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Bargain
Hunting
Are
there bargain stocks out there?�
You bet there are!�
So how do you find them?�
First let�s define what a bargain stock is and what
it is not.� A
bargain stock is not a stock that is simply down 80% from
its March highs.� Because
some stocks down 80% are just waiting to be down 90%, and
if you get in now you�ll suffer a 50% loss of capital while
it moves down another 10% off its highs for the year.��
A bargain stock is a stock that has been caught in
the downdraft that has brought down all the stocks in an industry
even when their fundamentals didn�t justify them being beaten
down.� Like a
fish caught in a flash flood, some stocks are going downstream
whether they deserve to or not.�
Face it, if a no-name stock is down 80% in nine months,
and isn�t going to turn a profit this year or next year, you
probably shouldn�t be adding it to your portfolio at this
time no matter how cheap it is. ������
The
place to start is with a stock�s earnings.�
First make sure they have earnings (vs losses,
although
many big-name stocks still move well even without current earnings).�
Scanning the financial page or using a computer database
looking for stocks with positive P/E ratios can be a good starting
point.� Stocks not
generating profits will have a P/E ratio that is left blank
or noted as NM (non material).�
Negative P/Es like those listed on AOL are a calculation
quirk and should be disregarded.�
Low P/Es aren�t necessarily best.�
Most stocks trading at less than 5 times earnings have
a good reason to be at these levels.�
Stocks with a P/E between 5 and 20 are good stocks to
look at.� Comparing
the P/E of a stock with the average P/E of the sector it is
in can give you a hint of stocks to look at.�
Another key is to look at how the earnings estimates
have changed over the past 90 days.�
Have analysts raised or lowered their estimates for the
current quarter, next quarter, this fiscal year, and the next
fiscal year.� A
company that has had its earnings estimates raised is a good
sign of good things to come.
Analyst�s ratings on a
stock can also offer some visibility.� If analysts have recently lowered ratings on a stock this is
a red flag, or if analysts have raised their ratings this
can be a positive clue.�
You need to be cautious, because sometimes a reduced
rating on a stock can occur as an analyst downgrades an industry
as a whole, possibly sweeping strong individual companies
into their general downgrade.�
New buy or strong buy upgrades mean the analysts will
act as cheerleaders to the firm�s sales force.�
Analysts initiating coverage on a stock also hints
of another cheerleader pushing the stock higher.�
These are a few clues on how to find undervalued stocks.�
There are certainly more parameters to look for, but
these are a good place to start.
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