Good morning,
I read the Fortune magazine as part of my weekly routine to keep myself updated for investment ideas. One interesting feature I notice is the Face-Off section in the Investing page. It always features 2 senior research analysts’ review of a selected stock and their forecast of the future direction of the stock price. What interest me is that the 2 featured analysts always have differing views. One will always be bullish and predict the stock to advance and the other will be bearish and predict the stock’s price decline. Interesting isn’t it? Whose advice should you follow?
So where did you find the last five stocks you bought? From your broker, or a good friend, or a web site promising fantastic returns, or a well known news letter? Were these good companies selling at a substantially discounted price? Why were these companies the best available investing candidates? Did they perform as you were led to believe they would? If you cannot answer these questions or are not happy with the answers, then you might want to reconsider your stock selection criteria.
Stock selection is an important step in building a quality portfolio. The selection criterion an investor uses to select stocks for their portfolio is a major factor contributing to their investing success. The KUTE system I use take the best of fundament and technical analysis: Fundamental analysis to find quality companies whose stock is undervalued and technical analysis to time entry and exit points. It first determines the macros of the markets and its’ forecasted direction and having establish the markets’ trading behavior, screens for companies that are good businesses that earn more relative to the price being paid than others. Good businesses have high Return on Capital. Companies that earn more relative to the price being paid have a high Earnings Yield. Company growth rates are another criterion I use in evaluating companies. I aim for mature companies with high, stable growth rates, which is an assumption based on historical analysis, current performance, and cash flows, earnings, sales, dividends, and book values. In addition, we look for companies that have the ability and able to efficiently pay off long term debt and not carry it on their balance sheet for extended time periods.
Operating cash flow is also considered as cash flow is a better indicator of a company's financial earnings power than net income. A company can show positive earnings and not be generating cash to pay bills. Operating cash flow provides a better financial measure of financial performance. While stock screeners are very helpful to potential investment candidates, they are no substitute for good old fashioned homework. One other important step KUTE system requires further analysis of the company’s information. Some of the best sources for information on a company is their Securities and Exchange Commission (SEC) filings, especially the 10K (annual report) and 10Q (quarterly report). Their other filings with the SEC can make interesting reading since they must report such actions as changes in executive management, new financing, changes in significant ownership, insider buys and sales, and acquisitions or divestures. It is helpful to know if management has an existing and growing stake in the company through stock and option ownership. If management is positive on the prospects for the company, then investors should be as well.
Once this is done, KUTE system uses Technical analysis to provide the best way to establish these selected stocks’ buying rules. The KUTE’s secret is to use the technical signs on the chart to develop the rules of when and where to buy the chosen stock. After all, you are preparing to commit your hard earned money, so you want to be as sure the trade criteria is the best it can be. So if the technical show strong buying signals for the week, I will buy when the price dip below the week’s opening price, believing that it should close higher at the close of the week. Honestly even if the stock does not close higher than expected, it is still alright to hold since it was first selected because the company is fundamentally sound and the price should rise in the near future.
Finally, the money management rule is established and above all, the success of the trades depends on the trader’s psychology and nerve to strictly follow all the rules for trading. I must be honest that while I am pretty successful so far using KUTE, I am still learning to control my emotion to strictly follow the full rules of KUTE.
So how did the stocks selected by KUTE performed last night? On the macros DJIA rose 14.21, or 0.1 percent, to 9,882.17. The broader Standard & Poor's 500 index fell 3.54, or 0.3 percent, to 1,063.41, while Nasdaq fell 25.76, or 1.2 percent, to 2,116.09, and traded the day within broad range, as expected. PTEN was up 0.18% to close at $16.33 and CAH up 0.1% at $28.74. PTEN has dipped to the low of $15.99 and rose at $16.67 during the trading period. With 2 stocks fell for every 1 that rose on NYSE, the stocks selected did pretty well. The other stock I am monitoring, EIX, closed at $32.35, down -0.09%.
Have a great day ahead.
Francies Cheng
BBus MAppliedFinance
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