Tuesday, April 17, 2007

What I look for in Stocks? PART 1

What I look for in stocks? PART 1 (Other parts will come in coming days,weeks, months)

I have gotten this question many times over the last 18 months since I started the StockDoubling.com Project. (Wow its only been 18 months it feels like longer then that.)

The easiest way to answer that is I look for VALUE.

Their are stocks trading that I feel are undervalued, fairly valued, and overvalued. Of course this is all based on the #'s that I look at. I am not saying I have the PERFECT valuation for all stocks. Their are stocks out their that will always be undervalued on paper but are really dogs because of one thing or another. And other stocks that I feel are EXTREMELY OVERVALUED continue to go higher and higher.

This is what works for me and that is all I can go by. I can't take someone else valuations and use it for my own trading as that may not suit my type of trading or risk factors.

When I go looking for stocks whether it be just looking in Barrons or on message boards I look for the doubling factor. Does the stock have the ability to double in the coming 12 months. In other words if the stock has traded between $1.50-2.25 for the last 2 years and doesn't move much and is currently at $2 per share more than likely I am not going to look at that stock. I don't want to be sitting in a stock for years even if it is undervalued but if NO ONE knows about it, it will always be undervalued.
I want to see some movement so as to know that people are following the stock. Even if its at its lows for the year I don't care at least I know people did own it and sold it and may jump back in if things turn around etc..

I look at value thru a couple different data sources. The one I will talk about today is book value. ( I use yahoo finance for a lot of my data it will show you book value as well under key stats when you type in symbol of the company you are looking at. It isn't always accurate but it gives you a rough idea. You will have to look at recent 10Q's for the company for exact #'s.)

Book value is all the company's assets minus all the company's debt. (Hopefully they will have a positive book value.)
A great example of this was my 2nd pick PSIT.
At the time when I picked the stock the company had a book value of $2.12. But the stock was only trading at .76 per share.
(Their are different things that go into book value as far how much cash they have, true assets vs goodwill etc.. which I won't get into a great deal here.)

So the company had a worth of over $2 per share yet the stock was trading at less than .80 that was good value. Does that mean its a good stock to buy? NO!!! I don't base what I look at always on book value. But it is something that I do look at and I think is important.
Other factors that went into my decision for PSIT were price to sales and the fact they were growing revenues at a good clip.
They had a market cap of roughly $10 million and the company was doing over $80 million in revenue. And they were looking to do $90 million in the coming year.
Their book value was actually going DOWN by about .25-30 per quarter. But revenue was increasing at a good rate.

They were still losing money each quarter but being a company that I projected would do $90 million in revenue and the company was only worth $10 million. And they had a book value of $2+ a share I thought it was a great stock.
And PSIT proved me right. (I got out on a big rally one day however since that one day PSIT has continue to move upward)
Actually it is about 11 months since I originally purchased PSIT for the StockDoubling.com project. I bought it on May 24th 2006. As of today April 17th the stock is at $1.90. (FYI the PSIT finished with $91 million in revenue for 2006 so I was in the ballpark)

Had PSIT not been growing but had a good book value. (Say I forecasted them to do $65 million in revenue for 2006 instead of $90 million) Then book value really isn't that important because they aren't growing their business anyway and they will be losing money quarter after quarter.
So their is NEVER only 1 thing that matters. Their has got to be more than just 1 thing otherwise it won't make my list.

So far all 4 of my stock picks for the project (Not including DFNS) I have exited the stock in about 4 months or less. (GNBT, PSIT were in 4 months, HIHO was 2.5 months, ATSX about 2 months)

Exiting all the stocks that quickly is GREAT the problem comes in when it happens so fast you lose the vision of what the point of the project is. Which is to find 1 stock per YEAR to double. And so far we have been fortunate enough where we have only had to wait 4 months. Sometimes it will take longer though so patience is key. The PSIT entry was only 11 months ago but since that time I have entered 3 other stocks (HIHO, ATSX, DFNS) that is why it seems so long ago to me. I have to be careful in that not to rush the project faster than it needs to go.

Watch book value it is one of the things I look for when picking stocks!

Steve Hoven

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