Ken Larsen's web site - My stock picking strategy

 

Selecting stocks to buy is an intricate process that is fraught with financial peril.   There are vast numbers of data elements and opinions, and deciding which ones to value and which to ignore is difficult.

 

Here are my current selection criteria:

  

#

Weight

Criteria

?

Comments

1 MUST Market as a whole  

It's best to buy stocks when the market is at the bottom of a bear market and sell when at the top of a bull market.  The market, as a whole, is like a lake that rises and falls.  Stocks are like boats on that lake.  The level of the lake is more important than the individual boats.  Bull markets then to last 5 years; bear market, an average of 18 months.

January 2016's stock market crash has shown that this advice dwarfs all my other thoughts.  Unfortunately I failed to take my own advice.  Back in July of 2015 I had more cash than any time in my life.  Unfortunately I used it to buy more stocks instead of sitting on it and awaiting a bear market.  All the stocks I bought have dropped precipitously, and I have virtually nothing left to buy more.

The Dow Jones Industrial average (^DJI) hit a high of 18351 on May 19, 2015.  I wish I could have not purchased any stock until the market was 10% below that level.  That is 16516.

It may optimal to spend the following amounts of cash at various levels:

  • Spend 25% of your cash on stocks if the market is 10% off its high.  That would be 16516.
  • Spend another 25% of your cash if the market is 15% off its high.  That would be 15598.
  • Spend another 25% of your cash if the market is 20% off its high.  That would be 14681.
  • Spend another 25% of your cash if the market is 25% off its high.  That would be 13763.

Similarly, I believe one should ideally sell stocks when the market is above the market's high:

  • Sell 25% of your stocks if the market is 10% above its high.  That would be 20186.
  • Sell another 25% of your cash if the market is 15% above its high.  That would be 21104.
  • Sell another 25% of your cash if the market is 20% above its high.  That would be 22021.
  • Sell another 25% of your cash if the market is 25% above its high.  That would be 22939.

However, the stock market has been on a bull run since early in 2009.  It's more likely to collapse than continue the bull run.

1 MUST Price

1

Don't buy a stock if its share price is below $ 5.  Such stocks are shunned by institutions and are considered "junk".  If a stock drops real low ... for example, to 20 cents or lower, it might be delisted from whatever exchange it is on.  That would dry up much of the volume.

3

9

Cash position

2

Buy stocks that have a lot of cash; ignore those who are submerged in debt.  Both of the following should be positive to a healthy degree:

  • Operating Cash Flow

  • Levered Free Cash Flow

4

9

Balance Sheet 5 Net Tangible Assets should be positive and growing from quarter-to-quarter and year-to-year.
5 8 Total Debt/Equity 2 A high number is bad.  It indicates that the company has taken on a huge amount of debt.  Anything larger than 1 indicates that the majority of a company's assets are financed through debt.

6

8

PEG

2

  • If N/A, don't buy.
  • Buy if 1 or less.
  • Hold if between 1 and 2.
  • Jim Cramer:  Sell if 2 or higher.

7

7

Dividend

1

Should be between 2% and 6%.  Those above 6% likely cannot continue paying that high and will cut their dividend.

8

6

Index Membership

3

Should be one of the following:

  • Dow Jones Industrials

  • S&P 500

  • Nasdaq 100

Of these, I prefer that the stock be listed on the New York Stock Exchange (NYSE).  This is because in order to be listed on the NYSE, a company must:

 

  • Pay a dividend.

  • "You have to make money for a year before you can list on the New York Stock Exchange." - Jim Cramer, page 38 of "Real Money".

 

Companies can be listed on the NASDAQ that don't make money. - Jim Cramer, page 38 of "Real Money".

9 6 Zacks Rating   Zacks Investment Research.  It's a paid service (fees ranging from $ 100 to $ 1500/year), but occasionally a news story will list the Zacks rating of a stock.  1 = strong buy; 5 = strong sell

10

5

P/E

1

If N/A, don't buy.

Should be between 0 and 12.  If above 12, N/A, or negative, don't buy.

11 5 RSI 6 RSI stands for ‘Relative Strength Index’ and it is a popular indicator used by technically focused investors. It compares the average of gains in days that closed up to the average of losses in days that closed down; readings above 70 suggest an asset is overbought, while an RSI below 30 suggests undervalued conditions are present.

12 

4

Insider Transactions

4

There should be more purchases than sales.

13

3

Enterprise Value

2

It's excellent if this is higher than the stock's Market Cap.  The enterprise value is the calculated worth of the entire company.  The Market Cap is the total value of all of the company's shares = the share price x number of shares outstanding.

14 2 Revenue Growth 2 Should be positive.
15 2 Price/Book 2 Should be less than 2; otherwise, don't buy.
16 1 Short % of Float 2 Under "Share Statistics", this number should be less than 6%; otherwise, don't buy.  Jim Cramer characterizes anything above 10% as high.

       

The "?" column identifies where the data element can be found:

  1. Yahoo! Finance - on the main page for a stock

  2. Yahoo! Finance - click on the "Key Statistics" page for a stock.

  3. Yahoo! Finance - click on the "Profile" page for a stock.  Look under "Details" beside "Index Membership".

  4. Yahoo! Finance - click on the "Insider Transactions" page for a stock.

  5. Yahoo! Finance - click on the "Key Statistics" page for a stock and then click on "Balance Sheet" at bottom of page.

  6. Yahoo! Finance - click on the "Interactive" under CHARTS.  Then click on "+Interactive", and add RSI to your chart.

Technical tip:  If a stock's 50 day moving average dips below its 200 day moving average, that's a bearish sign.                                                                  

      

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