Simple Growth Investing

Stock Charts Can Improve Your Investing Results

Bob — Sat, 04 Sep 2010 04:57:21 +0000

Have you ever noticed that a lot of investment advisors like to show you stock charts. They use charts to show you if a stock is likely to up or down, whether it should be bought or sold.

But they don’t always do a good job of explaining how to read the charts. So even though the information may be helpful, it’s not doing you any good, because it’s cloaked behind a bunch of incomprehensible lines and jargon. Ascending base? Upper channel line? Three weeks’ tight? Support at the 10-week line? What does all this mean? And how should all these bars and squiggles be interpreted?

I’m going to speak personally: There’s no question that knowing how to read charts has made all the difference in my success as an investor. Without chart reading, I honestly can’t imagine how I would have spotted my big winners, like Apple (AAPL), Green Mountain Coffee Roasters (GMCR), Salesforce.com (CRM) or Baidu (BIDU), as they were poised to break out and make huge price moves.

Fundamentals alone just won’t get you there. In my experience — and the experience of many, many others — stock charts are the only thing that will do the trick.

A chart will show you, instantly, if a stock is being bought in heavy volume, a sign that institutional investors, like mutual funds and hedge funds, are grabbing up shares. Also, it will show you if it’s being sold heavily after a big run-up, a signal that the pros are bailing out.

And yes, the classic patterns most certainly are indicators that a stock is digesting earlier gains, and may be preparing for another run. I’ve made so much money from stocks coming out of sound patterns, that I don’t even bother with those who scoff. In fact, I kind of feel sorry for them.

But I absolutely remember how I felt in the beginning, before I knew how to read charts. People around me were seeing cups and handles, double bottoms, flat bases, three weeks’ tight.

I didn’t see any of it. I just saw a bunch of price bars on a chart. If someone showed me a breakout, I couldn’t tell how it differed from anything else on the chart. I was sure they were making stuff up, like when a little kid gazes up at the clouds, and insists she sees animal shapes!

But I knew people were making money. I knew they were buying stocks that went up — and isn’t that why we’re all investors? So I decided to stick with it. When I read a chart analysis in an investing newspaper or on a Web site, I made sure I understood everything about it. I began to actually see those coffee cups with handles, and could identify a stock that might be ready to run higher. It was pretty exciting — and I became convinced that not only did it work, but it was completely learnable, without sacrificing every precious hour of free time!

So in this series of posts, I’ll show you the process I used, step by step, to master chart reading, or technical analysis.

By the time you’re done reading this series, you will have the tools you need to identify the basic chart elements and spot chart patterns that can signal a run-up may be near.

Of course, stock chart reading is a skill that you can continue fine tuning, even after you learn the basics. But without knowing how to interpret a chart and understand some of the most simple patterns, you can’t go on to higher-level skills.

In the next post, I’ll tell you how I came to the point of believing that stock chart analysis was they key to better investing results — and how I was right! I’ll share that process with you.

Cloud Computing: How To Beat The Markets This Week? Markets This Week: Cloud Computing

Samuel Smith — Sun, 29 Aug 2010 22:30:05 +0000

Nobody likes to see a shaky economy. The risk that major companies across the globe could earn less this year than projected has lots of investors worried. That’s why I’m looking to cloud computing for salvation. Now, please understand that the cloud computing sector is not a fundamental or a value play. It’s a play on growth, and a very risky one at that. Right now, the major names in the cloud computing sector, like Salesforce.com (CRM) and F5 Networks (FFIV) are substantially outperforming the market. That’s good, right? The answer is: maybe.

Why am I buying any cloud computing stocks? Simply put, I expect that at least one of the names in this sector is going to see a 4,000% return over the next 10 years. Cloud computing is oriented towards businesses and corporations. It replaces the “server room” and much of the IT staff that anyone who has worked in an office is familiar with. Instead, the servers and staff are at a remote facility, and that facility shares the computing resources among all the companies that use the facility. It’s certainly a winning business model, and anything that offers cost savings to businesses is going to be adopted.

Why am I wary? Cloud computing companies currently suffer from a lot of the problems that we saw before the dot-com bubble: high P/E multiples, hype, and investors that don’t understand exactly what they’re buying. Buying companies in growth mode is banking on future earnings. If the earnings never materialize, investors will lose their proverbial shirts, and in emerging IT, the risk of failure is higher than other sectors.

Since you’ve stayed to the end, you deserve a conclusion. Yes, you should buy in the cloud computing sector, but you should diversify. If there was a cloud computing ETF, that’s what I would recommend. In lieu of that, or until one appears, buy and hold stock in several companies, particularly at least all three of these: Amazon.com (AMZN), which sells cloud computing services to business customers), VMWare (VMW), and Citrix Systems (CTXS). They are my “best in breed” because they are companies that already show earnings. CRM and FFIV are newcomers to the market, so only buy shares here if you can follow the companies on a daily basis.

And of course, one element of following the company is regularly checking on its stock chart, to see how it’s holding up vs. the general market, or if it’s shaping a bullish pattern.

How To Learn Stock Charts In 5 Easy Steps

Bob — Thu, 26 Aug 2010 01:48:02 +0000

Most worthwhile goals require a bit of perseverance. After all, you wouldn’t want visit a dentist who had just decided to work on teeth that morning! And many pursuits demand some preparation and tenacity to build a knowledge base. That’s definitely true when you decide to learn about stock-market investing. A key step in that process is learning to read stock charts, a process also known as technical analysis.

Anyone can learn technical analysis. All you need is a stock charting program. There are many free options available on the Internet, such as Free Stock Charts by Worden Brothers. There are also many services you can pay for. Some of the paid services contain additional information, such as a complete database of company fundamentals, but you can absolutely master chart-reading basics with a free program.

Here’s how to do just that in 5 easy steps.

Step 1. Understand Price And Volume Bars

Price and volume are the basic building blocks of stock charts. You can find these represented in various forms on chart programs. Two of the most common forms you’ll find are a) high, low, close and b) candlestick. Unless you really understand the price and volume bars, the rest of the chart will become more confusing.

Fortunately, the price and volume areas of a stock chart are pretty simple to comprehend. Generally, one color signifies a day or week in which a stock closed higher; a different color signifies a day or week when it closed lower. Volume bars are higher during times of heavy trading, and lower when fewer shares moved. Generally speaking, you prefer to see higher volume when a stock makes price gains, and lower volume when it declines. If a stock falls on very heavy trading, it means a lot of investors were bailing out.

Step 2. Identify Moving Average Lines

These are also key to getting a handle on a stock’s price movement. Moving average lines show the average of a stock’s closing prices over a specified period of time. You can also check the moving average for an index, such as the Dow or the S&P 500.

Moving average lines are useful in showing you whether a stock is getting support from professional investors, including hedge funds and mutual funds. If a stock falls below a key moving average, such as its 50-day line, then it often means professional investors are selling heavily. Professional investors determine the direction of the market, so if you spot sighs of their selling, it may be time for you to also head for the exit.

Step 3. Identify Basic Stock Chart Patterns

Stocks tend to form some of the same patterns, over and over again. The cup with handle and double bottom are two chart patterns that stocks often form before making big price run-ups. If you learn to see these patterns on a chart, you could potentially identify big winners before they zoom higher in price. That’s how many successful growth investors have made money in the market.

Here’s an example of a cup and handle pattern that Salesforce.com formed in the early months of 2010.

Step 4. Understand Trend Lines

Stocks often form distinctive trends as they move up or down in price. One excellent way to identify a trend is by drawing a line between three points on a stock chart. If you can spot a trend line, you can also see if a stock is breaking it. That’s frequently a signal of trouble ahead. The most successful stock market investors have learned to identify these signals early, allowing them to protect their gains.

Step 5. Learn To Use The Relative Strength Line

This is a very useful element of many charting programs. It shows you a stock’s price performance relative to the general market, usually with the S&P 500 benchmark index as a proxy. The relative strength line is a fast way to visually determine how well a stock’s price action is performing, versus the broader market. If the line is heading lower, use caution! It means your stock is seriously underperforming, and that’s not the type of investment you want in your portfolio.

If you follow this advice, you’ll be on your way to successful stock chart reading. It’s really not as difficult as many so-called experts claim, and with a little practice, it will help your investing immeasurably.

Growth Stocks Riverbed, Stericycle Holding Up Well

Bob — Mon, 23 Aug 2010 15:55:10 +0000

Even as the market struggled last week, many top-performing growth stocks continued to hold up well.

For example, Riverbed Technology (RVBD), which helps business customers minimize bandwidth usage and speed up data access and backup.

Sales accelerated four quarters in a row, and earnings accelerated in the past two quarters. In the most recent quarter, earnings grew at a rate of 79% and sales grew 39%. Those are excellent, especially in a shaky economy, when many companies are suffering from lackluster sales.

Wall Street expects profit to grow 50% this year, and 25% in 2011. Earnings have grown every year since 2007.

Riverbed has been getting price support at its 10-week average, and has seen heavy-volume buying recently. Those are good indicators that professional investors, like hedge funds and mutual funds, are purchasing shares.

Another name showing strength is Stericycle (SRCL), which disposes of medical waste.

The company boasts a strong return on equity, 24%, and has shown a good track record of profit growth lately.

Analysts see earnings up 18% this year and 13% in 2011.

More mutual funds bought shares of Stericycle in the last reported quarter. That’s a good sign of confidence in the stock’s future prospects. It also bodes well for future price increases. It’s the professionals, not the retail investors, whose buying can send a stock’s price soaring.

Stericycle has been consolidating price gains for eight weeks, trading in a tight price range. Tight trade like that can be a positive sign, showing that professional investors like the stock enough to keep holding shares at that prove level. Tight trade is often a precursor to a fresh price rally in a stock.

Stericycle appears to be shaping a cup-with-handle pattern, a bullish formation that you often see before a stock moves higher in price.

Is The Smart Money Shorting Treasury Bonds?

Samuel Smith — Thu, 19 Aug 2010 06:18:14 +0000

In economic uncertainty, the smart money flees stocks and heads to bonds until the storm is over. There’s nothing wrong with not participating in a volatile market. Being risk oriented is often a poor decision for everyone but the most experienced traders. Still, I’m not convinced that treasury bonds are the right place to be. In my opinion, all the signs point to an upcoming selloff in the treasury bond market.

Here are some reasons why it’s wise to be cautious about treasuries now.

1. Shorting Treasuries

I’m not a fan of short selling anything. Short trades are notoriously risky, and in my opinion, a lot harder to analyze, enter, and exit than long positions. Even Nassim Nicholas Taleb, author of “Fooled by Randomness” and “Black Swan,” said that every single human being should be short treasuries.

Clearly, Taleb and other fund managers are concerned about the high level of debt, inflation, and the low Federal Reserve interest rate, three factors which together contribute to his belief that shorting treasuries is a ‘no brainer.’

2. The Thirty-Year Bond Cycle

Historically, bonds reach a bubble every thirty years. We’re currently a few years past the end of the cycle, which would indicate a bubble ready to pop. This was recently discussed in a SeekingAlpha article.

3. Economic Uncertainty

As I discussed in the introduction, in economic uncertainty, treasuries are an excellent place to be. As economic certainty returns, it makes sense that the bond market will suffer. The price of treasuries, like gold, reflects the fear in the market. I can’t imagine the market uncertainty being higher in five or ten years than it is right now.

Conclusion

Unless you’re getting close to retirement age, buying treasuries is a bet against the market, and the market is made by growth and earnings. So long as businesses continue making money, betting against the market is a bad idea. If you’re still in bonds, consider selling them and finding some safe businesses with room for growth, like Wal-Mart Mexico (WMMVY).

Will New Rules Help Or Hurt Goldman Sachs?

Samuel Smith — Sun, 08 Aug 2010 12:19:46 +0000

Goldman Sachs to Spin Off Proprietary Trading Unit

Goldman Sachs announced that they are likely to spin off their proprietary trading operations to third-party asset management companies in compliance with the Volcker Rule. Though the proprietary trading desk will no longer be seeded with the money of Goldman’s clients, Goldman will establish management contracts and continue to operate a proprietary trading division. Though full implementation of financial regulation is likely five or ten years away, Goldman is getting its ducks in a row and will likely establish the management companies as early as this month.

The financial regulation bill established new limits regarding the amount of bank capital that can be invested for the bank, rather than the customer. According to the Volcker rule, no more than 3% of the bank’s equity can be in proprietary trading. Instead, the money must be invested for the customers of Goldman Sachs and returned in the form of higher interest rates. Currently, Goldman has about 28% of their Tier 1 capital invested in their proprietary trading units.

It is uncertain whether this will help or hinder Goldman’s earnings in the future. It is uncertain whether Goldman will be able to hit earnings estimates in the short term, in particular, during the transitional period. I would not be holding Goldman during earnings season, but I know better than to bet against an extremely successful investment bank.

In my opinion, these changes will ultimately benefit Goldman Sachs. Who wouldn’t want to invest in a proprietary trading business managed by their extremely savvy traders and computer algorithms? I doubt they will have an issue finding private equity capital to fund the new asset management divisions. Investors agree. Goldman is trading up since the announcement.

Fears of Financial Regulation Dictate Market Movements

Caterpillar Jumps, Not Crawls, Into Second-Quarter Profit

Bob — Thu, 29 Jul 2010 17:05:33 +0000

Though I’m a growth investor at heart, I don’t dismiss other opportunities which may present themselves. For example, heavy machinery maker Caterpillar (CAT) could hardly be called a growth name, but it appears intriguing lately.

That’s especially true as industrials and techs have replaced many of the retailers and consumer-oriented big caps that have shown leadership in recent months.

Last week, the company reported better-than-expected second quarter earnings, which gave the stock a lift in heavy volume. Take a look at this weekly chart, to see the volume spike.

The company’s earnings got a lot of attention last week, because it raised hope that the economy may not be in the toilet as much as many believe.

In addition to beating second-quarter expectations, Caterpillar raised its full-year earnings guidance. Asia was its fastest-growing region (no real surprise there), but it also said North American sales were growing, which made U.S. investors feel a bit warm and fuzzy about backhoes and bulldozers.

Caterpillar’s profit was up 51% in the quarter. Earnings have turned around recently after declines in ’08 and ’09. Sales grew 31% after declining in the previous five quarters.

And Wall Street is optimistic about Caterpillar’s prospects, with an estimate of 84% profit growth this year and 41% in 2011.

Another good sign: Mutual fund ownership climbed in the most recent quarter, after falling prior to that. Fund ownership is among the signs of institutional support that often precedes a big price move. If mutual funds, pension funds, hedge funds and other professional investors are buying into a stock, that’s the fuel to send a price higher.

With a market cap of $44 billion and more than 10 million shares changing hands each day, Caterpillar is unlikely to show the kind of explosive growth that you occasionally see in a much smaller group-mate, such as Bucyrus International (BUCY).

But there’s definitely a place in your portfolio for bigger caps with good fundamentals and continued growth prospects.

No related posts.

Apple Has Room To Run Beyond New Price Highs

Samuel Smith — Fri, 18 Jun 2010 22:26:35 +0000

This week, Apple (AAPL) made new highs, closing at $274 on Friday. A lot of traders are expecting the momentum to stop, and at some point, it will, but how high will Apple climb before it does?

To all the bears who think Apple is an $11 stock and will always be an $11 stock, I scoff at you! Apple stock is hilariously undervalued for a stock that has so many eyes on it. Although technical indicators are crucial, too many traders are looking for bad news on the chart, expecting to find “resistance” at certain levels. They are failing to realize how good of a fundamental play the Apple stock remains.

From a strictly valuation perspective, Apple is undervalued, even at new highs. I think even conservative valuations place this stock at around $300, while more aggressive growth could lead to valuation in the $350 or even $400 range.

Why? Just look at the numbers. The iPhone represents half of the value of Apple’s stock. Apple doesn’t just receive the $199 or $299 up front that a customer pays. It also receives a significant subsidy from AT&T. Right now, they receive about $600 per phone that they sell.

And look around. Everybody has an iPhone. Even people who can’t normally afford a high-end cellular device are splurging on this thing. This week, Apple released the iPhone 4G – the next generation in its iPhone line. The Apple store received ten times as many orders for the 4G as it did for the 3G on release date.

Look, history shows us that one or two companies always emerge on top of any sector. For soft drinks, it’s Coke and Pepsi. For search, it’s Google. You cannot be involved in the stock market without making some decisions about where stocks are going to go. If you expect Steve Jobs to bork the Apple business plan like he did in the 80s, then bet against Apple at its current pricing. If you expect Apple to run the cell phone market over the next ten years (and maybe even compete with Google in the search market in the next twenty), then long this stock as soon as you can, because it will go up for a very long time.

Fears of Financial Regulation Dictate Market Movements

Samuel Smith — Mon, 14 Jun 2010 16:36:19 +0000

This morning, the Dow Jones Industrial Average climbed 100 points in early trade to reflect a bullish sentiment in a relatively uncertain market.

The only sector not participating in this rally? Financials. On an otherwise strong day, JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC) and other big banks are all down by about 1%. An upward move with one sector lagging, particularly the financial sector, can be very good news or very bad news.

On one hand, it’s good news because the market seems to be behaving rationally again. Financial stocks should drop with impending financial regulation in the U.S., especially when we’re not sure exactly what the regulation will entail or how strictly it will be enforced (it looks like there’s still a bunch of wiggle room in the current senate and house bills).

Lately, though, the market has been dropping across the board on fears of contagion from the European financial sector. Maybe I’m daft, but I just don’t understand how the troubled European financial system affects the price of eggs in California. All it really means is that eggs in California are now a more attractive value play.

On the other hand, weakness among financials is bad news because, historically, that sector has been an economic leader. When there are financial troubles, it’s felt throughout the economy. If financial regulation were to cause a large selloff in the financial sector, we would likely feel the reverberations across the entire economy.

One might argue that we’re learning from history so that we don’t repeat it. On the other hand, one might argue that we’re going down a path which invariably leads to a double-dip recession and a crash reminiscent of late 2008. Personally, I’m not sure if the banks learned their lesson, and if they didn’t, strict financial reform is necessary. Nevertheless, it’s important to be careful how we approach the subject, because a panic is the last thing that an already uncertain market needs.

Lululemon Athletica Holds Strong Pose Even In Volatile Market

Samuel Smith — Fri, 11 Jun 2010 03:27:10 +0000

Lululemon Athletica (LULU), which jumped more than 4% Wednesday, had its best-ever Q1 this year when its earnings tripled from the previous year. Analyst projections were for $0.21 earnings per share, and actual earnings beat this by a healthy margin for $0.27 per share.

Lululemon has raised revenue projections for the rest of 2010 by about 20%. LULU currently operates around 100 stores across North America, so there’s plenty of room for growth with this company, whose customers are women who participate in yoga and other sports.

Clothing retailers have done well lately, even in the poor economy. I’ve always thought that companies like Abercrombie & Fitch (AF), Urban Outfitters (URBN), and Aeropostale (ARO) were great businesses. They market to a great demographic for clothing sales. I just turned thirty years old; I wear a pair of $20 khakis and a 5-year old Polo shirt to work. For shoes, I wear whatever makes my feet feel best after a day of walking. I haven’t worn a pair of skinny jeans since the ’80s. I’m not the targeted demographic for clothing retailers.

They’re looking for buyers in the teen and tween market. You wouldn’t believe the price that people pay for trendy clothes, like $200 pairs of blue jeans. These companies have created a great business for themselves. Kids beg parents for trendy logos for Christmas, and many parents are obliging. Teens and tweens with their first real job are feeling what it’s like to have money in their pocket and nothing to spend it on, and they’re going out and buying $1000 worth of clothes and charging it to a credit card.

This kind of spending may not be good for their personal finances, and being saddled with debt might make these young folks seriously reevaluate their spending habits in the future, but that’s not our concern.

These clothing retailers are examples of stocks performing spectacularly well in a very volatile market, and they have a lot of room to grow.