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How Markets Really Work
by Laurence A. Connors identifies many fascinating stock price patterns, and many of the repeating price patterns can be used both by short-term traders and long-term investors.
Connors suggests that buying strength and selling weakness is not always the best choice. As an investor, many factors make up the decision process in allocating capital.
Unfortunately, many investors' reasoning doesn't hold water. Metrics commonly used or at least cited include: Price-to-earnings ratio, revenue growth, earnings growth, etc.
The common metrics have their place and are important for finding a "nail sticking out"/red flag, but when push comes to shove, my impression from years of trading is that most investors use emotion to drive their decisions and follow up with statistical metrics to justify their trades after the fact.
In the age of cheap computer power (either physically at your location or through a cloud service), excuses for not knowing your chances of success melt away fast. It's easier than ever to know what to expect based historical results.
As an investor, I rely on computers to generate statistical probabilities to aid in my research. One valuable tidbit in Connors' book is that bullish stocks that have recently pulled back in price tend to outperform those that are making fresh highs. Old traders like me know it as "buy on dips," but Connors takes it one step further and tells you exactly what a "dip" is.
All of the following companies pay a dividend and are now "dipping" in price. Most pay a relatively fat dividend and have other valuable qualities that are worthy of your consideration.
: Medtronic manufactures and sells device-based medical therapies worldwide. Medtronic trades an average of 4.4 million shares per day and has a market cap of $42 billion.
: $33.11 to $44.79
Earnings Payout Percentage
As a result of the recent price decline, investors are receiving a yield of 2.5% for a total of $1.04 in dividends per year.
Shares are now slightly lower in the last month of trading. Shares are about breakeven at 1.6% less than a month ago. The drop in price offers us the dip that makes the timing aspect of Medtronic attractive.
Medtronic appreciated a very bullish 19% in the last year, and the average analyst target price for Medtronic is $45.16. Will Medtronic reach the target price? No one can say with certainty, but I think Medtronic has a great prognosis.
There is almost zero desire by short sellers to move against this stock. Short interest hardly moves the needle at only 0.9% of the float.
: U.S. Bancorp is a financial services holding company. It is the parent company of
. U.S. Bancorp trades an average of 8.4 million shares per day with a market cap of $62 billion.
: $23.72 to $35.46
Earnings Payout Percentage
I really like U.S. Bancorp as an investment and use the bank for my personal banking. The customer service is top notch, and the stock is top-shelf. Travis Kraker epitomizes the gold standard in relationship building that other investment advisers should strive for.
U.S. Bancorp pays out 78 cents annually in dividend payments, and even with a 2.4% yield, the payout rate is under 30%. Look for a dividend increase next year (March maybe)?
Shares retraced 1.4% from a high of more than $35 a month ago, presenting investors with a buying dip opportunity. If U.S. Bancorp approaches the climbing 200-day moving average much more, the price-to-earnings ratio may fall into single digits. U.S. Bancorp is a classic value buy, and outside a strong move lower from an outsized event, the risk appears limited.
For a company analysts mostly rate as a hold, the stock really appreciated, gaining 26% in the last year, and the average analyst target price for U.S. Bancorp is $36.75.
Short-sellers are next to impossible to find with just 1% of the float short.
: Abbott Laboratories is a global, broad-based health care company devoted to discovering new medicines, new technologies and new ways to manage health. Abbott Laboratories trades an average of 6.4 million shares per day and has a market cap of $103 billion.
$52.05 to $72.47
Earnings Payout Percentage:
Abbott pays a large $2.04 annually in dividend payments. The yield is 3.3% and makes Abbott an almost must own for retirees trying to make it on investment income.
In the last month, shares have pulled back 2.6%. The new discount in price provides the buying dip for exposure to a portfolio-performing 3.3% yield.
Abbott is in a strong bullish trend. The shares have moved 21% higher over the last 52 weeks. Expect more upside as analysts are calling for a price target of $71.36.
Short-sellers are next to impossible to find, and 0.6% of the float is short based on the last reported numbers. Of course, I wouldn't include a stock that the smart money believes has more downside than upside potential.
Apple designs and markets mobile electronic devices, personal computers, and portable digital music players; and sells related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide. Apple was founded in 1976 and is headquartered in Cupertino, Calif. Apple trades an average of 16.7 million shares per day with a market cap of $567 billion.
$363.32 to $705.07
It's not a big secret I am an Apple bull in my
Buy on Apple's Dip Ahead of Earnings article.
Shareholders receive a big $10.60 annually in dividend payments, but with the stock price as high as it is, the yield is "only" 1.8%. I tend to stick with stocks with yields of more than 2%, so you can wait and see whether the stock continues to retrace, allowing for a 2% yield entry or go for it now. The primary attractiveness for Apple is the company's stock fell to a near single-digit earnings multiple.
The forward earnings multiple comes from the generosity of sellers letting the price retrace over 7% in the last month. We now have the world famous and calorie-free "Apple dip" within our grasp. If you question how tasty the "Apple dip" is, pull up a weekly chart on Apple and look at each dip over the last five years. The "Apple dip" is one of the most consistent chart patterns in the last five years.
The last reported short interest is only 1.7% of the average trading float. The smart money doesn't believe Apple will continue falling, should you?
If you ask me "what dip are you talking about" I understand. Shares have really appreciated, gaining 49% in the last year, and the average analyst target price for Apple is $767.83. The current drop from $700 is our opening.
AT&T Inc. is a premier communications holding company. Its subsidiaries and affiliates, AT&T operating companies, are the providers of AT&T services in the U.S. and around the world. AT&T trades an average of 24 million shares per day with a market cap of $198 billion.
: $27.41 to $38.58
Earnings Payout Percentage
After three solid weeks of discounting in share price, Ma Bell remains in a bull trend, albeit one that is now on sale. After falling 6.3%, and testing the 200-day moving average, the forward price-to-earnings multiple is near a very conservative 13.
The payout percentage is elevated and a concern for ongoing dividends, but next year's earnings are expected at $2.57 per share, lowering the payout ratio to less than 68%.
I consider 68% a very high number, and as a result, I don't feel the need to pound on the table and declare this the ultimate buy. I also anticipate the massive $1.76 in annual dividends isn't likely to increase soon, but hey, it's yielding 5.1%, so it doesn't have to increase soon. It's already "increased".
AT&T gained 18% in the last year, and while Ma Bell may not be my favorite in this group, it certainly earned its place here.
Forget about finding any short-sellers. Short interest is so low I only include it to demonstrate the smart money is not betting against this company. Just 0.8% of the float is short based on the last reported numbers.
General Electric is one of the largest and most diversified industrial corporations in the world. GE makes and sells products for the generation, transmission, distribution, control and utilization of electricity. GE trades an average of 41 million shares per day with a market cap of $222 billion.
$14.68 to $23.18
Earnings Payout Percentage:
GE dropped more than 5% in the last month. For those who bought at the top, ouch, but I wouldn't get too excited about selling here and taking a loss. I believe GE is now on sale and ready to move higher.
If GE doesn't move higher, you will "have to" settle for the oversized and relatively safe 3.2% yield. That's a big yield in a world with near zero inflation (if you think the government numbers are accurate anyway).
Even after losing 5% recently, the one-year gain is over 20%. GE appears to offer much more upside. Analysts are calling for a price target of $24.86 per share. I think they have it too low, and I think a one-year price target closer to $27 is more likely.
GE has beaten estimates in three out of the last four quarters, and with next year's earnings estimate of $1.71 per share, the P/E is less than 16. GE is a great name with growth and leadership for only 16 times forward earnings.
Short-sellers may be paying attention to GE, but they are not shorting it, and just 0.6% of the float is short based on the last reported numbers.
What is better than buying a bull-trending stock paying a large dividend? How about a bullish dividend-paying stock on sale?
At the time of publication the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.