Financial Figuring

So how does one go about picking a good company to invest in? Some people analyze all the numbers (revenue, sales, profits, earnings per share, P/E ratio and on and on). This is called Fundamental Analysis. Other people look only at the price of the stock thinking that anything worth considering is already reflected in the price. These people are using what is called Technical Analysis and are often looking for patterns in the price charts. Both methods have merits and to be perfectly honest I try to use a bit of both before I make any purchases.



I find that fundamental analysis can convince you that you’ve picked an excellent company but you may end up buying at the wrong time. Once you’ve decided upon a company put it on your watch list, which is just a list of companies that you are interested it and are considering for investment. At this point I would open up a chart and examine the price trends. This can help you discover if the timing is right for your purchase. Keep in mind this is really an art, not a science, you are dealing with expected probabilities not hard and fast rules.

I will post more on both Fundamental Analysis and Technical Analysis over the next couple of weeks, but I think that there is a more (pardon me) fundamental question here. Namely, how do you find a company to begin your analysis?

There are as many ways of doing this as there are investors. One of the best is to begin by looking around your home. What do you use all the time and can’t do without? Does your neighbour agree with you? What about your friends? Do they use the product too? Would you still buy it if you lost your job? OK, who makes it? Now you have a company to investigate.

Often this will produce a company that is huge and a proven winner. Like Proctor & Gamble (makers of every day consumer goods) or Apple Computer or even Wal-Mart. No doubt these are good companies to invest in, but they are already pricy. One way to find a smaller company that has a chance to really explode on the scene is to identify a supplier to these companies.

Just like in the Klondike it was the suppliers to the miners – those people and companies that supplied the picks and shovels – that were the biggest winners. Sure a lucky few struck it rich and drew thousands of people to try their luck, and every single one of them bought a shovel and a pick (and a back up in case one broke out in the bush).

Apple Computer and Wal-Mart are two companies that have already “struck gold”. Shares of Apple more than doubled in 2009. They’ve soared more than 1,000% over the past 10 years. Apple produces the iPod and has sold hundreds of millions since their introduction a few years ago. It is one of the greatest business stories – and greatest stock moves – in history. What do you think happened to the stock price of the company that supplied Apple with the little scroll-wheel feature on the iPod? The company is called Synaptics and its stock jumped from $2 to $40 for a nice little gain of 1,840%

Wal-Mart too has a great story of massive growth. A few years ago Wal-Mart announced that it would put a little tiny radio frequency tag on every single product in every single store. This would help out with managing their supply chain and increase their efficiency and therefore positively affect their bottom line. What do you think happened to the company that supplied those millions and millions of RF tags and readers? You guessed it; Intermec went on a $14 to $39 sky-rocket.

The trick of course is finding out who supplies the critical piece of hardware for the latest must have gadget. But you can do this with a little research at Yahoo Finance and Google, by reading news reports and keeping your ear to the ground.

This article is written substantially from material gathered from the great staff at All About Trends and has been reprinted with their permission. Thanks very much for all your help and support.

PULLBACK OFF HIGHS — On the longside it’s the only pattern you’ll ever need to know.

The Pullback Off Highs (POH) pattern is one of the most bullish and constructive long-side set-ups out there. Rather than go straight up, an index or stock will make a move higher, then spend some time consolidating those gains often down to an area of chart support such as its 50-day moving average, before making another move into new high ground.

When a stock clears these consolidation periods, it’s your opportunity to buy them and take advantage of the next run — and the bonus part is when you catch a stock at the beginning of a new uptrend, you’ll often get to trade the stock and lock in profits over and over again. You are buying it at the point where it’s just started a new move and is near support which minimizes your risk. Here’s an example:

ABVT — Abovenet

In the chart above are 3 things you ALWAYS want to be on the lookout for:

1. The stock is in a clearly defined uptrend and above the 50 day average.
2. The stock pulled back to trendline support in green. Trendline support also happens to be the 50 day average.
3. Full stohcastics were in oversold position (Green circle).

Once you see those things there is only one thing you need to know after that. That is to draw a trendline (Pink) off the most recent highs as shown. That is what we commonly refer to as a Pullback Off Highs Line or POH for short. Then it’s all about an upside crossover of that line. That crossover is you’re longside entry.

On the longside of the market you now know why they really are the only chart pattern you will ever need to know.

Thanks very much David and I thought that I would include a follow up from the article to see how ABVT did in the following weeks from that upside crossover of the pink line in the first week of December 2009. As you can see, even if you had waited until the day or two after the crossover and bought around $54 you still would have enjoyed a large move all the way to $66 in just three weeks. It doesn’t always work like that, but in this case it did. Usually though you would place your buy order as soon as it crossed over the pink POH line.



Like David at All About Trends says it’s the only long side chart pattern you will ever need to know.