There are many investment styles used by professional money managers ranging from a go-go momentum approach to a more sedate, value methodology. Knowing which style is hot and concentrating on those types of stocks can be a rewarding experience. Although this sounds like a sound approach, it isn't easy to identify which style is in vogue and once it is recognized, typically the majority of the move has already occurred. Therefore, jumping from one style to another can be very frustrating. What makes more sense, is to stick with a proven approach, screen for buy candidates based on the fundamentals unique to the style and then use technical analysis to alert you when the time is right to get on board.
A very popular investment style among those who are seeking bargains in the market is called value investing. The value approach identifies companies that are trading at a discount to the market relative to its future earnings potential. Typically these companies have had a series of problems, which has caused them to fall out of favor. The trick when selecting these stocks is to identify company's whose problems were temporary, the core fundamentals of the company remain strong and the negative situation is turning around.
Market Edge screens its database of over 4300 stocks on a daily basis to isolate stocks that are considered to be value stocks. In order to qualify as a Market Edge 'Value Stock' the company must meet the following fundamental characteristics:
- Price to earnings ratio (P/E) ratio well below that of the market.
- The total assets of the company exceed $50,000,000
- The price is less than 4 times the book value.
- The current ratio is greater than 1.
- The price to cash flow is less than 12.
- The percentage of long-term debt is less than 25% of the company's capitalization.
- The price to trailing twelve months sales per share is less than 6.
The problem with a value approach to investing is recognizing when the company's situation is beginning to turn around. Many value stocks have gotten a lot cheaper before making a comeback with a large percentage falling into bankruptcy. To identify value stocks, which are making a transition, we turn to technical analysis (TA). TA is not a method of predicting the future. Rather, it tracks the transactions of the smart money crowd that typically have advanced information concerning the company's prospects. The methodology assumes that both the public and insider information is priced into a stock and that this combination is expressed through the relationship between the stock's price and volume pattern over a period of time. By using TA to time entry points for long positions, much of the risk associated with value investing can be eliminated. Therefore, in addition to the above fundamental criteria, the following technical characteristics must be present in order to qualify as a Market Edge 'Value Stock'.
- The stock has a Market Edge Long (Buy) Opinion.
- The Up/Down Volume Ratio is bullish indicating the stock is under accumulation.
- The average daily volume is greater than 100,000 shares per day, which assures liquidity.
- The ADXR reading is greater than 20, signaling a strong trend is in place.
Market Edge performs both the fundamental and technical screening process for a value investment approach on a daily basis with the touch of a key. Value stocks with a positive technical slant can be found in the 'Prime Ideas' section under the Advanced Tools module. In addition to value selections, there are four other investment style classifications which include Momentum, CANSLIM, Growth and Bottom Fishing approaches.
The Right Stock At The Right Time®
