You should look at a company’s charts and graphs when picking individual stocks to buy. The price of a stock is a representation of all its future cash flows (revenue & profits). That’s why Sirius XM Satellite Radio’s stock is worth only $1.30 per share and Google is worth $444.25 per share. Google is going to make billions of dollars in the near and long term. Sirius has a great product but cannot even break even. That’s a very simplified but obvious rationale as to what is consider most important when determining individual stock prices.
There are two ways to value stocks: fundamental or technical analysis. Fundamental analysis deals strictly with the discounted cash flows (DCF) we talked about above. Discounted cash flows are definitely a subject for another post later. The second way to determine the value of a stock’s share price is with technical analysis, comparing of charts and historical graphs of a company and the overall market.
When I’m considering a certain stock to invest in and conducting my own research before I buy, I like to look at the one year stock chart. I usually go to Google Finance or Yahoo Finance which both have excellent chart features.
Is the stock price’s trend going up, down, or just in a sideways fashion? What is the 52-week high and 52-week low for the stock? I like to buy a stock close to the low because it has almost no where to go but up in theory. Just remember that the price might be low for a reason such as very bad news or a flaw in the business’s strategy. The shares of Under Armor (Stock Symbol: UA), seen in the chart above, appear to be on a long term downward trend, but there is hope for a rebound in this past quarter as the stock ticks upwards. Notice the volume bars under the graph. High volume on a specific day most likely represents a news story about the company that came out that day. You may want to track those down and find out exactly what happened. Google Finance’s charts are best for this.
I also like to look at the 200 and 50 day moving average lines. Moving averages are some of the oldest and most popular technical analysis tools to valuate stock. A moving average is the mean of the stock’s price over a period of time, 200 days or 50 days. The 200 day moving average is a representation of the stock over a long time horizon, and the 50 day moving average is the near term. When a 50 day moving average is under the 200, that can insinuate a depressed stock that is lower than the value it should be priced at. A buying opportunity for a stock might be when the 50 day average starts to rise above and surpass the 200 day moving average. When the stock price rises above its moving average, it may be a good time to buy. If the price falls below its moving average, the stock is clearly on a downward slope and should be sold. In the example below, Under Armor (Stock Symbol: UA) has a few more weeks if its current upward trend continues until its 50 day moving average (red line) reaches its 200 moving average (green line).
Charts are a wonderful tool to use but not the only tool. Use it as one of the many attributes of a good stock when you are looking for one to buy.
Disclaimer: Remember that most of your investing for retirement should be through good growth stock mutual funds. I recommend only invest in individual stocks with a small amount of “fun” money.
Stay tuned for more in our six part series on picking individual stocks. Next time we will talk about dividends and dividend growth.
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