Editor's note: The Aggressive Stock-Picking Training Program is a series of six weekly assignments. Each assignment is based on one of James Altucher's strategies in his book, Trade Like a Hedge Fund. To get a copy of the book, click here.
This assignment was written by Stockpickr member Ira Krakow.
The most obvious advice for trading stocks is "buy low, sell high." So why not start with stocks that are hitting their 52-week lows, pick those that have been unjustly beaten down (and are due for a rebound) and buy them? Indeed, variations on such a strategy are part of the arsenal of many a
hedge fund professional.
Psychologically, buying a stock when it's at its low is difficult. The doom and gloom about the company is everywhere, from the office water cooler to the television news. If you're buying the stock as it hits its 52-week low, frequently you're going against your gut instincts, as well as the opinions of all your friends. That's where it pays to put on that green eyeshade and calmly analyze the situation. Many times what appears to be the perfect storm is in fact the perfect buying opportunity.
Here is your first professional-grade assignment as a hedge fund trader in-training: Pick the best stock buy on the 52-week low list.
. Check out the latest
. Read the "Reason for picking" box for the first five stocks in the portfolio to see why each stock made the list.
. Build a Stockpickr portfolio of these five stocks. Title your portfolio "52-Week Low Analysis:
Your Stockpickr Username." (To create a portfolio on Stockpickr, you'll need to first log in. If you're currently not a Stockpickr member, you can register at
. Review the
fundamentals on all five stocks. As you do this essential homework, write your observations in the "Reason for picking" box. Ask yourself whether you are buying the stock based on fundamentals or on the price action you believe will happen in the next few days.
. Compare this list of holdings to the 52-week lows list for that day, which can be found on most financial Web sites. If there are any stocks on that list, add them to your "52 Week Low Analysis" portfolio.
. Choose which one stock you would buy at the open of the next trading day. Note the
closing price in the "Reason for picking" area. When the stock opens the next day, note the
opening price in the "Reason for picking" box.
. Repeat steps 1 through 4 for the next three trading days. Add to your "52-Week Low Analysis" portfolio. Did you come up with the same reason for picking the top stock to buy, or did the reason change from one day to the next?
. Test your results (on paper). If you had sold the stock at the close of the next day, did you pick the best performing stock? What about three days after the close, or five days after?
Professional investors are constantly testing their ideas, because what worked today or in the past may not work in the future, especially when too many other investors catch on.
Trade Like A Hedge Fund
describes many variations on the "buy low" theme, including "The 10 Percent Down -- Panic 101 Strategy," which is: Buy a stock that closed at 10% lower than the prior day's close and sell it at the end of the current day. Why? The idea is that a stock that closed down so much lower is due for a bounce back.
Search Stockpickr for other portfolios that include "52-week low." You may find both professional and nonprofessional portfolios. Read the "Reason for picking" box. Do your reasons match theirs?
Also, see if the 52-week low stocks appear on the following Stockpickr portfolios:
- Today's Hot List: This daily list is a must-view at midday each day to see what stocks are making the biggest moves and why.
- Biggest % Losers: This is a list of stocks that lost big the day before, because they can snap back hard. When you check this list on Stockpickr, you can see which stocks are owned by the quality hedge funds and mutual funds. Pay attention to those. They will be buying at the lower prices, so you should be also.
- Stocks Most Likely to Surprise: This list features stocks that have gone down at least 10% in the last year but may be poised to surprise on the upside. In addition to being 10% down, a stock must have a PEG ( P/E ratio divided by growth rate) of less than 1 and an analyst rating of buy or strong buy to make the list.
If the stock appears on several lists, this gives you additional reasons for buying. You can then come up with your own trading strategies. You should, of course,
back test any strategy you develop before using it with real money.
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