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When to Buy and Sell Stocks

Wednesday, October 3, 2007

When to Buy and Sell Stocks

When to Buy and Sell Stocks:

Slow Growers (Cash Cows): utilities, railroads, banks, financial companies

AT&T (T), Verizon (VZ), Duke Energy (DUK), ExxonMobil (XOM), Union Pacific Railroad (UNP), Bank of America (BAC), Bank of Montreal (BMO), JPMorgan Chase (JPM), Bear Stearns (BSC), Goldman Sachs (GS), etc.

How to Buy: check for cushion in earnings to eliminate risk that a fall in earnings could erase dividend. Buy when yield is attractive relative to stock’s’ history.

When to Sell: Fundamentals start to deteriorate (losing market share, adding too much debt, acquisition of unrelated business, no research and development or share price has appreciated 30 to 50 percent and yield becomes unattractive)

Medium Growers (Stars): Large established companies that continue to grow at a moderate pace.

Often huge companies: Coca-Cola (KO), Procter and Gamble (PG), Colgate-Palmolive (CL), Kraft Foods (KFT)

Grow in 10 to 12 percent range with high degree of certainty.
Can be bought when undervalued for 30 to 50 percent gain.
Offer good protection from recessionary times, (Sub Prime Mortgage Meltdown)

How to Buy:
Value, with historically low P/E

When to sell:
P/E rises above historical average, or if growth starts to slow down, or new products fail

Fast Growers (?): smaller aggressive companies with growth estimates above 20% a year (Most will have very high P/E’s). A lot of tech companies can be found here.

iROBOT (IRBT), 1-800 Flowers (FLWS), Baidu (BIDU), Google (GOOG), etc.

How to Buy: Make sure plenty of room for expansion, Note whether expansion is speeding up or slowing down. Be careful if the P/E on the stock is greater than the growth rate of the business.

When to Sell: Watch for end of rapid growth phase. Sell if P/E ratio is well above the current growth rate or if company has expanded as much as it reasonable can (Watch out Starbucks (SBUX)). Also, look upon unanimous Wall Street buy recommendations and heavy institutional ownership as sell signals.

Cyclicals (Boom and Bust): autos, airlines, tire companies, steel, chemicals, defense, manufacturing.

Ford (F), Honda (HMC), Toyota (TM), Boeing (BA), Delta Airlines (DAL), Michelin Group (ML), Alcan (AL), Dow Chemical (DOW), Allied Defense Group (ADG).

Sales and Profits rise and fall in response to an expanding or contracting economy. Timing is everything and stock swings are huge.

How to Buy: Watch sales and inventory trends and cost cutting plans. Buy after extended period of misery when business conditions start to look better.

When to Sell: economic slow down begins potting up in the media, inventories begin to rise, hiring ceases, the Fed indicates possible rate cuts may be necessary. Some Cylicals are front runners while others are laggards so look for where a specific industry falls in its cycle.

Turnarounds (Nightmare to Love Affair): Normally established companies with turbulent times. If they can turn things around huge stock movements can occur (Be the Vulture).

Magna International (MGA), General Motors (GM), Merck (MRK), Pfizer (PFE)

How to Buy: Ask touch questions. Can company survive raid by creditors? How much cash and debt? What’s left for shareholders? Is the company simultaneously cost cutting and growing sales?

When to Sell: After it’s turned around and all troubles are over. Also if inventories start to rise faster than sales, or debt increases, or if P/E ration gets too high in light of earnings growth. At least take some of your profits once the company is back on track.

Asset Plays (Finders Fee): Railroads usually land rich, may have mineral and timber rights that the market is unaware of.

Canadian National Railway (CNR.TO), Union Pacific Railroad (UNP)

How to Buy: Ask probing questions: What’s the value of the assets? How much debt is there and is debt increasing? Is there a catalyst (corporate raider) in the wings to help unlock the value?

When to Sell:
After the market appreciates the value of the assets. Once it’s in the news you know it is time to, at minimum, take some profits.

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