Getting a "Feel" for the 3 Key Pieces to the Investment Puzzle: Stock Market Direction, Company Earnings and Technicals
Being an avid sports fan, I am always interested in learning the practice techniques of the top athletes.
Kobe Bryant of the Los Angeles Lakers basketball team seems to glide into his shot with grace, no matter what part of the court he attempts a shot. In golf, Tiger Woods has a certain feel for each shot when he's on his game. In bowling, Pete Weber once said that, in practice, all he thinks about is "feel".
That word, "feel", is sort of mystical. It is something that great players know they have when they have it and also know when they don't. They work hard in practice to get that "winning feel".
The same can go for stock investing.
Getting a feel for investing is not the same as "feeling lucky" or "feeling hot" or feeling something good may happen. "Feel" is putting the key pieces together, and then you know you have a potential winning play. Why? Because you've done it before and it worked.
Great athletes perform well because they work hard, study and learn from their mistakes. Once they get that "feel", they seek to repeat it and get into a groove.
The same should go for investors. They should study the key attributes of winning stocks, review prior investments and see what went right and what went wrong. Then, they should try to avoid mistakes and improve. It takes work, discipline and control of emotions. And, the more you practice, the more you will get the "feel" for what looks like a good investment. They will not all work, but your percentage of winners should rise.
A cardinal rule in investing is to go back and look at all your investments and see what went right or what went wrong. Athletes sometimes do things wrong, and they literally "drop the ball". The same goes for investing. You may have done well with a certain investment, but, in reality and retrospect, you know you made a bad decision.
There are three key pieces to the equity investment puzzle:
- Stock market direction
- Company earnings
- Stock's technical action
There are, of course, other factors, but these are the basics.
Always ask yourself this question: Is the stock market in a bull or bear market or in a trading range? Don't listen to opinions. Look at the stock market charts yourself and study the duration and amplitude of prior bull and bear markets. Get a "feel" for them. You should also have in mind the time duration of your investment: short-term, medium or long-term.
The current bull market, as measured by the Dow Jones Industrial average, began in March 2009. It is now 34 months old as of December 2011. The Dow has moved from a low of 6,469 in March 2009 to as high as 12,876 in May 2011. That is a gain of 99 percent.
The Dow finished 2011 at 12,217. So, it has come off 659 points, or 5.1 percent, in late 2011.
When we look at daily, weekly and monthly charts, we see that the Dow remains in an overall up trend. However, one needs to be vigilant.
Corporate earnings are the key fundamental driver that can push a stock higher. Often, a stock may even begin to move higher in anticipation of strong profits, or it could move lower on any hint of even a slowdown in earnings growth. The basic principle is that bullish-leaning investors should always seek out companies with growing earnings and avoid those with declining earnings.
Some top money managers keep a "watch list" on stocks of those companies whose earnings will be strong, and by strong, we mean annual growth in earnings of at least 20 percent, preferably more.
Also, another key to look for is "accelerating quarterly earnings growth". Companies that have shown steady earnings growth over prior years and then are about to show "acceleration" can often turn out to be big winners. Usually, those firms have developed a new hot product or service that is increasing in demand.
However, one does not want to be chasing so much after a cyclical stock that is going to show accelerating earnings growth. A cyclical stock could do well, but what you are after is a firm with something new -- and "new" is the key word. Also, the stock should be liquid and have a good institutional following.
One issue that could be a candidate is Rackspace Hosting Inc. (RAX). The company, with sales of 780 million dollars, provides Internet and corporate hosting services. They are also involved in the newly developing "cloud", which is an online system that provides access to software from anywhere.
Analysts expect Rackspace's earnings to climb 60 percent in the fourth quarter to 16 cents a share from 10 cents a year ago. In the first quarter of 2012, profit growth is expected to accelerate to 70 percent with net expected to be 17 cents a share, up from 10 cents a year ago.
Overall, Rackspace's net for 2012 is projected to climb 52 percent to 80 cents a share from 53 cents a year ago. In 2011, net was estimate to be up 50 percent. The top four mutual funds holding the stock have a 5-star rating, the highest possible.
Of course, the fundamentals need to be complemented by the technicals. That will show that the stock is still in demand.
Rackspace's weekly chart shows the stock climbing from 17 back in late 2010 to a peak of 46. The stock has since been forming an ideal basing pattern. It just needs to push through upside resistance at 46. So, a move through that point with volume would be very bullish.
The ideal bullish scenario would be for the stock market to continue advancing in a bull market phase through 2012, for RAX to continue to show strong earnings growth and for the stock to break out to a new high with strong volume.However, if one of those variables should fail for Rackspace, it could spell trouble. So, one always needs to keep a close eye on the market and his / her individual holdings. A good investor should also develop a "feel" when things are not going as expected.
Mr. Fasciocco is the publisher of Ticker Tape Digest at www.tickertapedigest.com. He is a contributing writer for several publications. Mr. Fasciocco can be reached at email@example.com.