Let’s look at fundamentals and charts. (October 26, 2012)

by DAN SP-500 DJ-30 DJ-20 NDX--X QQQ CF PBI AAPL PBI AGU ARMH EBAY FMX MRX IDCC LKQ DLTR LKQ 
I’m Dan Fitzpatrick at StockMarketMentor.com. Rather than give you the Chart of the Day, the freebie, I’m going to give you the video that I gave all of our members this week. The video itself is explanatory so I hope you enjoy it; it’s almost a half an hour long, but I think you’re going to find it useful and also if you haven’t tried Option Market Mentor yet you’ve got 30 days risk free so I want you to check that out if you find this video interesting. All right Dan here, this is actually Friday night I’m doing this, on October 26th and I’m in Orlando. I taught a class today on Fundamental and Technical Analysis for Worden TC2000 and I will be teaching one tomorrow, just an hour, on Trading Volatility With Options. Guess what? What I’m going to do in this Weekend Update, it’s going to be a little different because I’m going to give you the presentation that I taught today. It will be a quite a bit quicker here because I don’t have to take questions and I don’t have Internet issues, but we’re going to get through it. The reason I feel comfortable in saying this is because there’s really not a whole lot that the market is giving us right now. We’re close to support, but I don’t know what’s going to happen, we’re very close to this election, as you know and if you think I’m fixated on that, well, you would be right; the market is, everybody is fixated on that; it’s a totally different direction or possible direction for the country and if you don’t think that influences the trading of stocks then you really need to not be trading. So because of that I just don’t have a lot, I can’t say with conviction and with respect to you and to your money, “Hey you’ve got to buy this dip right here and right now, look at the NASDAQ, here it is on Friday night and I’m telling you come Monday morning buy, buy, buy.” Or “Oh my gosh, stay away because the trajectory is really steep, I don’t believe this will hold, we could go down further.” I just don’t know, if I knew, trust me, I would tell you, you’re paying me to tell you, but what I’m telling you is I really don’t know. So instead what we’re going to do is we’re going to look at a way to find, basically an analysis, a very easy, easy analysis to find stocks that are fundamentally sound, Okay? So here we go; this is “Understanding Fundamentals Through Chart Analysis.” Basically what we’re doing is blending the two, but in all your fundamental analysis, I don’t care how deeply you get into it, it’s all designed to answer one question, “Hey dude how’s business? How’s your business going?” You can ask the small business owner, your buddy who owns the UPS franchise down the street, or whatever the case may be, but basically when you’re interested in his business you don’t say, “Hey, what are your revenues?” Or, “How’s your profit margin doing? You just say, “How’s business?” That’s all fundamental analysis is. We’ve got three sources, don’t freak-out here guys, we’ve got three sources of financial data. Every company publishes them every quarter, Income Statement, Balance Sheet, and Cash Flow. Look at all these measures of valuation; we’ve got Enterprise Value, Trailing P/E, Forward P/E. Guess what? Everybody’s estimating what the company’s going to make over the next four quarters which is kind of like economists estimating what the economy is going to do next quarter or next year; always, of course, subject to revision, always certain about the forecast, always wrong. Similarly with P/E’s. Then there’s the PEG Ratio’s, that’s the price earnings divided by the earnings growth rate; remember that, it’s important. We’ve got Price/Sales, we’ve got Price/Book, we’ve got Enterprise Value divided by Revenue, then we’ve got Enterprise Value/EBITDA, that’s earnings before interest, taxes, depreciation, and amortization; in other words what’s the value before the accountants start goofing around with it? Then we’re got Profit Margin, Operating Margin, Gross Revenue, Revenue per Share, Quarterly Revenue Growth, Earnings Growth, but is it annual or quarterly, then we’ve got Gross Profit, then again EBITDA, which is basically how much money is the business itself making? We’ve got even more, how much cash? Do they have Free Cash Flow? How much cash per share? Total Debt, Debt to Equity, Book Value per Share, Operating Cash Flow; I already mentioned that, Free Cash Flow. Well guess what? These are the guys that know all that; Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America, Stifel Nicolaus, you know, whatever. All of these firms pay guys gazillions of dollars to pour through the financial sheets, they pay them a lot of money to look at all that stuff so that they can advise their clients as to whether the business is doing well or not; again it’s all designed to answer the question, “Dude, how’s your business doing?” Okay? These guys need to tell their clients that. These are the fundamental data points that matter to me, just the basic P/E, what’s the basic price/earnings ratio, what’s the price per share divided by the earnings per share? And what I really care about is trailing 12 months and do you know why? Because it’s not subject to revision, there’s no economic forecasting in there, it is what it is, it was what it was, period. Then earnings per share growth rate, I want to know, and I look at this as an average, I want to know whether earnings per share are growing or not if they’re growing, great, how fast a clip? I want to look at revenue growth, just annual revenue growth and also quarterly. Annual is actually more important to me. If I’m trading in a really, really short time frame I don’t care about any of this stuff anyway, all I care about is the chart, but what I really want to know is, generally speaking, how’s the company doing? Obviously you can’t tell that on a stock like Michael Kors ( $KORS Michael Kors Holdings Ltd ) or whatever, it hasn’t been trading that long, or Phillips 66 ( $PSX Phillips 66 ), but you can tell that on most companies. So here’s the rule of thumb, PEG ratio, price earnings, and if I’m going fast I apologize but you can re-wind this video or pause it or whatever; price earnings divided by the earnings per share growth, earnings growth, less over more is best, in other words low P/E verses a high earnings growth, that is best. PEG ratio, if the PEG ratio is .9 and by the way you can get this on Yahoo Finance, a P/E of nine and an annual earnings per share growth rate of ten, that’s a good PEG ratio. Now look at CF Industries ( $CF CF Industries Holdings, Inc ). Okay, here’s the chart, nice looking chart, I wouldn’t really buy right this minute, but you can see the stock’s been rewarding those that have held it. Look at the profile here on the PEG ratio, the P/E is 7.9, earnings growth, the five-year average is 30 percent, over the last year the average has grown 83 percent; now that’s not always going to be that way, 83 percent is a pretty high growth rate so this is kind of a little blip. If you’re looking at this 5-year growth rate that’s the more conservative one, you have a PEG ratio of .26, remember a 1.0 would be like a PE of 10 and the growth rate is 10, so when it’s a quarter here, that’s a pretty low price stock; if you’re looking at the latest year, meaning 83 percent growth rate, then you’ve got a super, super cheap PEG, super, super cheap stock; but I look at this and I don’t think that’s sustainable, but I will say this though, remember we’ve got the drought, we’ve got all these crops that got absolutely crushed, well guess what? Next year, when farmers are planting, they’re going to be buying a boatload of agricultural chemicals, they’re going to be buying fertilizer so you’re going to see these stocks like CF ( $CF CF Industries Holdings, Inc ), potash, stuff like that, you’re going to see them continue to grow, so watch these stocks, this is just a basic rule of thumb fundamental. Now Pitney Bowes ( $PBI Pitney Bowes Inc ), I remember jan2138 was talking about this, we’ll look at this chart, Pitney Bowes ( $PBI Pitney Bowes Inc ), look at the dividend, 10.5 percent, not too bad, stock, it’s been getting crushed, but has it really? Lately, no, it’s been trading sideways, that’s the weekly chart, look at the daily chart you can see it’s a long base, right? So let’s get back to this, P/E’s 4.2 that’s super cheap, 5-year average growth is 6.63, not that’s not smoking the place up but a 6.3, we’ll just say it’s a 7 percent growth rate on average with a stock that pays over 10 percent in a dividend and a P/E of 4.2 that’s pretty good. Last year the earnings growth was over 100 percent, okay, fine, you can see either way we’ve got a pretty cheap stock. So those are just two that you can look at, I think they really help. Now again we’re back to these guys Darth Vader and all these other guys on the Death Star, right? How are we going to get our edge on them? It’s easy, you go to Yahoo Finance, look in the key statistics, you look on the financials, here I’ve got this pulled up, Pitney Bowes ( $PBI Pitney Bowes Inc ) for example, you just go down here, look at the ALYST COVERAGE, Analyst Opinion, alright, Mean Recommendation, 2.5, that’s right in the middle between strong buy and sell so there’s not a whole lot of Bears or Bulls on here, they’re all kind of in the middle, guess what? There’s only four; now if we go to a stock like let’s say Apple ( $APPL Apple Inc ), what do we have here? Come to papa, you can do it; you can do it, finally. Okay, here we’ve got a mean of 1.7, remember, 1 is a strong buy, 5.0 is a sell so analyst’s are pretty bullish on it, right? We’ve got 44 brokers, okay so that’s fine, this has a lot more coverage than Pitney Bowes ( $PBI Pitney Bowes Inc ), we know this, I don’t really care so much about upgrades and downgrades, I don’t really care about that, but what I do care about are estimates, if I can ever get to this, this is an unbelievably slow Internet connection. Okay, Estimates, here’s our revenue estimates, you can look at all this stuff, but this is what’s important, the target, the price target of all these brokers is $780.00, we look at that and we compare that to the stock, it’s $604.00, the reason I care about those estimates is this, there’s a lot of headroom between where the stock is now and where those estimates are, so what you’re not going to get is, you don’t really risk much of an analyst downgrading the stock because their price target was reached. Now, I don’t believe this happened, but the stock peaked right around $700.00; let’s say that we had looked at all these analyst’s on the Analyst’s Opinion and the mean target was $700.00, now all of the sudden as the stock gets closer to $700.00, what you’ve got to worry about are analysts changing their rating, saying, “Okay, we’re downgrading on valuation this is no longer a buy it’s a hold, our price target has been hit.” Now, look at Pitney Bowes ( $PBI Pitney Bowes Inc ) for example, I’m seeing a lot of 15’s in here Mean Target, Median Target, there’s a difference there but basically it’s 15, right? Okay, where’s the stock? Fourteen; now there’s only four analysts covering it so it’s not that big of a deal, but the point is if this stock starts to get up to 15, let’s say there were more analysts with that price target, what do you think they’re going to start doing? They’re going to say, “Well our price target has been reached so let’s sell.” This is what I would call latent supply or hidden supply and what that is, is supply where when price target is hit you’re going to typically get some selling, like if Apple ( $AAPL Apple Inc ) were to ever reach $750.00, everything being just what it is right now, what do you think those analysts would start doing? They would start saying, “Okay, time to get out of Apple ( $AAPL Apple Inc ) now.” Okay, so this is what we’re doing, we’re just looking at the upgrades and downgrades and we want to know whether there’s headroom for the stock, and like there is for Apple ( $AAPL Apple Inc ) there is for a lot of stocks, or is there hidden resistance? This is the single most important data point, the chart, you look at this PEG ratio, you want to have a basic idea, is my stock expensive or is it cheap? Sometimes the most expensive stock is the stock you want to buy, sometimes the cheapest stock is the stock you want to buy. A lot of times, do you know what the ultimate arbiter of whether you should buy or sell is? The chart, you want to look at the chart. My bet is, and we were long, we were looking at Ross Stores ( $ROST Ross Stores, Inc ) almost all the way up here guys, okay? My bet is the fundamentals were still looking great here, they might have even been looking better than great, they’re probably still pretty good here, maybe not so good here, but what was the stock doing? Traders were forecasting a weakness in fundamentals before you’re actually going to see the fundamentals deteriorate; this is why we need to be looking at charts. This is a scan that you can use, I use this, in fact I’ve done it, I’ll share with you my list; I do this on TC2000, but you can do it on your trading software, I’m sure, with your brokers or something like this. Here’s what I’m looking for, I’m trying to find fundamentally sound companies without having to go through too much brain damage, I’m not smart enough, actually I’m being humble, I’m smart enough to figure out all the fundamentals but I’m smart enough also to know that I have no edge, I don’t really care about figuring out all the fundamentals and neither should you. I talked to I think about 100 maybe 150 people today and after I got done going through this I asked, “Does anyone here feel like you need to know anything more about fundamentals than I just covered?” Not one single person raised his hand, including the guy in the front with the pocket protector. This is all the stuff you need to know; I’m looking for stocks with an earnings growth rate, 5 years, between 20 percent and 100 percent over 5 years. Why do I want to limit it to 100? Because you know what? If they’re doubling every year, if they’re average is a double per year over the last 5 years there’s probably something wrong with the company, maybe it’s a needle in a haystack, the perfect stock, but that’s a pretty high growth rate, but I’ll look at anything that’s averaging 20, very few are though. And what about 20? Well why don’t I take one that’s 10, well I would have missed Pitney Bowes ( $PBI Pitney Bowes Inc ), sure I would have, but you know what? In this particular scan I’m looking for stocks where the earning growth is 20 percent, this is a growth scan, it’s a reasonable growth scan, it’s a GARP, growth at a reasonable price. I’m looking for a P/E, trailing P/E of between 5 and 10. Why five? Because, it could be two, although that’s like too cheap, it could be 10 instead of 5. Well, why five? Because you know what? There are some really good companies with P/E’s of five or between five and ten. Why limit it to 100? Well I’ll tell you why. Because I’ve got the growth rate limited to 100, if a stock is trading at more than 100 times earnings I’m really not interested in it, not in this scan; and I explained this way today; think of yourself as fishing, you’re out there on your boat with you line in the water, and you’ve got your nice jigger on there, I think it’s called a jigger, I don’t know, anyway, you’ve got your bait out there on the hook and It’s sitting there in the water and what you’re trying to do is catch fish, one thing you’re not going to do is get them all, you’re not going to get them all, a lot of times you’re not going to get the biggest one, but what you’re trying to do is get some fish, this is what I’m doing here, I’m fishing, I’m limiting my search, so I want a P/E of between five and a hundred, by the way if it doesn’t have a P/E I’m not looking at it, I don’t want a company that doesn’t make money. The stock price has to be over $5.00, it can be less that $5.00 but think about it, if a company’s really doing that well wouldn’t the price have climbed over $5.00? So that’s important. The first two are fundamentals, that’s all the fundamentals I care about, the last three are actually technicals, first price, that’s easy, this is a biggie, moving averages, I want the 20-day moving average to be above the 50-day moving average, and I want the 50-day moving average to be above the 200-day moving average; it will look like this, 200-day moving average here, the 50-day moving average is above the 200-day, and the 20-day moving average is above the 50-day; it will not be this, for example, yes, the 50-day moving average is above the 200, but the 20-day moving average is below the 50 so I’m looking for a particular configuration that’s going to give me uptrending stocks, that’s it, uptrending stocks, that’s what I’m looking for here and then finally I want my daily volume at least 500,000 shares, typically I’d like it to be a little more, but you know what? I’ll take 500,000. Okay, let’s see what we got, I have 39 items in this watchlist, we’re not going to go through all 39 charts, they’re on the email, I think I’ll have Josh format it so you have the tickers on the one page of the video, but this is what we’re doing, forget about the chart I’ll go through some in a minute. We can sort this way, we can sort according to Price Earnings Ratio, the highest P/E is 96; why aren’t there any higher than that? Because what was my limit? I limited it to 100, right? So we sort down, this is the most expensive stock in terms of P/E, strictly P/E and you look at that and it kind of makes sense, the growth rate is 30, the P/E is almost 100, so this is an expensive stock, the price earning ratio is much higher than the growth rate. Now, let’s look at this thing another way, let’s look at the growth rates, I’m sorting these by growth rate so the highest grower over the last five years is ARM Holdings ( $ARM ARM Holdings plc ), nice looking chart, it would have been nice to buy it a while ago, but does this mean you don’t want to buy this stock now? No, I would, I would just wait for a pull back, fundamentally the stock is sound, the stock looks fine. Here’s another one, we’ve got eBay ( $EBAY eBay Inc ), eBay, P/E 17, growth rate 38; look at the chart, fundamentally the stock passes muster, doesn’t it? Look at the chart, chart wise this works too, this is a stock that I’m comfortable buying, technically it’s working, remember the ultimate arbiter of buying or selling is the chart. Am I talking about a short-term trade here? No, I’m looking at fundamentals guys, we’re looking at five year P/E’s, but this is a stock that’s working, it’s totally working. Now, let’s look at some others here, FMX ( $FMX Fomento Economico Mexicano SAB (ADR) ), I just like to say this, “Fomento Economico Mexicano SAB,” it’s like a car on the end of that or something. I don’t know anything about this but I’ll bet they make booze. Food and beverages, guess what? I’ll bet this is probably not from Philadelphia, but look at the chart, first of all it only trades 340,000 on Friday, but do the “eye squint,” the patented Fitzpatrick eye squint for clarity, what do you see? You see a nice uptrending stock. Is it perfect to buy at the 50-day moving average? No, because there have been some violations of that, but if we drop this line here, and this line here, you can see what’s happening; so do you buy this stock now? No, but you watch it, and do you know why you watch it? You watch it because the fundamentals are pretty solid; P/E, Average P/E over five years, 11, Average Growth, 33, and by the way, I think this is P/E over the trailing 12 months and not over the last five years, I apologize for the confusement, but the growth rate over the last five years is 33. What we’re looking for, well look here for example, MRX Medicis ( $MRX Medicis Pharmaceutical Corp ), not a good looking chart, because guess what? I don’t think this thing is trading anymore, but here you can see the growth rate was 34, P/E 28, so it’s trading kind of about par, you know, kind of where it should be. What I’ve done though is gone through this list and I’ve just flagged the stocks that are interesting to me for various reasons, and so I’ve got 17 out of the 39 that are flagged and what I would suggest doing is freezing this video if you want to look at all of these, freeze this video and type these tickers, and then after ADS ( $ADS Alliance Data Systems Corporation ) that’s it. The others, nothing particularly wrong with the others, but these were just the ones that I find interesting for various reasons, but they all fundamentally, they all pretty much work and you look at the Growth Rate, 60, 59, 43, 41,40, 38; look at the P/E’s, the P/E’s are all good. Again got eBay ( $EBAY eBay Inc ), 40 growth rate, 17 P/E. IDCC ( $IDCC InterDigital, Inc ), 33 growth rate, 22 P/E; look at the chart, this is a good looking chart, it fits the formula too, the 20-day is over the 50 is over the 200-day moving average and it looks to me like it’s just kind of close to coming out, right? It’s just starting a nice uptrend. So anyway, I could go on and on and on through these, but instead I going to suggest that you do that and I’d love to see you guys talking about these things in the Forum. I hope this strategy works for you it really does for me I’ll tell you that, by the way LKQ ( $LKQ LKQ Corporation ), love this one, look at this, 25 percent growth rate, consistent, P/E is 24, so it’s about par, PEG ratio of about one. One thing, remember I always talk about Dollar Tree ( $DLTR Dollar Tree, Inc ), about splits, how you’ve got to watch a stock when they announce a stock split, when they announce a stock split then you have to watch the uptrend because they’re doubling the liquidity so the stock’s ultimately very easy to buy, there are twice as many shares for sell, they’re worth the same, you know they’re half the price, double the shares, but the liquidity goes up. So if the stock continues to rally even after a sock split you know it’s in strong demand, you can buy it with confidence. On the other hand if it starts to trickle down then you know that really the main impetus for the rise, at least into this last part, was just because the stock was hard to buy. Then they make it easy to buy and all of the sudden that aggression, that aggression that you thought was, there really isn’t; it was just kind of a demand thing based on the number of shares available as opposed to how attractive the company was to own. So here you see Dollar Tree ( $DLTR Dollar Tree, Inc ), it split the stock and just got crushed, and we’ve been talking about this for a long time, that’s fine; but you look at LKQ ( $LKQ LKQ Corporation ), stock split right here, two for one on the nineteenth, now it’s trading about 10 percent higher and doing nicely, so this is a stock that I’d be comfortable buying, particularly after a big old down draft, massive high volume move like we had on Thursday and then the stock’s moving higher again on Friday. This is a stock that I want to own for a trade, no, but for a kind of a longer position, sure and a big, whopping dividend of, oh, that’s right, there is no dividend, this is a growth stock guys. So that’s it for this Weekend Update. I hope this helps, I’m confidant that it will. I’m not asking you to get really deep into fundamentals, in fact I’m asking you not to because, frankly, it may make you feel better, but it’s not going to help you make more money. I was joking today about how you know, if going through all these fundamentals really kind of, you know, they kind of keep you warm at night; do this instead, print out the balance sheet, the income statement and the cash flow and then burn them. Put them in your fireplace and burn them, that will keep you warm and it will also save you time. So just look at these basic things and ultimately you’re going to wind up going to the chart, but you’re going to go to the chart with more confidence. Okay, I will see you guys on Monday.

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