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Stock Ratings |
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You may read or do research on your own, and may
think that some of the stocks I recommend
have fundamental issues, or unacceptable PE
ratios. Welcome to the world of investing. All stocks that go a through a price correction have
some sort of a problem; otherwise, they will not be
correcting. My advice to you is to ignore
everything that
Wall Street is saying, telling,
implying, or advising, as
things are not what they seem.
Assuming you are following the Market Gauge, my X score ranking
will single out the most volatile stocks. Furthermore, use of my index scaling technique
through your Position Manager will ensure that your
final average position in each stock will be fairly
close to the final bottom in the stock. You
can take this to the bank. By using a
conservative and constant IPS, as calculated by your
Position Manager, you will slowly and safely add
money as the stock falls in price. Although there
are certainly times when a stock falls below my
comfort level, in general I hope that my average
pick will fall low enough to trigger 2-3 buys per
stock to end up with a decent size position. |
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"Recommend a
few good stocks to me." is probably what most investors ask
their investment advisor. Unfortunately, "good
stocks" often mean a huge downside risk.
While in
theory we all want to invest in "good stocks", the fact is
that "good stocks" face huge downside risks.
To me, a good
stock is just a stock that hasn't blown up yet. In my
experience, the percentage of stocks which have experienced
train wrecks after spectacular runs is just too high to take
the risk.
Let's
take StockScouter, which is a stock rating system, and let's use PFE
as an example.
Now
as you can see below, StockScouter has a 4 level stock rating system, and currently
ranks PFE as follows: |
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Fundamental |
StockScouter gives PFE a nice A as a fundamentally
very sound company. |
A |
|
Ownership |
However, it gives PFE a bad F rating for the fact
that it had recent insider selling. |
F |
|
Valuation |
In
addition, it also gives PFE an F for its PE
ratio. |
F |
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Technical |
Lastly,
it gives PFE another F rating for its lousy technical
picture. |
F |
The only possible time a company would get good rating
on all 4 counts is when all is hunky dory. So, if a company
is doing great, then it would get an A for fundamental, an A
for Ownership, an F for Valuation, and an A for Technical.
The only problem with that is that it will no longer be a
"good" value
stock.
Here is how it really works.
First,
the stock takes a dive.
There is
always a reason why a stock is taking a dive, and therefore
it is not likely to score well on fundamentals.
Obviously, since management is close to the action, insider
selling is always part of the equation.
Funny but true, the
PE ratio
is
often unreliable when bad
news hits.
Lastly,
when a stock takes a dive, the technical picture is never
pretty. |
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While PFE is currently not considered
to be a "good stock", I think it has a better risk
reward ratio than most good stocks. Now that the story is
out, and PFE has taken a hit, it has a better upside potential and less risk. |
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Wisdom:
Avoid all stocks that are subject to
regulatory injunctions, Attorney General lawsuits,
product deficiency and fraud class action lawsuits.
Staying away from companies facing
heavy litigation is justified by the following
reasons:
Senior
management will be heavily distracted by
depositions and lawyers' meetings and will
be out of business focus for a while.
Financial losses
incurred in the stock markets may trigger a
rating review of the corporate debt by the
rating agencies, leading to more stock
losses.
Financial fines
and unfunded/uninsured damages will take a
toll on the balance sheet.
Once the legal
matters are resolved and damages assessments
and fines are paid off, then one can revisit
the issue. |
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