Don't Be An Average Trader, Use Better Trades

It is all enough to drive the average trader nuts. Then, add into the mix an Iraqi dictator whose defiant stance has the whole world wondering when the first bomb will be dropped, by whom and what will be in it? Many of the basic economic indicators are weak and the latest rumor on the street is that the Fed MAY cut interest rates another 25 basis points to a 60 year low of 1%. This week the housing sector posted good permit applications and sales numbers, two indicators that bode well for a continued strong housing market.

Today, most of the stocks that were reporting posted better than anticipated earnings and the Dow managed to break a 5-day losing streak. We are in the midst of earning 's season and the market could not be any more crazy.

Miagi 's advice to Daniel san in "The Karate Kid"; "Daniel san, the best defense is to not be there when the punch is thrown." Trade different stocks or indices, trade different strategies that adapt to the current market environment and follow Mr. The answer is, "Don't be average!" Don't do what everyone else is doing. So, what are you going to do?

In this market I think that there are two tacks that bear your scrutiny. The first is to take a look at defensive sectors, sectors where money goes to hide when there is so much uncertainty. Precious metals are one area you should watch. From the end of 2000 to mid 2002 most of the gold stocks doubled in price while the rest of the equities market hemorrhaged. Many of these stocks have consolidated or gone down slightly as we have had a weak recovery in the equities over the last few months. Today, amid fears of war in Iraq the gold stocks surged. This could be an area well worth your attention.

Another sector that has often been a hiding place for capital is the pharmaceutical stocks. These companies have a license to steal and they exercise their license well. Case in point, many drugs that sell across the counter in the U.S. sell at 50-75% discounts in Canada. There is a thriving business by Canadian companies selling prescription drugs across the border. The drug makers are threatening to boycott companies in Canada who participate in this practice and there appears to be a trade war brewing. The point is that these companies will go to any means to protect their bottom line at the expense of the consumer, many of which are held captive by the drugs they take. If you are on the drug consumption side of the market it is not a pleasing position to be in. However, if you are on the investing side of the market, not many positions could be better. Add to that the fact that the pharmaceutical lobby is one of the largest in the nation 's capitol and contribute heavily to both parties. It is unlikely, no matter how much the politicians profess pending change; that any drastic changes will be made that will adversely affect this powerful industry. You might want to head for this protective harbor right now!

Before I leave this chain of sectors to watch I will add one more suggestion that may have merit. I have been promoting the utility sector for three months. It is also a defensive sector which appears to still have some upside potential.

Now to my second tack that you might take. For the last four months I have been trading "Under the Radar" stocks. Stocks that are undervalued and have improving fundamentals. It has been a real winning combination so far. I have created a scan that lays these undervalued stocks at my feet and when the technical indicators present themselves I pick up a bargain.

A couple of cases in point. I invested $1000 of my daughter 's savings in Corning when the stock was trading at $3.33, the dollars into the trade were $999. Four days later I sold 200 of her shares for $4.33 that was a 20% profit. I have held onto 100 of those shares for her portfolio. I fully anticipate that when she returns from her mission to Brazil that this stock will be trading well above the $4.33 price where I sold her other 200 shares.

Part of my reasons for buying the stock was that the company lost $1.42 for the last 12 months and the estimate going forward was for a loss of $.11. That is a BIG change. I know it is still a loss, but boy are they getting better at not losing so much! Add to that the fact that they were trading at a price to book of .74. That means that if I were capable of buying every outstanding share of stock, I could sell off all the assets and make a 26% return on my money. With this fundamental information in hand I waited for the technical indicators to show the right time to buy the stock, jumped in and four days later jumped out with a nice profit!

A similar thing happened with Vitesse Semiconductor VTSS. I bought my daughter 300 shares of stock for $2.64 and five days later sold it for $3.13. Fundamentally the stock was a value when the stock was trading just barely above its book value. It was 42% institutionally held and showed it was going to go from losing $4.78 a share to just losing $.15 a share. It was also trading at a current ratio 20% above the rest of the sector.

The point to all this is that many of the most closely scrutinized stocks have been trading "Above the Radar". EVERYONE watches them and they are subject to every whim of the market. In the meantime, many of these little "Under the Radar" stocks just keep doing what they have been doing because they are not nearly as closely watched.

So far it has been a highly profitable strategy to be trading, especially in these turbulent times. Join me at www.marketmastergroup.com for more commentary and access to a list of my upcoming events.

Good luck and good trading

Doug Sutton

Analyzing Your Investments With The PEG Ratio

A thorough analysis of these dueling indicators reveals that one is definitely superior to the other. The former has been around for as long as the stock market itself, the latter originated more recently. The two most important numbers that investment analysts look at when evaluating a stock are the P/E ratio and the PEG ratio.

The ratio is calculated as follows: Using it, an investor can get a sense of whether a stock might be overvalued or undervalued. It is used to calculate how expensive or how cheap a stock is relative to its earnings. The P/E is the price-to-earnings ratio.

P/E = Price per share / Earnings per share

The price per share is the current market price for a single share of stock. The earnings per share is the net income divided by the total number of shares outstanding. You can find net income by looking at a current income statement, which almost all corporations now make available on their company website.

The lower the P/E, the cheaper the stock is. The higher the ratio, the more expensive the stock is relative to its current earnings. However, that does not give you the full picture. The reason why some companies sometime trade at very high price-to-earnings ratios is because they are expected to grow tremendously in the months and years ahead. So, investors are willing to pay more than what the company is currently worth because they feel the company will be worth a lot more in the future.

So, you should not necessarily run away from a company with a high P/E. In fact, those companies are sometimes the best investments, because if their earnings climb tremendously, then the stock will pay a large dividend in the future (for the uninitiated, dividends are a percentage of the profits of a company that are distributed to its shareholders). So, a high P/E ratio can be a very good thing or a very bad thing.

As with a high P/E, a low P/E can also be tricky. If it is low, this could be an indication that the earnings of the company are expected to plummet, causing investors to run away from the stock, resulting in a low share price.

Or, the low ratio might indicate that the company is currently undervalued, making it a good buy because as long as the company is expected to have stable earnings growth in the future, then the share price will go up. It is not easy to discern whether a high or low ratio is good or bad; you need to take into account the expectations for future earnings growth to understand if the P/E ratio is a positive or a negative.

The pitfalls of using the P/E ratio to interpret the relative worth of a stock resulted in analysts coming up with a better measurement, which is known as the PEG ratio. The PEG refers to the price-to-earnings growth ratio. It is calculated like this:

PEG = (P/E) / Annual earnings-per-share growth

The lower the PEG ratio, the more undervalued the company is. A PEG ratio of 1 or less is considered excellent. For example, if a company has a P/E ratio of 30, and annual earnings-per-share growth of 50%, then the PEG would be 0.6, making this company an excellent buy because it is undervalued and the stock price will almost definitely climb. However, if a company has a PEG of 1.5, that means that the stock price is high relative to the earnings growth, which means that unless the company is supposed to grow at a faster rate in the years head, the stock price might not hold up.

So, it is obvious that the PEG is a much more valuable tool for investors to use. It reveals whether the high price of a stock is justified based on whether earnings will grow enough to continue to drive the stock higher.

Therefore, using the PEG, you can truly ascertain whether the price is currently too high and whether it is a good time to buy the stock. Increasing earnings are the driving force behind an increase in the price of a stock. The P/E falls short in this regard because it does not take into account by what percentage earnings are growing each year.

Research carefully the companies you are going to invest in and you will do fine. They may not go up right away, but in the long run they should increase significantly, unless there is something fundamentally wrong with the company. Try to set aside some money for investing, and begin to analyze stocks and buy the ones that have a low PEG.

I hope this information has helped you form an understanding of how to evaluate stock prices.