Stocks Trading: Finding Solid Companies to Invest In !!

Before You Start Reading Stock Charts Upside Down -- to determine which are accumulating or distributing, and when to buy or sell them – there is the issue of finding solid companies to invest in.

You may have heart about "Fundamental Analysis", which just like technical analysis could be made so overwhelming that you rather give up than start taking investing seriously…Some investment managers and writers about investing would argue that it is essential to learn to read the balance sheets and income statement of companies; to assess the quality of management; to call or meet with management, to correctly estimate the intrinsic value so as to know when a stock is undervalued…Tons of books on fundamental analysis could put you back into study mode for years.

Fortunately, a lot of that has become unnecessary since the publication of "Investors Business Daily". In the newspaper that William O’Neil pioneered you can find a lot of analytical data (notice I wrote "data", not "intelligence") that narrows down the number of companies you should investigate. In fact, the IBD 100 list, published every Monday in IBD, reduces some 10,000 companies listed on the exchanges down to one hundred worth your time.

How do you then pick out of these 100 a watch list of 10 to 12 stocks from which you select two to four to buy when your Chart Reading tells you it is time to buy them? I’ll spell out my approach, which does not entirely follow what Mr. O’Neil wrote in his books or tells in his workshops, but as any guru in the field he has a tendency to make things more complicated than necessary. Why else would so few women attend his workshops?

Let’s start with Earnings Per Share (EPS). IBD provides a ranking of companies based on EPS. If a company does not rank in the top five or ten percentile (meaning a score or 90 or higher), it should not belong in your watch list. The EPS rankings of all stocks can be found daily in IBD.Next, look at relative strength (RS) and group RS ranking. The RS should be bigger than 80 and increasing and the group RS ranking should be at least 85.

Next look at sales growth and earnings growth per quarter. Without sales it is impossible for a company to make earnings; so both sales and earnings growth better be growing more than 25% quarter to quarter. Earnings growth over time and return on equity should at least be 20% or higher. Management should still have a significant stake in ownership (20% or more), and an increasing number of institutional shareholders is also something to look out for.

Finally, my personal preference goes to companies that produce a product or service you understand. As I am not a chemist, biologist, pharmacist, material specialist....I shy away from companies that produce services or products that I do not understand. This does not mean I stay away from all technology. For example, I understand what a GPS system is, how useful it is for navigation and many other applications, so Garmin (GRMN) is a stock that fits in my criteria.
If you apply these simple criteria to the IBD 100 list you will quickly reduce the list down to a watch list of a dozen or so. Out of these the ones the two or three to buy are the ones that are accumuatling and come within 5% or less of their buy point, which you find through your chart reading, When there is a spike in volume and a significant price increase you buy the stock right at its Buy Point.

In spite of all the efforts by Bill O'Neil and company, not many people following this approach. Lots of investors who are just starting out take the IBD 100 list, pick the Top Ten Stocks and invest in several stocks from that shortlist. This is the worst possible use of IBD 100. Remember, IBD provides "data", that only you can transform into intelligence for your best advantage.



To Your Investments Success,
A Professional Stocks and Forex Market Trader
Dan A.


P.S: I hope that 2009 is a breakthrough year for you in every aspect of your life - including trading! Sign up for your FREE trial to our Stocks Trading Newsletter and see if you aren’t closer to reaching your goals in 2009! Go Here.

Stocks Investment: What Is a "Retained Earnings" Account?

A Special kind of account, called "Retained Earnings" is an interesting and important account. Most business people know it better as "Net Profit". Net Profit is, of course, your total income less your total expenses. For example:

Sales: $1600.00 USD

Cost of stock: $1200.00 USD

Operating expenses: $300.00 USD

Net Profit: $100.00 USD

So, after this series of transactions $100 profit is made. Since net profit is usually the same as retained earnings (they are not always exactly the same and this point is discussed later) and retained earnings is a liability, then it would seem net profit is actually something we don't want...Of course, this liability is a special case. It is not money owed to our suppliers, but money owed to "us" (since the company must issue its profits to its owners). In this case, from our perspective, this is a "good" liability. In reality of course, the company may decide to keep the profit as a reserve because its managers are expecting additional expenses next month, and so on. The Net Profit or retained earnings may be eaten up before the firm gets a chance to issue it to its owners.

From an accountant's perspective, operating a general ledger involves shuffling numbers between sets of asset and liability accounts. Obviously, the higher the numbers on the assets side, the better. These types of accounts are referred to as balance sheet accounts.

One of the key concepts that accountants use to ensure that they don't miss anything when updating account totals is that of balance. Every monetary transaction involves the interaction of at least two accounts. Let's write the above example out again in a form that an accountant would be slightly more happy with:

Sales: $1600.00 + (increase by)

Stock levels: - $1200.00 (decrease by)

--------

$400.00 -

Operating expenses $300.00 (deduct expenses)

--------

Net Profit: $100.00

In the above all the amounts that make up the transaction have been accounted for. Sales have been increased by $1600. We therefore need to offset this $1600 against other accounts that balance to $1600 also. This was achieved by deducting $1200 worth of stock (or increasing the cost of the sale by $1200 depending on how you look at it), increasing operating expenses by $300 and Net Profit the remainder. The principle of balance will be discussed in greater detail in the next section when we get to debits and credits. For now, lets continue to look at retained earnings.

The major problem dealing with only asset and liability accounts is that while they tell us how much we owe and how much we own, they don't tell us how we arrived at this situation. If the retained earnings account holds $10,000 what did we do right to arrive at this figure or if the balance is negative $3000 what did we do wrong?

In order to determine how the final total was made up, it is common accounting practice to expand the retained earnings accounts into income and expenses. Income, revenue or sales are usually thought of as assets and expenses, overheads or costs are thought of as liabilities. However, they are not quite the same thing. We don't really owe money to the "vehicle maintenance" expense account, we owe it to Joe's garage, for example. Likewise, we don't strictly speaking, get money from a sales account, we get it from a customer's account when they pay their bills.


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To Your Online Trading Success,
A Professional Stocks and Forex Market Trader
Dan A.

Recommended Book: "How I Made 2 Million In The Stock Market" - By Nicholas Darvas

Why? You must, absolutely MUST, read, re-read, study and think about every line in the book "How I Made $2 Million in the Stock Market".

Well let's start with the fact that Nicholas Darvas (the author) turned $25,000 into $2,25 million by scanning the newspapers in just five minutes during the late, night early morning, period. He him-self said it wasn't so much the amount of money he made that pleased him but the ease and peace of mind it was achieved. It was SO easy.

Admittedly, he was lucky in that he traded his system during a roaring bull market. But his system makes money in all market conditions. It's just a fact that you'll make a lot more during a run-away bull market. That can be said for most systems.

Nicolas Darvas had the perfect attitude for trading. When he was wrong on a trade he shrugged his shoulders, cut his losses and looked for the next one. No second guessing. No emotion. No ego involved.

Without doubt Darvas' best quality was his ability to question everything. When he was wrong, why? What worked and why? What didn't work in the stock market and why? Question everything and eliminate what doesn't work. He pieced together a system that fitted his personality. The person who can do this will be a big winner in the markets.

Darvas' methods still work and always will work. If it stops so will the stock market. So if your serious about taking control of your investments and are willing to spend the time necessary, Darvas advise will be well worth the effort.

And as an added bonus, not only is this book filled with great infomation but it reads like a highly entertaining novel ' too. It's hysterical when news of his success leaks out and TIME magazine sends three different sets of editors down to interview him before they finally decide he is for real...I won't spoil it for you though!

To Summaries..."Read How I Made $2 Million in the Stock Market". Free Download Here.



To Your Stocks Investments Success,
A Professional Stocks and Forex Market Trader
Dan A.