Thoughts on how one man does DD...interesting site...real stocks, real thoughts...
TigerInvestor.com - tigerinvestor.com
I have received many posts about what kind of DD I do during the trading
day before entering a trade. I have tried to assemble, as best I can, a
list of those things I check. I am sure there are many more intangibles
that I have not covered here, but hopefully this will give you some
insight as to what I do during the trading day. I call this my 60-Second
DD and try to do it just before entering a trade, or soon after a trade to
see what I have gotten myself into.
DD is very subjective and open to interpretation by the person doing it.
There exists no hard and fast rule to determine if a trade is good or not.
If you find one person to say that a float of 10 Million is good, another
will say that it is too high.
Again, a person's DD is just to get an initial idea of what we are getting
into before actually trading or sometimes after the initial trade to
determine how long we could hold it.
For the most part, you can use Yahoo's site to answer your DD questions.
Lets go through some of the things I look at.
1) Volume, take a look at the avg. daily volume of the stock. I normally
like to see at least 3x (3 times) the avg. daily volume before I trade an
issue. It tells me that something is up and that the issue is in play. It
doesn't have to be 3x but the more the better.
2) I immediately look at the P/E ratio to see what kind of fundamental
value the issue is. Many people commonly use a P/E of below 20 to indicate
a good value, above 20 to be so/so depending on the sector. Tech plays are
usually between 20-80 if they have a positive P/E at all. The lower the
P/E the more I think, "Ok, we have a decent value here relative to past
earnings" (And this is an important fact).
3) Click on "Research" for the issue and note the "Earnings Per Share"
area in the upper right of the box. Specifically, note the "Surprise"
field. Is it positive or 0....or is it negative and by how much. Lets say
from item 2 above that you have a P/E of 8 which would indicate a
tremendous bargain compared to the 20 that many use as an indicator. You
then go to this Earnings per Share (EPS) box and note the surprise number
to determine whether they met their recent earnings expectations or not.
The reason that this is important is that if they did not and the surprise
is very negative, it means that they missed their estimates and thus will
most likely not make their yearly estimates. Since the P/E is figured on
trailing numbers, it may not show the recent earnings downturn and the P/E
(Price to Earnings ratio) is so low because their earnings are down. In
this case, the forecasted P/E could be 2x or 3x of the current one...so
the 8 could end up being 16 or 24, even higher (thus not representing a
very good value at all.). However, if the P/E is low and the most recent
earnings surprised by a good number then you may have found a good bargain
as the P/E could be even lower if they keep up their good performance next
quarter, and thereafter. It should be noted that the P/E ratio is just the
Price of the stock divided by its current yearly earnings.
4) After finding the P/E and whether they met their earnings estimates, I
immediately turn to the news. Click on the "News" link and browse as far
back as you can paying particular attention to most recent events. If you
have a low P/E above and earnings were still good, check to see if there
have been any downgrades/upgrades or earnings restatements by the company
or analysts. How about any earnings warnings? Many companies sell at a
very low P/E because they have just come out and said that although they
made their recent eps expectations, the next quarters will not be as
bright. Thus, the issue sells off and the P/E ratio drops. Read the
earnings reports from the news lists and any 10-Qs you find. Look for
things like declining margins, takeover plays, charges, declining revenues
and pay particular attention to what the company execs. are saying in the
release. Basically, take in all the news.
5) Next I jump to "Insider". Have any of the executives or others bought
shares or filed any 144s (Intent to sell shares). Insider activity must be
reported and is a very useful tool in determining how much confidence an
executive has in the current price of the stock. However, just like you
and I, sometimes even execs have to sell shares to buy things such as
homes and big cars. But you should not see a flurry of 144s.
6) How about analyst coverage, again from the "Research" link. How many
analysts are following the stock and how do they have it rated. Not that
it is that important but it gives you an idea of how "followed" an issue
is.
7) From the same "Research" link, take a look in the lower right hand
corner and find the "Consensus Estimates" for "This Quarter", "This Year"
and "Next Year". This ties into the surprise from #3 above. Take the
current estimates for this year and divide them into the current price of
the stock to see the expected P/E for this year. Then do that for the
"Next Year"s estimates. Hopefully there is an increase in next years
estimates compared to this years, which means EPS growth and an ultimate
lowering of the P/E ratio relative to today's prices. However, this is
where you factor in that "Surprise" figure from above. Did they meet this
quarter's estimates and does it seem feasible that they will meet this
year's estimates as well. Sometimes you will have to do some addition from
previous earnings announcements via the "News" link to determine what they
earned previously.
8) Next onto the "Profile" link. Read the brief summary of what they do
and get an idea about their growth or lack of same. Then down to the
52-week highs/lows...where are they trading compared to it.
9) Float - I use a three tiered system for float. 1) Less than 5.0
Million, 2) 5M-25M, and 3) 25M+. The float is the number of shares
available for public buying and selling. The "Outstanding" shares are the
number of shares total issues by the company including those held by
officers. The float works on a simple supply/demand model. The less the
shares available for trading, the more the price will swing based on good
news or bad news. During times of good news, people will be buying and
there are few shares for sale, the price goes up due to demand. Just the
reverse during bad times. Generally, if you can find a low float stock
with upcoming good news and a volume spike, you can do very
well....however, hang around too long and when the selling begins, it will
work against you.
10) Shares short, also from the "Profile" link. This is the number, at
last report, of shares that people are holding short or, betting that the
price of the stock is going to go down. Many see this as a negative while
many, like myself, see this as a positive. Because of the nature of a
short-sale, when "covering" the short, the trader/investor must buy the
stock as opposed to selling it. So, if a short seller has a position in
say, NAVR and the price begins to rally, the short seller may get scared
and have to "buy" his short position to close (cover) his position. You
and I make money when a stock goes up, shorts make money when stocks go
down and lose money when stocks go up. That is why it is very dangerous to
short these high flying net stocks. A very well known trader from Tokyo's
board, shorted many shares of SKYM at 9, practically overnight...it hit
50, for a 41 point loss. Additionally, brokers may ask you to contribute
more money to insure your loss from the recent price rise, or a margin
call.....since short shares are purchased on margin. I consider a large
short position as kindling for the fire on good news as not only will the
longs be buying the stock, but the shorts will be buying to close their
short positions.....win/win.
11) 5 day chart. I like to look at the 5-day chart, especially into volume
to determine how it has been trading recently. Is the trend up or down.
Has it been gapping in the AM or selling off in the PM, how about volume?
I find this very useful.
12) The 52 week (1 year) chart. Where are the support levels. Is it coming
off of support, has it bounced off the same number more than once
recently, is it breaking out? The 3 month is good for this as well.
13) I like to go to clearstation.com and take a look at the
MACD indicator, are we green, red, or neutral. I don't swear by a lot of
TA but I do like the MACD. Do some reading on clearstation about it, you
will find it interesting.
14) But most of all, what is the current rumor or news swirling about the
play in general. Are traders just hype buying or is there impending news
coming. Let the price action of the issue determine your ultimate decision
either way. If you are wrong, sell immediately, if not....have fun with it
and lock in your gain when you reach your goal. Many times I enter a trade
without doing any DD, because the time is right and the issue is
moving.... for example ... IMON.
I have hopefully covered everything here but have probably left out a few
of the intangibles. I hope you find this useful. It is difficult to relay
this kind of information as everyone has different methods and different
interpretations of the information. Find what works for you and go with
it.
I will also do much more research during the evening hours on stock
screeners and news links.
The single most important thing anyone can do is to call the Investor's
Relations personnel of the company. Do not be shy, they are here to answer
your questions. They are just people and sometimes you can get some very
good information from them.
I hope this helps some of you who may be confused as to what to look for
before getting into a trade. Good luck and trade well. - Trader J |
