The key to value investing is finding a good stock at a good price. Today I'd like to focus on that second issue -- how you can decide whether now is the time to buy or if it's better to wait for a bit.
Let me be clear here: This price check is one of the last things you should do in choosing a value stock. By now you should already have determined that you see long-term potential in the name. But it's also important to decide whether you're getting a real bargain by buying now, or whether you should see how the trends play out for a bit and maybe bring the price down even further.
Below I have listed ten of my favorite methods for judging whether the price is right now.
- Take a look at the chart. Ideally, I look for companies whose stocks have recently based -- shown some consistency after a long decline -- and whose share volumes have been increasing. I also look for identifiable patterns or levels of support.
A pretty good example of this can be found in my Oct. 1, 2001, recommendation of 3Com (COMS) . You'll note by looking at the chart that the stock had taken a sharp plunge in late August from the $5 level. But then it started to level off just below $4, which is where I decided to pull the trigger. This basing of sorts gave me a little extra confidence that the stock had probably bottomed out. End result: I sold it (in my newsletter) in February at $5.12 -- for a 36.5% gain. Never buy into a collapse. If a company has recently announced some really terrible news and the stock is getting pounded, I refuse to buy in until the selling has subsided and the volume has petered out. Remember, there are no medals awarded for being a hero. Your job is to make money. Look for insider buying. Of course, what makes insider buying -- purchases of stock by executives and directors -- an even safer indicator is when they've been buying at lower prices than where the stock is. I feel much more comfortable knowing that top management is in the same boat as I am. A great example of what I'm talking about here was when insiders at Goodrich (GR) stepped up and bought more than 200,000 shares in the open market, just after Sept. 11, when the stock got crushed. I saw this buying, placed Goodrich on my radar screen, then recommended it in on RealMoney.com in February. End result: Since my recommendation, the shares are up about 15%. Look at competitors. Sometimes you can smoke out early signs of an industrywide trend that will affect your picks by looking at their rivals. For example, it stands to reason that the margin pressure being experienced by Intel (INTC) - Get Report could also hurt Advanced Micro Devices (AMD) - Get Report -- and vice versa. Of course, like any other indicator, this one is open to interpretation and isn't a fail-safe signal to buy or sell. But more often then not, stocks move with their group, not against it. Watch the calendar. I say this because some stocks trade in predictable seasonal patterns. If you notice how a stock trades, you can get ahead of the trend and profit from it in a fairly safe manner.
For example, had you purchased Wilson's Leather (WLSN) , which sells leather jackets and the like, each November for the past four years and then sold it in the new year, you could have pocketed 20% a year on average without having to hold the stock through the lean summer seasons. Bottom line here: It pays to know and follow the trend. Watch the window dressing. By this I mean that institutions will, at the end of a quarter, buy stocks that have fared well and dump stocks that have fared poorly to look good to their shareholders. My point is that if you can isolate some big names that are likely to be on the shopping list of a couple of mutual or hedge fund managers, you stand to make a pile of money. This same strategy works for so-called markups, which usually occur at the end of a month when institutions drive up a stock they already hold in an effort to goose their performance. Two stocks where I made a lot of money by taking advantage of window dressing were 3Com and Hilton (HLT) - Get Report, both of which I scooped up for my newsletter after Sept. 11 as funds dumped them. Know your analysts. No matter how solid a company looks, if it doesn't trade above $5 or have a market capitalization of at least $100 million, odds are it's never going to get any Wall Street sponsorship. Sometimes I try to buy a $3 to $4 stock that I think can go to $5 on a given catalyst. Then, when the stock hits $5, it usually gets another bump up, because suddenly the analyst community will flood the market with optimistic research reports. Wait for the bait. You'll find that sitting out a couple of weeks until after a secondary or convertible debt offering is completed can really pay off. Again, my logic here is simple. When an offering is completed, the stock will change hands, and some of the new shareholders will liquidate their positions. But once the selling is out of the way, the stock often pops back in short order. Get on the road show. For those unaware, occasionally company execs will meet with investors to tout the merits of their stock. After the tour is completed, the share price will often rise on the enthusiasm. Clearly, the run-up is often temporary. But I've found that sometimes it does make for a good entry point nonetheless. Get the details. Buy a stock only after the major costs of making a new product or erecting a new plant are divulged. My logic here is that the initial costs and uncertainties associated with these projects may cause the stock to drop. But once the initial fear has passed, investors will start to focus more on the cost savings and incremental revenue they will generate. This in turn could drive the stock higher.
The bottom line, folks, is that determining an entry point is key to your investing success. Doing it right can put you on the road to making money.
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In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Curtis welcomes your