn.com/investor/invsub/insider/trans.asp?Symbol=aol and enter your stock symbol then click on the [Go] button. A list of recent insider stock sales will appear.
You can also click the Planned Sales link on this page (or go to http://www.moneycentral.msn.com/investor/invsub/insider/planned.asp?Symbol=aol) to get a look at pending insider sales that are in the pipeline.
A certain amount of insider sales may be expected for tax reasons or to re-balance a personal portfolio. So don't be too alarmed by several sales. Something to look for is a complete lack of sales. If you find a stock where all the insiders are holding onto their stock or the sales are low compared to the number of company shares outstanding, then you might have found a potential winner.
Can you profitably hedge your way into the stock?
We all took some lumps over the last few years on stocks that dropped in price. If more investors used simple hedging techniques, the pain probably would not have been as bad. No matter how great a stock looks, it can still drop the day after you buy it. But if you use a simple hedging technique known as covered call writing you will be protected against a potential drop in the stocks price.
If a stock costs $35 a share and you can hedge the stock purchase by 5% to 10% in the first 60 days, you will sleep a lot better on those nights after the stock drops. By continuing to hedge month after month you should be able to create a price cushion in the neighborhood of 20% to 30%.
If you can't hedge your way into the stock, why take on all the risk of just buying the stock alone?
To test if you can hedge your way into the stock, go to http://www.poweropt.com/ and scroll down the right edge of the page until the Market Data and Analysis box appears. Enter your stock symbol in the Covered Calls box and click on the [->] button. A table will appear with your stock's current price and a series of ways to hedge into the stock. The Strike column shows the target price for the stock for the month shown and the Opt. Bid. Column shows how much money per share you can receive for selling the right to purchase the stock from you at the strike price shown. Assuming the stock fits all of the items in 1 through 5 above, you should choose a strike price above the stock's current selling price. If you can't get at least a 5% return (see the If not Asgnd and If Asgnd columns) in the next 60 days, then you should remove this stock from your list.
For more information and details on how to use this hedging technique you can call (302) 992-7971.
No checklist like this one can be complete. So many variables and unknowns determine a stock's price and the way it fluctuates over time. Using a structured method like this Winners checklist to choose the stocks you add to your portfolio should result in better returns over the years. It took time and hard work for you to build the value in your portfolio to where it is today. The future growth of your holdings will be a big factor in how you enjoy your life so it is worth your extra effort and time to build that portfolio's value for the future.
This uncertain market is the best time for investors to use covered calls, spreads and other cash-producing option strategies to hedge their portfolios. You make these transactions with your broker, similar to buying and selling stocks.
