Hello Friends! Thanks so much for stopping by and reading my BLOG. I almost get the feeling that I am getting to know some of you. I mean MAYBE there is something to what I am writing! As always, PLEASE remember that I am an AMATEUR investor...honestly...so do your own investigations of all of the stocks I discuss on my blog, and consult with your financial advisors regarding the timeliness and suitability of all investments discussed!
Jason M. responded to my post with:
here is another question.
i often feel overwhelmed by just the sheer amount of
stox out there to pick from. how do you go about
looking for the stox you choose?
Well Jason, let me use an example from a stock today and see if I can walk you through my thought processes. Basically there are two methods of picking stocks...I will refer to them as a "top-down" as opposed to a "bottom-up" approach. Top-down investment decisions are made after you read something or heard somebody mention a stock, or even read a BLOG where a stock was described...and you decided that you were convinced about that stock and decided to invest in it. Bottom-up approaches are what I would call "screening" techniques. That is you first set up parameters, or characteristics of the kind of stock you would like to invest in then go to the market to see if any stocks out there fit you criteria. I hope you are following me.
My approach, I hope, is a "bottom-up" approach. I am looking for stocks with certain criteria. What are they? If you read through the Bob's Advice for Stocks homepage, you will see some of my criteria listed.
The first place I look for a stock to "pick" is the "Price % Gainers" which can be found on different online services. I like to use the Money.cnn.com site...but sometimes use the USA Today "% increase in Price" information.
Why do I start there? I have found in my experience, and I have NOT verified this statistically but this is my belief, that stocks that make large percentage gains in a particular day, MAY be stocks which later on go on to appreciate greatly. This also reduces my need to screen ALL of the stocks a given day. I restrict myself to the stocks on the lists of largest % gainers.
Today, I came across SYNA on the NASDAQ % gainers lists. Currently, as I am writing this note, SYNA is trading at $17.69, up $2.77 or 18.57% on the day. It does turn out that I do own some shares of SYNA, I am not sure how many quite frankly, in a managed account that I do NOT make decisions in regarding which equities should be purchased or sold. It is my policy, as much as I can remember, to point out whether I own shares in a stock or not. I really do wish to have full disclosure on this website, and that is why I also post my trading portfolio...and let you know about my brilliant trades and my flubs.
What is my next step? Well, first, I tend to start with the stocks over $10. Especially with my 8% sell point, a low-priced stock just has too much volatility and I tend to hit sell points quickly. Just my preference. Anyhow, I check with Yahoo.com to see if I can find a recent earnings report. I demand of my selections that the latest quarter earnings be a positive results AND that revenue has GROWN from the prior year. I believe that the BEST stocks, the HIGHEST QUALITY stocks, are the ones that growth their revenue each and every year (as much as possible) and ALSO grow their earnings.
Above all, this is NOT the only or even necessarily the BEST way to pick stocks. I do not know if this method even works long term (!). This is just the method that I am currently using. I believe it makes sense and I am trying to use it to make investment decisions.
One of the first things I look for is WHAT the company does. For this I find the "Profile" on Yahoo.com, which for SYNA, the Yahoo "Profile" for SYNA shows that they are "...a worldwide developer of custom-designed user interface solutions for notebook computers." Further down, they note that they are the ones that manufacture the "TouchPad" I believe for the IBM notebooks.
So back to SYNA. Yesterday, after the close of trading, SYNA reported 3rd quarter earnings. Over and over again I have found that if a company reports good earnings the stock price JUMPS. And that is what happened with SYNA. First what about revenue? Net revenue for the third quarter was $34.3 million a 31% increase over the $26.1 million the prior year. And earnings? They came in at $3.5 million or $.13/share, a 69% increase over $2.1 million or $.08/diluted share the prior year. These are GREAT results.
Next, I like to look a little longer term. I make these possible investment ideas "jump through hoops" before I post them! I have found that Morningstar.com is a WONDERFUL free service (the basic service) that provides me with a lot of information that I incorporate into this BLOG. On this site, the most helpful for me has been the "5-Yr Restated Financials"...which for SYNA is found here. (I assume you are sophisticated enough to know that all of these different color words are LINKS to other sites that I am referring to.)
The Morningstar site shows that first, the company has had great revenue growth more than just the most recent quarter. In fact, they have increased revenue fairly steadily from $29.8 million in 1999 to $118.2 million the trailing twelve months.
How about earnings? This is something I also like to check. Since data starts in 2003, I assume that SYNA started reporting these results as a public corporation since that date and in fact increased from $.31/share in 2003 to $.41/share the trailing twelve months (the TTM).
And Free Cash Flow. Why do I think that is important? I am old enough to remember the many dot.com investments that had LOTS of cash received in an IPO and didn't have any real earnings. They (analysts) used to talk about the "burn rate", that is how fast companies were USING UP their cash. I just want to make sure that a company I suggest, or invest in, is CREATING cash and not BURNING it up!
For SYNA, we can see the row of figures under "free cash flow" which shows NEGATIVE cash flow in 2001 of $(3) million improving to positive cash flow of $12 million in 2002 and $10 million in 2003, and $12 million in the trailing twelve months. This also gets a passing grade! Cash flow is positive and at least steady. It is even NICER if cash flow, in my opinion, is GROWING!
The next thing I look at is the Morningstar.com "Balance Sheet" figures. Simply put, does the company have a lot more ASSETS than LIABILITIES? And how about CASH? For SYNA, we can see that Morningstar is reporting $84.1 million in cash and $25.2 million in other current assets. But this is only significant when we contrast this with their liabilities, things they have to PAY out! For SYNA, their current liabilities are only $17.7 million (things they need to pay in the next twelve months) and the long-term liabilities are a nominal $2.3 million. The balance sheet looks GREAT!
Next place I like to look is VALUATION. That is, is the price REASONABLE, are you getting a good deal by buying this stock? For this I look under "Key Statistics" on Yahoo Finance section for stocks. I think if you explore Yahoo, you will see this along the left hand page of the quoe section. For SYNA, this is located here. And WHAT do I look for? I like to see what kind of Market Cap the company has...which is the value of the entire company found by multiplying the # of shares by the stock price. For SYNA, the market cap is $438.76 million.
Next, what is the p/e of the stock? That is how much price to you have to pay for a given earnings amount. For SYNA, this is 39.64, with a forward p/e of 30.10. This indeed sounds pricey, but a better indicator is what kind of price/earnings "multiplier" are you paying...when adjusted for growth. The closer the PEG or price/earnings/growth is to 1.0 the better. For SYNA, this PEG is at 0.99 which is GREAT. The price/sales is another ratio some people review, I do not find it as helpful but for SYNA, this is at 3.12. Usually, this is more helpful for "retail" stocks...like BBY, or COH, etc.
Finally, how many shares are outstanding? And what is the float...gives you an idea of the liquidity of the shares....for SYNA, there are 24.70 million shares outstanding and 17.50 million of them that float. And the Short Interest, which for SYNA is 1.34 million shares which represents 2.902 trading days as of 3/8/04....tells me how many people, traders, have sold the stock short...that is BORROWED shares speculating that the price would DROP. These shares need to be re-purchased at some point, and if the short interest is HIGH, then the possibility exists that a short "squeeze" could occur. That is, a RUSH to purchase stocks by speculators who borrowed shares to sell first...on the heels of GOOD news driving the stock higher. Do you follow?
Next, I like to see if the stock pays a dividend (NO)...this is an added bonus if present and see if any stock splits have occurred recently (again NO) for SYNA.
Lastly, I have started looking at some technicals, by checking the free charts on Stockcharts.com. I like the Point and Figure charts which give a feeling for the "ebb and tide" of the stock price. (did I say that right?)...For SYNA, this is found here. We can see that this stock, which was trading lower, broke through the red line we call the "resistance line" (the blue line is the "support line"), about June, 2003 at about a price of $12.5 and has traded higher since, although it appeared to be possibly breaking down in early March 2004. Overall the graph looks fine.
So this is what I do. PHEW....and do it quickly! When I have found a stock I like, I gather together the online pages, and start writing. Thank goodness I do not have writer's cramp! But I might get carpal tunnel instead! lolol. This stock looks GREAT. As I pointed out, I do happen to have a few shares elsewhere. I do not purchase any additional shares for my trading account until I sell a portion of an existing position at a gain...just one of my rules, and I plan on a maximum of 25 positions...I believe I am up to 22.
I hope this long-winded answer was helpful to you! If you or anyone else has any other comments, questions, or words of encouragement, please feel free to email me at firstname.lastname@example.org
Posted by bobsadviceforstocks at 1:20 PM CDT | Post Comment | Permalink