Maybe itâs because I grew up as a poor country boy, but I hate to overpay for something. I like to spend money and reward myself for my hard work, but I canât stand overpaying. I feel the same way about buying a stock. I want to own the leading stocks in the leading groups, but I donât want to overpay for them. The best way to see the real price you pay for a stock is by looking at the Price to Earnings Ratio. The core of my trading is based upon William OâNeilâs CANSLIM methodology, but this is one area where I do not concur with his advice. I look at the PE ratio as an additional form of leverage I can employ to my advantage in a growth stock, let me explain. A stockâs price can really go up (long term) for only a few reasons. The major reason is an increase in earnings which makes the underlying shares more valuable. If a stock has earnings of $1.00 per share and has a PE of 30 it will trade at $30.00 per share. If the stock grows at 30% the earnings will be $1.30 the next year and assuming the same PE the stock will trade at $39.00 per share. A nice gain of 30% will be shown on your account. However, if you find a stock that is under owned by institutions the same stock might have a PE of 10 and thus it will be trading at $10.00 per share. It is also growing at 30% per year, but you find it before Wall Street. Once Wall Street does get turned onto the stock there is likely to be a rapid inflation of the PE. By the end of the year perhaps the PE is up to 18, and so having grown earnings to $1.30 you are now sitting with a $23.40 stock. So here by focusing on the leverage a low PE can provide you, you have gained 134% as opposed to 30%. I will trade stocks with high PEâs, I will not invest in them.
The major indexes started off slightly lower on Friday, but technology stocks soon recovered their footing on positive economic data and lead the market higher. The NASDAQ Composite gained 24.07 points to close at 2,085.34, while the S&P500 gained 10.69 points and closed at 1,184.17. Volume was heavier across the board, 1.99 billion shares changed hands on the Nasdaq, an increase of 14%, while on the NYSE 1.53 billion shares traded, an increase of 10%. Market breadth was very positive, with advancers leading decliners on the NYSE by 3 to 1, and on the NASDAQ 19 to 12. Jeff Semmelâs Tradingscans.com is showing 416 one month highs and only 10 one month lows. This is showing us an extremely positive tape.
I think that the market is very healthy at this point, but it needs to rest a little more than it got. This of course does not mean we can not or will not go higher, it just tips the risk scales in a slightly less favorable direction. I currently have 60% long exposure, which is fairly high for me. Should the markets get a better resting period I will increase it slightly. For the most part I will continue to work with the list of leading stocks I have been giving here for the last month or so.
Leading stocks: EWA, EWA, EWC, IWD, IWS, GGC, UPS, UTIW, VIP, CME, HMT, ABFS, CREE, MRVL, PGR, FPIC, RSTI, CNCT, NATR, JOE, AAPL, WYNN, CME, PAAS. Oil stocks are starting to give potential setups on the long side, IYE for example looks great. If the price of Oil heads higher again and stays there, that is a major negative for the market. Short of another terrorist attack I see Oil as the major risk we face at this point for the market. AIG looks like a great short. I think it has about a 30% chance of working out if it breaks lower, but we have about 50 cents of risk and $5 + in upside. Iâll take that trade every day.
Brandon
PS, Iâm going to start sending out specific picks and a portfolio for paid members starting on January 3rd. It will look like the write up on NATR which was in the 31st of October.
The major indexes started off slightly lower on Friday, but technology stocks soon recovered their footing on positive economic data and lead the market higher. The NASDAQ Composite gained 24.07 points to close at 2,085.34, while the S&P500 gained 10.69 points and closed at 1,184.17. Volume was heavier across the board, 1.99 billion shares changed hands on the Nasdaq, an increase of 14%, while on the NYSE 1.53 billion shares traded, an increase of 10%. Market breadth was very positive, with advancers leading decliners on the NYSE by 3 to 1, and on the NASDAQ 19 to 12. Jeff Semmelâs Tradingscans.com is showing 416 one month highs and only 10 one month lows. This is showing us an extremely positive tape.
I think that the market is very healthy at this point, but it needs to rest a little more than it got. This of course does not mean we can not or will not go higher, it just tips the risk scales in a slightly less favorable direction. I currently have 60% long exposure, which is fairly high for me. Should the markets get a better resting period I will increase it slightly. For the most part I will continue to work with the list of leading stocks I have been giving here for the last month or so.
Leading stocks: EWA, EWA, EWC, IWD, IWS, GGC, UPS, UTIW, VIP, CME, HMT, ABFS, CREE, MRVL, PGR, FPIC, RSTI, CNCT, NATR, JOE, AAPL, WYNN, CME, PAAS. Oil stocks are starting to give potential setups on the long side, IYE for example looks great. If the price of Oil heads higher again and stays there, that is a major negative for the market. Short of another terrorist attack I see Oil as the major risk we face at this point for the market. AIG looks like a great short. I think it has about a 30% chance of working out if it breaks lower, but we have about 50 cents of risk and $5 + in upside. Iâll take that trade every day.
Brandon
PS, Iâm going to start sending out specific picks and a portfolio for paid members starting on January 3rd. It will look like the write up on NATR which was in the 31st of October.
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