First consideration in buying stock is safety.
Safety is derived more from the good timing of purchase and less from the financial strength of the company.
The biggest stocks and growth stocks also decline during bear market. Even income stocks (stocks with high dividends) decline during bear market or periods of high inflation
Most stocks are price cyclical
Buying stocks as the market rebounds from bear market lows. It is the safest time and it offers the best opportunity for large capital gains.
The best time to buy most stocks is when market looks like a disaster. It is then that the risk is lowest and potential rewards are highest
Buy for large capital gains
I believe that the investor should look for stocks that are capable of tripling in value within two years. Since it is unlikely that the investor will buy the stock at lowest price and sell it at highest, it is more likely that he will double his investment rather than triple it.
Stocks should not be purchased unless there is a good chance of a big move.
Superperformance= SPF (as short form)
The selection of common stock for large capital gains depends primarily on a search- a search for super-performance (SPF)
I define SPF stock as one that tripled in last two years.
Rate of price increase >300 in two years
Move was considered ended if price failed to make a new high in last six months
Or a if there was a price correction of more than 25%
Super-performance has occurred in well known growth stocks and it has happened in well known mature companies at some stage in their growth.
It is triggered by many actions such as earnings, mergers , but most often it is found in stocks that are rebounding from oversold conditions, such as those characteristics of bear market bottoms.
When you invest in common stock you must make three correct decisions: when to buy, which stocks, and when to sell. The evidence is overwhelming that really good price gains are made by stocks as they rebound from bear market bottoms.
SPF price action is not consistent year after year in even the greatest growth stocks. The stock prices usually move rapidly upward for a period of months or several years. That stage might be followed by price reaction or sideways price moves. After a period of consolidation, which sometime lasts for years, there might be another SPF stage.
Price SPF phases like these can be highly rewarding financially in a relatively short period of time.
Many SPF moves can be correlated with earnings increase by companies.
Most SPF stocks belong to small companies with relatively few shares of stocks.
Most SPF stocks experience severe declines after SPF phase has run its course.
Three causes for price reactions in SPF: weakness in general market, overpricing of stocks, and drop in stock's earnings. Stock price begin to slide much before earnings slide.
A winning combination in potential SPF stock is rapidly rising earnings, a small supply of stock, low P/E, and a product that promises strong future growth.
Superperformance= SPF (as short form)
After you decide on ideal time to buy, next question is "which stock"
Look for price volatility . The volatility a stock experienced in past continues in future. Look for highly volatile stocks.
Volatility is a result of company's size and nature of the markets for its products, its financial leverage, and volume of trading in its stock.
Volatile stocks have larger swings.
Huge and mature corporations do not have high price volatility. Small and medium companies do.
Large % increase in price is caused by a number of factors, but particularly by the size of the float.
Demand for stock is determined by several factors including: price levels, price action, future outlook, earnings trend, overall market direction, sponsorship, cost and availability of money
Some of the strongest SPF price moves have been result of a severe imbalance between the limited supply and the demand of investors.
Opportunities for a big gains in stock market are most likely to occur in relatively small companies than in companies with many millions of shares outstanding. Look for small company introducing a unique product that is likely to become widely used. This is the combination that has time after time resulted in dynamic growth and volatile SPF price action.
Financial leverage in a stock is often responsible for high volatility in the stock's price. In such companies reported earnings can fluctuate greatly if there are large amounts of debt in the capitalization.
Stocks with high leverage offer good opportunities for profit provided you can time entries and exits. Such stocks are risky but very profitable.
A stock has high leverage if the company has high proportion of bonds and preferred stocks relative to the common stock.
A relatively modest increase in income in such companies leads to disproportional increase in EPS
Airlines and utilities are best examples of high leveraged companies.
When high leverage is combined with an erratic income pattern- such as railroads or certain cyclical businesses, volatility in EPS can occur resulting in great volatility in stock price.
Financial leverage is also found in warrants, stock options, and in many low priced stocks.
Retail sector is another high leverage sector . Retail tend to have high volume but low margin. Any improvement or deteriorations in margins have strong impact on EPS
High leverage is involved when a small company discovers large oil field or metal ores.
Safety is sacrificed when you select company with high leverage. High leverage companies have greater danger of going bankrupt.
During periods of recession, when profits decline for most businesses, companies that have large amounts of debt sometimes have no profits at all. But as the national economy emerges from recession, corporate sales and profit margins improve. The % increase in profits can usually be larger than for stocks with small leverage. Highly leveraged companies, then, are even more business cycle sensitive and often are buying opportunities when the stock price is depressed.
Another type of leverage is that found in low priced stocks.
Best place to look for Superperformance (SPF) stocks is among stocks selling at 5 to 20
Comparatively few high priced stocks move in to SPF action
Cyclical stocks often have abrupt declines in sales or earnings that are temporary.
Many low price stocks have only temporary problems and can rebound if earnings and sales rebound.
Another kind of leverage is warrants.
A warrant is preferable to buying common stock.
Avoid warrants with less than one year to go before rights expire and options become worthless.
Look for new earnings power
Primary objective of companies is profit.
Companies are not in a business to make automobiles or soap or television set or widget, they exist to make money.
Investors should evaluate companies from the point of view of their profit generating potential.
In established companies earnings are predictable. Most of them are too large to be affected by new products. Their product lines are too extensive for a new product to make dramatic change in profit.
But in smaller companies profit are strongly affected by change. Their prices often do not reflect changes like new product launch or new management.
One place to look for new earnings power is to look where change is happening.
Change means opportunity, and change is one thing that is certain.
Wars begin and end
Fed policy changes from tight to plentiful
Technology changes constantly
Technology changes during past century have afforded countless opportunities for profit.
New industries in last century were
railroads
automobile
airplanes
electricity
radio
computers
rocketry
electronics
birth control pills
mobile houses
travel
Many shareholders who bought shares of these companies at early stages profited handsomely
Today there are other companies in similar early stage of development
Change in company might involve change of management or acquisition of another company
Major mineral or oil find
Change implies the introduction of a new element that has not been factored in to current stock price.
