Finding a Trade Candidate 2
Search for a Trade
High/Low of the Day
High/Low 5 Day/ 30Day
Earnings that misprice a stock
News events that misprice a stock
A few years ago when I started focusing on Value stocks as my primary trade candidates. I found most of them from earnings calls. I was focused primarily on retail stock and was a buyer around a 15 P/E after a minor miss on earnings that dropped the stock price 15 to 20 percent into a strong support area. Support and resistance is a topic for another day but if you can’t find strong and weak support and resistance within 30 seconds of looking at a chart you REALLY need to bone up on that skill set. (See themaketistalkingtoyou.com)
Above you see a partial list of Dollar Losers from my TradeStation platform. As you can see I had to go 90 deep in that list to find a likely candidate. I gave a cursory look at 8 or 10 other symbols but most either had no earnings or were within 10 to 30 percent of their highs.
FreightCar America Inc. (RAIL) is in the railroad freight car manufacturing business. If you have been watching the market you already know that the railroad business is slowing down.
RAIL topped out at $78.34 in 2006 and is down more than 80 percent from there. More recently the high in 2015 was $32.07 and at today’s close of $14.72 is down over 50 percent from last year’s high.
Briefing.com tells me that RAIL’s earnings per share last year were $2.78. Halaluha, I have a trade. Then I checked NASDAQ.com and find that FY16 earnings are projected to be $1.50 and FY17 comes in at only $1.41. No trade. With the weak economy and the slowdown in rail traffic RAIL will likely continue down to a 4 to 5 P/E where I would reconsider it at that time.
Although I don’t have a trade today I will add this to my watchlist and when the economy turns around this will be a great buy for a long term hold.
Just because it’s down big does not make it a buying opportunity.
Below you see TradeStation Hot List Dollar Losers. This is my most productive way of finding trade candidates. #34, RRTS, is a real trade opportunity. Along with daily dollar losers, which I check every day, I also check the 5 and 30 day losers at least once a week. The 5, 10 and 30 day losers will show you stock that didn’t have a dramatic fall but were steady losers.
|04-May-16 16:30 ET||RRTS||Roadrunner Transportation misses by $0.10, misses on revs; lowers guidance for FY16 EPS, below consensus (10.25 -1.19)
As you can see from the report above RRTS missed their earnings call by more than 40 percent and also had a slight miss on their revenue for the quarter. Revenue growth this quarter over the same quarter last year was down 4.8 percent. If you’ve been watching the transportation sector you know that this about average industry wide at this point in time.
Support is at $6.39 but RRTS was unable to get there today and had lots of buyers at $7.00, which was the low of the day. I bought at $7.05 but RRTS could easily reach the $6.39 support in a day or two. It’s also possible RRTS could drop to a P/E around 5 which could take it down to $5.50 or so. If you’re not prepared for these possibilities then I recommend that you not trade. When I posted this on the blog this morning I said there was no stop price on this trade. That means I feel confident that RRTS will recover but I am willing to add to this trade at lower levels if and when necessary. It is up to you to size this trade so you are comfortable sitting on a losing position for whatever time is necessary. Whether you’re comfortable with a hundred shares or 10,000 for this trade it is imperative that you honestly do this worst case analysis and be prepared for that worst case to transpire, if not you will be bumped out for a loss on a good trade.
In June of 2015 RRTS topped out at $28.51. At $7.00 they are down slightly more than 75 percent with a forward P/E of 6.36. Transport sector P/E is 14.
When a stock is new or has a major fundamental change and their revenue and profits increase in large bounds (10 to 100 plus percent per quarter and annum and projected growth is similar) the P/E multiple increases accordingly. We have all looked at stocks with P/E’s in the hundreds. The reason is expected increases in revenue and profit. Eventually they reach their apex and profits levels off and the P/E drops accordingly.
For example, a stock that has growth of 30 percent and EPS of $3.00 a share would be valued at $90.00 per share. When growth and projected growth levels off the P/E will drop to the sector or market P/E of 15 to 20. Now all of a sudden the same stock with the same profit is worth $45.00 to $60.00 or so. Add a slowdown in the economy or their business in particular and 10 to 12 P/E would not be unusual and now you have the same stock at $30.00. Add in poor management, too much debt, an unexpected earnings and/or revenue miss and the public, who have been holding this little pig from the over 40’s or higher area, panic’s when the stock drops 30 or 40 percent overnight. Now that same stock is $18/20 bucks a share with a P/E of 5 or 6 and I’m buying while the 97 percent of traders who lose money sell me their shares on the cheap. This is a simplified scenario that could have hundreds of variables in it but this will give you an idea of what to look for.
I like the panic scenario much better than a stock that just eases down a little bit every day. I have found the ones that are easing down tend to ease right on through support and just keep on easing down. The panic scenario gets the weak hands out and replaces them with folks who are in at the right price and are willing to hold the stock which reduces selling pressure.
If you’re trading value or deep value stocks it’s imperative that you find fundamental value before you consider a trade. Just because a stock is cheap relative to where it was last year doesn’t mean it won’t get a lot cheaper.
Last month (April 2016) I only found one actionable trade. When things slow down on the hot lists I move on to a search engine that allows me to pick the parameters I would like my trade candidate to aspire to.
My favorite search engine is finviz.com.
Finviz has so many search capabilities you can spend days there looking for the right stock if you don’t have a plan of attack. You can look at top gainers or losers, new highs or lows, unusual volume up or down, over-bought or over-sold conditions, numerous chart patterns, insider trading, upgrades and downgrades. The list goes on and on but this will give you an idea of how comprehensive this site is.
My favorite search is as follows. Open the screener at the top of the page and you will see Descriptive, Fundamental, Technical or All. Hit All.
From the left to the right in the second column highlight
P/E and highlight Under 10,
then EPS Growth next 5 years enter Positive (+0), 5 or 10%,
then forward P/E Over 10%,
the under Industry hit Stocks only,
and then under PEG hit Under 1
and finally EPS growth qtr over qtr Positive (0%).
The first four search criteria are necessary for a good search. The last two criteria just refine the search. In EPS growth and forward P/E you can tighten these up or loosen them at will to expand or narrow your search.
I will usually get 20 to 60 items to examine. I start by idling my cursor over the price of the stock which brings up a chart of the last three months. If the price is near the three month low I pull it up on TradeStation where I see six time frames from two minutes to weekly. If the stock is down 40 percent or more from a high within the last two years then I start doing fundamental research. I start that with FINVIZ. Click on the symbol or any cell in the line and it will take you to a complete breakdown of the fundamentals. The first thing I check is the quick ratio and the current ratio to see how far in debt they are. These will vary greatly between sectors as different industries carry different debt levels.
Another productive search is 52 week lows. A lot of traders are afraid to buy a falling knife, that’s what all the research into P/E valuation and debt are about.
If you’re buying a growth stock that’s down 20 percent from a high of $100.00 with a bunch of buy ratings then you have every right to be nervous and afraid. That’s a falling knife with a lot of room to continue falling. If on the other hand you’re buying that same stocks down 60 to 90 percent and you have done you’re due diligence then you become the predator instead of the victim.
Confidence is the name of this game. Even after trading for many years on a daily basis several years ago I took a 40 point loss in two days on a stock that had guided higher and 15 or 20 analysts were telling me it was going up another 150 points. I was lucky because ISRG fell 200 points before it turned around. That’s when I made a complete switch to value trading. The problem with high growth rates (10 to 50 plus percent) is that the market always gets saturated and for whatever reason that growth rate falls. Or they just have a bad quarter or two.
When I first started doing value based trades I was only buying three hundred to 500 shares. After a few months of trial and error I had a seven and a half month run with no loses. Needless to say my share size increased accordingly. Now my biggest problem is staying within the trade criteria.
There are lots search engines out there, many of which are excellent. Find one you like and stick to the criteria. There are always exceptions to the rules, don’t make an exception that will cost you money. When in doubt, use a stop price to limit your losses.
The trading plan.
P/E 7 or lower.
Down a minimum of 40 percent, 75 to 95 is much better.
Preferably an earnings or news event that drives it down 20 percent or more in a day.
Past earnings under 7 P/E and future earnings with some increase projected.
No SEC or other Federal agency investigation.
I’m a believer in KISS, keep it simple stupid. These are the overlaying rules but as with all rules there are refinements and exceptions.
If you have questions email me at firstname.lastname@example.org. Please make them intelligent or educational as I don’t have time to waste on stupidity.