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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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