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Bargain Hunting

Are there bargain stocks out there?  You bet there are!  So how do you find them?  First letís 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 youíll 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 didnít 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 isnít going to turn a profit this year or next year, you probably shouldnít be adding it to your portfolio at this time no matter how cheap it is.       

The place to start is with a stockís 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 arenít 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.

Analystís 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 firmís 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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