This column was originally published on RealMoney on May 10 at 10:00 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
There are two sides to the investing coin: One is how strong the company is from a fundamental perspective; the other is how strong demand is for its shares. The former requires financial analysis; the latter, technical analysis. The best investments are those where both sides are in alignment.
The market moves fast and I like to make decisions quickly. Financial analysis is complex and takes time, so I don't try to reinvent the wheel. I use the
Investor's Business Daily
rating system to identify fundamentally strong companies, particularly the earnings-per-share rating.
Stocks are rated on a 1 to 99 scale (99 being the best) comparing a company's earnings-per-share growth on a current and annual basis with all other publicly traded companies. Stocks with EPS ratings of 80 or above have outperformed 80% of all publicly traded companies. The EPS rating combines each company's most recent two quarters of EPS growth with its three- to five-year annual growth rate.
If I get a rating of 75 or above and the chart is setting up for a continuation of an uptrend, along with supportive volume, I'm good to go. Using this system allows me to analyze the most suitable stocks for investment -- quickly.
Koninklijke Philips Electronics N.V.
fits this profile. Since December, Philips has been trading between $30 and $35, while putting in higher lows at $30.62 and $32.21.
Philips, a global electronics company based in Eindhoven, the Netherlands, is focused on health care, domestic appliances, consumer electronics and semiconductors. It has a market cap of $40 billion.
The fundamental trends in play for Philips are bullish, to say the least. It has a very strong
Investor's Business Daily
EPS ranking of 95 out of 99, with a whopping annual growth rate of 277% over the last year.
One more factor to consider is that Philips is 15% overvalued according to the ValuEngine model. I find that overvaluation ratings are very helpful when considering whether to sell. They can give a very strong reason for taking profits on weakness.
However, overvaluation shouldn't necessarily keep you from buying stocks, because they will continue to be overvalued as they go up. I prefer to be in the trade, while keeping my finger firmly on the trigger in case selling is needed -- that is, if the stock's price action indicates that the trend is reversing.
I see strong upside potential for Philips -- its strong fundamental profile is complemented by the equally strong technical pattern forming on the chart below.
Philips has traded as high as $50. A strong breakout above $35 should get the stock back to that level, as it is the next level of resistance. For an entry here, I'd use $30 as a stop. Any drop below this level would signal a reversal of the trend.
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Michael Soni is president and CEO of Cronus Capital Markets where he developed the benchmark ISE-CCM Alternative Energy Index (POW), ISE-CCM Homeland Security Index (HSX) and ISE-CCM Nanotechnology Index (TNY) in partnership with the International Securities Exchange. Prior to founding CCM, Soni managed money at Scotia McLeod. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Soni appreciates your feedback;
to send him an email.