Stock Picks 2:How to pick the best stocks for profits

In my last post, I talked about the importance of choosing the right time to start to pick stocks . The market should be in a trend that is in your favor. If you are thinking of going long in the market (buy low sell high), do ensure that the market is:

1) making higher highs and higher lows (presence of an uptrend) for weekly graphs,
2) the increase in the market indexes is accompanied with good volume as support.

This will ensure the market climate is safe currently, but do take note that the uptrend should not have lasted over a year. Any later and you'll be the last person to the party and worse still, end up being the one everyone unloads their stocks on. In fact, once the uptrend is confirmed (less than 1 month is good) you should start to load up your shares in anticipation of the continuation of the uptrend before the financial institutions and the mutual funds have finished buying. The converse is true if you are thinking of shorting the market. Do remember that fear is a stronger emotion than greed and as such, the market index drops will be much faster in a bear market than market index increases in a bull market.

In short, for going long, do learn to spot institutional buying with the indexes, detect what stocks the financial institutions and mutual funds are buying and buy your stock picks before they are done and all the buying power is exhausted. The converse is true for going short: learn to spot institutional selling with the indexes, detect what stocks they are shorting and short sell them before they are finished with it and all the selling power is exhausted.

For this post, I'm going to discuss about how pick stocks for the greatest profits and minimal risk. In order to do that, let's look into one of the most profitable stock picks ever and do a quick analysis of the company behind it. Let's talk about... Apple.
(Chart of AAPL, courtesy from BigCharts.com)

Over the last 5 years, AAPL has risen from $50 or so to about $250, which makes for a 250% profit had you bought shares in it before. What led to the meteoric rise in AAPL shares? Let us dissect it from different angles:

1) The first thing that should pop into everyone's heads is that Apple should be making a lot of profits. Let's check Apple's EPS (Earnings Per Share) for the last 5 years:

2005: $1.42 (up 246.3% from 2004)
2006: $2.27 (up 59.9%)
2007: $3.93 (up 73.1%)
2008: $6.78 (up 72.5%)
2009: $9.08 (up 33.9%)

Notice anything interesting? The EPS seem to be rising at exponential levels and it actually beat analyst's forecasts every time. This tells us that not only is Apple a highly profitable company, it's profits are growing solidly every year. This is one of the most important reasons why AAPL shares are doing so well. Compare this with some other company whose EPS has been stagnant for the same time period and you will see the difference.

2)Other outstanding metrics about this company include the Return on Equity (31%), Free Cash Flow ($9.97) and outstanding sales (increase in sales from 32% to 61% as compared to the same quarter a year ago) record. It has no debt and has billions of cash on hand. This tells us the company fundamentals are excellent and this has no doubt convinced mutual fund managers and financial institutions to be a shareholder in this excellent prospects.

Do take note that I'm not trying to teach you how to analyse a company's accounts or do value investing. I'm just trying share the general principles of safe and profitable stock picks here, and pointers 1 and 2 tell us that companies with quality fundamentals like Apple are the ones that provide the most profitable stock picks. :)

3) Apple has a visionary CEO in Steve Jobs. He was a co-founder of Apple, got ousted for a while (he went on to start up another highly successful company Pixar which was eventually listed and merged with Disney) and came back to lead Apple to what it is today. In fact, in this case my opinion is that Steve Jobs was the soul of Apple who brought it back to life and even to up to it's iconic status of today. This tells us how important one person can be: the CEO. Another example I can think of will be Warren Buffett, CEO of Berkshire Hathaway. CEOs can make or break a company (think Worldcom and Enron) and some special people can turn around a company and bring it to greater heights. If the CEO with a sterling reputation joins a new company, chances are that he's do very well and be able to turn the company around too.

4) Let's talk about products. Apple produces MAC computers, iPods, iPhones and iPads for consumers and fans. MACs are slowly gaining market share over PCs with Windows, iPods are dominant in the MP3 music industry, iPhones do very well in the mobile industry (although Android by Google is catching up) while iPads have created an industry for themselves and Apple's potential competitors in the tech industry are eager to have market share in it. What does this tell us? Innovative products that can capture a dominant market share or are even able to create an industry for itself helps the company to do very well in terms of fundamentals and this has helped in thr rise in share prices.

All in all, the stock picks with the greatest benefits and minimal risks are those those with excellent fundamentals, a visionary CEO as well as creative and innovative products to offer to the consumers. This results in growing EPSs and sales which further drives up the prices of these shares. If you pick stocks with these qualities, ensure that you monitor them and buy shares along with the financial institutions and mutual funds start doing so and to continue to monitor them. Exit them when the big boys start to do so as well and this will ensure you will make profitable and safe stock picks in the stock market.

Ok, that's about it for today... I will return again when I am free and we'll discuss more about stock picks and more aspects of the stock market.

Tags: stock market, investing, trading, make money, stocks, finance, wealth building, stock market basics, stock picks

Stock Picks 1: How to choose the right time to pick stocks

One of the most important skills for a trader or an investor is to be able to have profitable stock picks. Selecting profitable stock picks is certainly both an art and a science (and certainly not an easy thing to do) and that is why many people are not able to do it well. However, it does not mean one is not able to do well consistently. It takes years of practice and monitoring to be good in it.

Before we can do stock picks profitably, we must remember what we have learnt about the nature of the stock market. This is because no matter what stocks picks we have, it will not be profitable if we go against the current condition of the market.

What drives the stock prices up or down? If you have read to my previous post on Stock Market Basics 101 and the stock market timing guide, you will know that the big boys (aka the financial institutions, mutual funds and exchange traded funds) are responsible for the upside and the downside of the market. Now, the interesting thing to note is what they actually do to bring down the market indexes.

Before that, let's understand how the big boys do their stock picks. What they do is that they make their purchases or sales in several large blocks that can last from days to several weeks. This is to prevent the stock price from getting too expensive to buy or too cheap to sell off as people can easily follow their lead if they do it all at once. They will also stock picks from the same sector or industry at once as they seldom purchase a particular stock only. When this happens, you can notice that stocks in a sector start to rise, thus resulting in the laggards rising in sympathy with the group leaders. However, when they do that we retail investors can follow their tracks easily by checking for the volume that accompanies the stock price change. If the volume is higher than average significantly, say 30% or so we can be sure that the financial institutions are behind this. That is why we should always check the volume together with the change in stock prices too determine the reality of the situation.

What actually happens is that some of the big boys will start selling a number of stocks in large amounts (these stocks are usually related by sectors, say the tech sector and so on). When the selling power overwhelms the buying power, the prices of the stocks start to slide as a result. This will result in the the index being unable to rise, in fact it starts to slide as the selling "gravity" starts to act on the indexes. As the indexes go down, this weighs on all other stocks and their prices start to follow south as a result. If there is serious net selling, the drop in the indexes will be accompanied by a rise in volume, especially if the volume is greater than the previous day and greater than average.

The converse is true for a rise in the indexes. When the big boys start to purchase several stocks in large amounts over several weeks, the stocks' prices start to rise and this will lift the indexes. As the indexes go up the other stocks will tend to follow (a rising tide lifts all boats). If the net buying power is strong, there will be a good rise in the indexes followed by good volume.

The first golden question on stock picks is this: How do we differentiate the stocks that have been bought and those whom are lifted by the tide? Check for the rise in price followed by good volume. If the stock rises strongly in above average volume ( minimum 30%) this is one that the financial institutions and mutual funds are targeting and are buying. Note that one day of accumulation will not be enough to state that the big boys are buying. There should be at least two days within a space of a few weeks. Similarly, if we are looking into shorting we should be looking for stocks that are selling off in big volume. This tells us the big boys are doing as such and we should be doing the same too.

Before we get to the first rule of profitable stock picks, we need to know what exactly is the essence of profitable stock picks. If you have not realized it by now, it is to actually to decipher what stocks the financial institutions/mutual funds/exchanged traded funds are buying or selling and join in the ride. It can be done as remember, the big boys actually do their buying or selling over several weeks and we do not have that restriction. Learn to read the footprints and get in early way before the selling or the buying is done.

Thus the first rule of profitable stock picks is as such:

If you are going long in an uptrend market, purchase stocks that are rising in strong volume over a few days as these are the reasons why the indexes are rising.

If you are shorting in a downtrend market, sell short stocks that are falling in strong volume over a few days as these are the reasons why the indexes are dropping.

When a stock price rises with the rest of the market but in weak volume, it is merely rising with the tide and should not selected as one of your stock picks. Similarly, when a stock price drops in weak volume, it is not the target of the financial institutions/mutual funds/exchange traded funds and should not be considered a short selling candidate.In fact, the stock might have the power to do exactly the opposite and burn a big hole in your pocket.

Ok, this concludes part 1 of the stock picks series. I will be posting the part 2 within the next two weeks (my work is keeping me a little busy right now). Thanks for reading and hope that you have learnt something on stock picks that are valuable! :)

Tags: stock market, investing, trading, make money, stocks, finance, wealth building, stock market basics, stock picks