Sunday ended a great team's hopes, two months after the Giants' star receiver shot himself in the foot, so to speak. Plaxico Burress' absence at Sunday's playoff was a contributing factor to the Giants' lackluster loss to the Eagles, as New York failed again and again to gain on fourth downs.There are many ways investors can shoot themselves in the foot. But the chief one is failing to do their homework. Investors may be in for a fall whenever they hand their money to investment managers, who won't disclose their strategies or open their books to outside auditors. Investors who accepted Bernard Madoff's lack of transparency are ruing the day. Blind trust in a fund manager, based on reputation alone, now seems like a quaint idea.
I prefer companies with low P/E ratios, relative to the market. That usually means they trade below 15 times forward earnings per share, making them undervalued. Since the market declines of late 2008, P/Es have dropped. The iShares Russell 3000 Index ( IWV) had an average P/E of 10.8 at the end of 2008. I am finding many promising stocks trading below 10 times 2009 earnings. In P/B ratios, I look for a slight premium, indicating investors see value in the company's assets. The Russell 3000 has an average price-to-book of 1.5. A P/B ratio below 1.0 may mean the market sees trouble ahead. Garmin ( GRMN), which has been a winner for me three times in the past year, has a solid P/B of 1.93. An important criteria for me is return on equity, which tells us how profitable the company is relative to shareholder equity. I'll use blue-chip stock IBM ( IBM) as a benchmark. Big Blue has some of the best returns going: Its ROE is 49.4% for the last 12 months. One of my recent picks -- and a previous winner for me -- is Caterpillar ( CAT), which has a solid ROE of 42.4% for the past 12 months. You won't see much return without evidence the company can generate cash flow. So those numbers usually merit a look. My frequent pick and win Halliburton ( HAL) had $973 million in cash and equivalents on its balance sheet and free cash flow of $342 million at the end of September. The fundamentals help me find a pool of potential picks that are undervalued but in a good position to rise. I turn to technical analysis for evidence that the stock is picking up momentum. I compare the 21-day moving average to the 50-day or 200-day moving averages. Archer-Daniels-Midland ( ADM) won a hefty $7,650 for me in November, just as its 21-day moving average overtook the 50-day average.
Another corporate action that may make it a good pick is the initiation of a bigger stock buyback program. On Monday, DirecTV Group ( DTV) initiated a $2 billion stock repurchase program to punch up its price in a slumping economy. And Microsoft ( MSFT), which won for me three times last year, has resumed huge stock buybacks in recent months. So, check out my newsletter, Nails on the Numbers, because I always do my homework. Always remember: Life is a journey, enjoy the ride! Lenny Dykstra manages Nails on the Numbers, a subscription service sold by TheStreet.com. Mr. Dykstra is 94-0 in his options picks this year. Click here for a free trial to Nails on the Numbers. Mr. Dykstra writes regularly about options trades for TheStreet.com.