Fundamental Analysis and Position Trading: Evolution of a Trader

CHAPTER 2

Stock Selection

This chapter is about selecting stocks for investors using methods that have proved helpful. Other tips follow in the coming chapters, so you can create selections that are ideal for your situation.

When I created my website (http://thepatternsite.com) in late 2006, I started receiving emails from people asking how I selected stocks in which to trade or invest. I thought back to the 1980s in the public library when I hunted for stocks in Value Line to populate my watch list. I took my picks home and then typed the quote information into my computer each day from the Wall Street Journal. That was easy enough to do until the list grew to 500 stocks, but it usually took less than an hour to update my database manually.

Some old timers will claim that you get a better feel for the stock if you manually type in the quote information. My reply to that is hogwash. With 500 stocks, there is no way I can keep them separate in my mind. I am not that smart.

Anyway, here are the Value Line criteria I used, and they still apply today.

• The stock needs a heartbeat. That means in two of the past five years, the yearly high must be at least twice the yearly low.
• If the stock was too expensive, I threw it out. The preferred price range is $10 to $20. In fact, a study I conducted (see http://thepatternsite.com/prices.html) shows that chart patterns in stocks priced from $0 to $10 outperformed the other ranges, but I did not know it back then.
• The stock must have a price-to-earnings ...