Stock price selection

[stink]

Hi All,

Being undercap and trying to look at stocks that have the most potential to move quickly, what price ranges do you guys recommend?

I have currently been scanning on stocks between 1$ and 10$ as i feel stocks that are at a higher price generally will move slowly and are not going move enough in the short term to aid me in increasing my measly 6k intial investment.

Stocks below 1$ i feel are just to speculative and to risky for me at this time.

I have found quite a few stocks within the $1-$10 that seem to range quite a bit within channels but still in a long term up trend and these have been the ones up until now that i have been focussing on.

Do you think this is a sensible approach for someone with only a small amount to start with or should i be looking in other areas?

Regards Stink

 

[Realist]

Well in theory a $10 stock is exactly like 10 $1 stocks for the same company so there should be no difference in any increase or decrease. If the stock doubles, it doubles regardless of what price it was.

But in reality lower priced stocks do tend to double or halve quicker than higher priced stocks.

Although RIO pretty much doubled from $45 to $90 a share in the past year.

If I was you I'd look at the market cap of a company more so than the share price.

Companies worth between $7M and $100M may be your best bet...

Any smaller is a bit too speculative, any bigger may be a bit too stable to create the wild swings you probably want.

Do your own research on CQT and NWR they may be worth a look...

 

[stink]

Thanks Realist,

I hadnt thought about it from that angle before and will definately investigate further.

I have done alot of research and papertrades and now feel its time to take the plunge, but i think i am looking for the perfect stock which doesnt exist. I should just trust my entry strategy and do it

Cheers Stink

 

[Realist]

What stock/s are you thinking of buying?

How did your paper trades go?

 

[ducati916]

Here is an example of a low priced stock, that is additionally an example of an undervalued stock and should price trade back towards intrinsic value, you will realize a return in excess of 100% on invested capital.

For disclosure, I do hold this stock.
It is a US equity.

Current Price $6.56
Code WON
Yield 5.90%
Market Capitalization $1006.3
TCI Price Target $17.20 to $23.22
Investment Sector Entertainment
P/E Ratio 8.88
Recommendation Buy

Industry Statistics

Market Capitalization: 83B
Price / Earnings: 35.6
Price / Book: 5.6
Net Profit Margin 10.2%
Price To Free Cash Flow -366.8
Return on Equity: 10.2%
Total Debt / Equity: 1.4
Dividend Yield: 2.6%

We can surmise from the Industry statistics that the individual business is currently unpopular and underperforming the industry relatively in terms of price multiples being awarded to the shares.

Business

Westwood One, Inc. supplies radio and television stations with information services and programming. The Company provides traffic reporting services, as well as produces and distributes national news, sports, talk, music and special event programs, in addition to local news, sports, weather, video news and other information programming. Westwood One obtains the commercial airtime it sells to advertisers from radio and television affiliates in exchange for the programming it provides to them. That commercial airtime is sold to local/regional advertisers and to national advertisers. The Company provides local traffic and information broadcast reports in over 95 Metro Survey Area (MSA) markets in the United States. Westwood One is managed by CBS Radio Inc., a wholly owned subsidiary of CBS Corporation.

Capitalization

The business is leveraged, carrying 42% of the capitalization as long term debt.
This debt is amply covered within EBIT earnings at 8.5 times interest charges.
This is important as the returns that will accrue to the investor owe no small part to the use of the senior capital, thus the interest payments must be secure.
INCOME STATEMENT

Revenue 544.52M
Revenue Per Share 6.104
Qtrly Revenue Growth -9.90%
Gross Profit 185.55M
EBITDA 140.73M
Net Income to Common 67.31M

Herein lays the problem.
Revenues have been under pressure and are showing lack of growth. They in fact have been showing only 1.57% compounded growth over the last five years. In Wall St, this is not a good way to be awarded high multiples on your stock.

Profitability
Profit Margin 12.36%
Operating Margin 23.75%

The margins are however higher than the Industry average and they are consistent and stable, which allows the safe use of a leveraged Capital structure to generate returns for the Equity.

Net Profits in direct comparison to Revenue growth have been growing at the compounded rate of 14.4% over the last five years. This is a direct consequence of the leveraged Capital structure.

BALANCE SHEET

Total Cash 6.41M
Total Cash Per Share 0.074
Total Debt 425.32M
Total Debt/Equity 0.617
Current Ratio 1.599
Book Value Per Share 7.972


The Balance Sheet is average.
It would be nicer to see a stronger cash position. The cash position is below strict standards for investment, but only marginally.
There are no inventories to carry, thus the benefit of doubt in this instance would seem to be acceptable, as in an emergency, a portion of the Receivables could be monetized, thus providing a significant margin of safety to the cash position.

CASH FLOW STATEMENT

Operating Cash Flow 78.88M
Levered Free Cash Flow 155.37M


Here is where the story lies.
Capital spending requirements are minimal. The cash is free for acquisitions, or, to be returned as a dividend, the free cash flow being substantial. This dividend can, due to the use of the capital structure grow at the same rate as Net Profits and provide an amortization of capital to the investor.

In the past, an acquisition was purchased, and has been a successful investment, returning 11.5% on investment to the business. With seemingly a lack of investment opportunity, a cash dividend has been instigated and in the future a share repurchase program may be initiated. This will increase the earnings per share, and increase the multiplier assigned.

Of course there is always the possibility that Revenues start to grow a little faster than the current growth rate. This would be a very positive outcome, but one that is speculative in nature and cannot be relied upon.

SUMMARY

At the current price of $6.66 I feel that this offers a good opportunity to invest in a business that offers a currently safe, though speculative Capital structure through which the Equity capital benefits from the senior capital.

The low capital expenditure requirements benefit the common in three ways; it allows expansion via an acquisition which based on past returns would benefit the holders of the common, it offers the potential of a growing dividend, and lastly the possibility of a share repurchase program

jog on
d998

 

[stink]

What stock/s are you thinking of buying?

How did your paper trades go?

Well, i have been away the last couple of weeks but my most recent one was Bendigo Bank cant remember the exact dates but basically a couple of months ago it started moving up and when i look at the trade i still think it was a good entry. However i was looking for 10% from that trade and from memory i got about half way there over abou 10 days i think and then it dropped and kept droppping until i got stopped.

Please excuse my methods if they seem stupid, but i scan the market each evening looking for stocks between 1-10$ that are doing something, price and volume, market conductor, ditribution to name a few.

So lately i feel like its time for me to get into the market with some money but am questioning what to actually buy. The Bendigo probably scared me a bit cause i thought it was a good decision.

The shares you mention are both spec's which is against my intial trading plan. Maybe i will have a look and paper trade those two and see what happens.

To tell the truth i dont think i have papertraded enough at all but just have itchy feet and want to get involved, i have watched and marked heaps of stocks with my buy and sell point etc and about 70% have been profitable trades. I have not however actually applied my full trading plan including money management with my intial amount 6k to any one trade. I have just been concentrating on picking my entry and exit points and trying to get that right and being able to justify why i made a decision.

I have had so many mixed opinions on papertrading, i do think it serves a purpose but just dont know to what extent.

Cheers
Stink

 

[Realist]

Well Stink, as long as you go in understanding you can lose money and you are prepared for that, I'd say go for it!!

Be selective with your first purchase, unemotional, plan it, and don't pay too much for anything.

Good luck.

 

[dutchie]

Duc

Nice report on that stock (WON).

Your fundamental lean is evident as the chart is not very pretty at the moment.

Cheers

Dutchie

 

[ducati916]

dutchie

Your fundamental lean is evident as the chart is not very pretty at the moment.

Well, yes, I am a fundie.
However, if you look at the daily chart, most of the volatility seems to have disappeared to the downside..........

It is flatlining.
This from a technical perspective is a pretty good entry point.
You can if you wish set a very definite stoploss.

jog on
d998

 

[Julia]

Well, i have been away the last couple of weeks but my most recent one was Bendigo Bank cant remember the exact dates but basically a couple of months ago it started moving up and when i look at the trade i still think it was a good entry. However i was looking for 10% from that trade and from memory i got about half way there over abou 10 days i think and then it dropped and kept droppping until i got stopped.

Please excuse my methods if they seem stupid, but i scan the market each evening looking for stocks between 1-10$ that are doing something, price and volume, market conductor, ditribution to name a few.

So lately i feel like its time for me to get into the market with some money but am questioning what to actually buy. The Bendigo probably scared me a bit cause i thought it was a good decision.

The shares you mention are both spec's which is against my intial trading plan. Maybe i will have a look and paper trade those two and see what happens.

To tell the truth i dont think i have papertraded enough at all but just have itchy feet and want to get involved, i have watched and marked heaps of stocks with my buy and sell point etc and about 70% have been profitable trades. I have not however actually applied my full trading plan including money management with my intial amount 6k to any one trade. I have just been concentrating on picking my entry and exit points and trying to get that right and being able to justify why i made a decision.

I have had so many mixed opinions on papertrading, i do think it serves a purpose but just dont know to what extent.

Cheers
Stink

Hello Stink

Re Bendigo Bank: to expect 10% from a regional bank in around two months is probably rather optimistic.
If you watch BEN from now on you may find it resumes an uptrend. They have just turned in a very good and popular report and have been rewarded by a turn around in the SP.
I wouldn't regard BEN as a likely candidate for short term trades.
Don't overlook its 4.2% fully franked dividend when considering your return.

Good luck

Julia

 

[stink]

Hello Stink

Re Bendigo Bank: to expect 10% from a regional bank in around two months is probably rather optimistic.
If you watch BEN from now on you may find it resumes an uptrend. They have just turned in a very good and popular report and have been rewarded by a turn around in the SP.
I wouldn't regard BEN as a likely candidate for short term trades.
Don't overlook its 4.2% fully franked dividend when considering your return.

Good luck

Julia

Thanks Julia,
This is exactly why i love this forum, my immaturity in trading nor my trading plan at the moment take into consideration these things? What i mean is i simply do not know why its optimistic, other then looking at previous support and resistance etc.

Which i suppose is another element to the discussion in what sectors generally are not going to perform i the short term given that my strategy at the moment is short term trades like from a couple of days but no more than six weeks and to compound my profits and minimise any loss.

LOL that last paragraph sounds like i am asking for someone to give me an answer. I'm not, what i am after is where in your opinion is the most appropriate sector for me to be looking? Or is this irrelevant?

Cheers Stink

 

[Realist]

I'm not, what i am after is where in your opinion is the most appropriate sector for me to be looking? Or is this irrelevant?

Cheers Stink

Well I would say not banking. They are solid and reliable, but hardly likely to give you quick profits, and with interest rates rising it's not a great time to be buying into a bank.

The Resource sector is your best bet as a trader. A tiny company can more than quadruple overnight. And if you only have $6K to punt with that is your best bet for quick returns.

Speculative yes, but that is not always a bad thing.

 

[stink]

Well I would say not banking. They are solid and reliable, but hardly likely to give you quick profits, and with interest rates rising it's not a great time to be buying into a bank.

The Resource sector is your best bet as a trader. A tiny company can more than quadruple overnight. And if you only have $6K to punt with that is your best bet for quick returns.

Speculative yes, but that is not always a bad thing.

You peak my interest in this area thats for sure. Would i be right in saying though that because of the potential for overnight volatility it takes alot of the TA out of the decision and makes it more an FA decision?

I say this because if i am an EOD trader than on a share like this my TA of the price is really irellevant as when i wake up it could be ? So from what i have read here most people seem to go for the spec's that have good fundamentals and the company is having positive reports etc

Maybe i shall use a small amount say $500 and "have a play", of course i am prepared to lose it but it could be a good learning curve.

Thanks for the input
Stink

 

[Realist]

Would i be right in saying though that because of the potential for overnight volatility it takes alot of the TA out of the decision and makes it more an FA decision?

No, actually the opposite really, charting is about all you can do for speculative resource companies with no exact resource. Unless you are in the know that is.

You can't really do much FA on some gold explorer that's drilling away and waiting for results.

The theory goes, the share price will show some volume and price interest if they're onto something, and you need to spot that before it booms and goes into a trading halt and comes out trading 10 times higher!

For fun have a look at the PDN, CDU and CQT's charts - they are interesting. Would you have spotted the booms and got in early enough? I never did, but got on CQT earlyish enough to make a small profit.

 

[stink]

No, actually the opposite really, charting is about all you can do for speculative resource companies with no exact resource. Unless you are in the know that is.

You can't really do much FA on some gold explorer that's drilling away and waiting for results.

The theory goes, the share price will show some volume and price interest if they're onto something, and you need to spot that before it booms and goes into a trading halt and comes out trading 10 times higher!

For fun have a look at the PDN, CDU and CQT's charts - they are interesting. Would you have spotted the booms and got in early enough? I never did, but got on CQT earlyish enough to make a small profit.

But isnt looking through pages of company reports on what they have been mining for in the last week and how much financial backing a company has, isnt that fundamentals? In this case isnt the Volume and price movement in direct relation to positive or negative reports on company finding's and activities? I mean i can spot a higher then normal level of turnover for a particular stock based on its relatively short history, but is that what you make a decision on?

Company abc crusies along for six months trading between 10c and 32c, one day i look at this stock and it spikes from say 14c straight to 33c with high volume compared to its past history. Do i jump on this based on this? my normal thinking would be no i need to get some confirmation that its on a break out, but by the time i get that i have missed out its already at 40c? In hindsight i then can look back and say well look at that unusual volume increase right there, i should have been on that!

With only that knowledge on a speccy it could have gone either way? Unless there is some fundamental element that is available that adds and confirms a better case for entering this stock.

I think i know your answer.

On speccy's unless you have some knowledge that tells you otherwise, its simply a gamble?

Cheers Stink

 

[nioka]

In myopinion low priced stocks worth looking at are THX, OIL , MOS .Any comments?

 

[felix]

In this case isnt the Volume and price movement in direct relation to positive or negative reports on company finding's and activities? I mean i can spot a higher then normal level of turnover for a particular stock based on its relatively short history, but is that what you make a decision on?

As a trader, I use TA primarily.

The fact is, however, that trends are often a response to news. When you spot an up-trending stock, then if you should happen to check out its news page on ASX.com or wherever, I'd say 50% of the time the company will have released positive news around the start of the uptrend. This is my own observation so 50% is an estimate.

Someone who buys on news would have contributed to the start of the uptrend and this is the reason that the stock is now appearing on your stock search. What TA does is shows you what stock is being bought (or not-bought). Purist TA traders would say they don't need to read the news report, because it's already reflected in the stock price on their charts. With TA, you are not likely to be buying in on the low. You don't need to, because in TA, you are not interested in a stock until it is doing something, until it has support.

If I was you, and I pretty much still am, I would not complicate myself too much right now worrying about news, and fundamentals, and all that, since you say you are aiming to be a short-term trader. I did try to keep track of everything, and got confused, and lost faith in everything, and missed trade after trade sweating about which was better, tech, fundamentals, or news?

Company abc crusies along for six months trading between 10c and 32c, one day i look at this stock and it spikes from say 14c straight to 33c with high volume compared to its past history. Do i jump on this based on this? my normal thinking would be no i need to get some confirmation that its on a break out, but by the time i get that i have missed out its already at 40c?

A spike like that is either news, or insider trading. Generally speaking, if a stock jumps significantly (say, 10% or more), I would see what it does tomorrow. If it's still going up, I'd consider it.

Look at OCO on 31st July. It moved from 4.9c to 11.5c - over 100%! (this BTW was in response to a news report about signing some deal with Microsoft in China). But the next day it closed back down at 7c and has been lower since. Due to its down day after the up day, I decided not to trade it.

Compare it to AKK. It also moved strongly on news on 31st July, going up more than 10% in one day. But the next day it opened higher, and kept going. AKK had another advantage, it was already in the midst of an uptrend. So I bought AKK, instead of OCO, and sold a few days later for a 11% gross gain (buy 26.5c, sell 29.5c). I think this shows the safety of buying into a stock that is already trending, not one that has just started its trend.

Advice from a newbie, so take it on that basis.

 

[stink]

THanks All for your replies,

Some good information has been passed on i feel.

Nick, thanks for your input mate but i dont understand that formula at all, would you care to elaborate?

Felix, It seems you and i trade in a similar fashion as in any other stock i would wait until the up trend has started and been confirmed before getting in and as you say there is really noo reason not to do this with spec stocks.

I just need to be aware that the risk is alot higher with specs so have to be prepared for that. I have decided i will use 1k on spec trading just for educational purposes more than anything else that wont be for a couple of weeks though as i want to do a bit on paper first.

Cheers Stink

 

[rub92me]

I created an inidcator called Bang For Buck which defined what stocks showed the best potential when compared to others. The higher the rank, the better the upside possibilities. A high rank does not mean higher probabilty of success.

Here is the formula:

((10000/(Close))*(Average(Range,200))/100);

Nick

Hi Nick, I don't know what code this is written in, but can this be restated as:
(100/(Close)) * (Average(Range,200)) to simplify things?

 

[Nick Radge]

rub92me,
If you remove the "/100" you will get the correct reading.

The original code used an a trade allocation of $10,000 hence the input.

Stink,
All I'm doing is converting the average day's range into dollar volatility. The days range of a lower pruced stock may not match the days range of a higher priced stock in terms of percentage change, but in terms of dollar movement it can create a better reward opportunity for the same risk. A high priced stock such as ANZ has a low ranking because it takes more dollars allocated to the trade to create the same dollar profit than say buying ARQ. Even though the daily range of ANZ is much higher than ARQ, its actually lower when converted into dollar terms. But as I said, its only useful when you have too many opportunities and not enough funds to go around.