Since You AskedQ&A
Since You AskedConfused about some aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. To submit a question, post it on the Stocks & Commodities website Message-Boards. Answers will be posted there, and selected questions will appear in future issues of S&C.
ANALYST REPORTS
I am part of a small group of traders and investors, most of us pretty new to the business. We spend a lot of time doing research, checking charts, fundamentals, technicals, and all the rest. A newcomer to our group is telling us we should really just focus on analyst reports, because it’s easier to rely on these “experts.” What do you and your team of traders rely on? —Jeric
Let’s go through the list, and then I’ll answer your question regarding analysts directly. First, we are big fans of doing research ourselves. Of course, we have teams who share in the work, but when it comes to the individual trader, especially one with fewer than five years’ solid experience, doing it yourself is almost a must.
Fundamentals are very important, especially for longer-term positions. We focus on factors like price to book value initially. The book value (BV) is basically the value of the company based on assets minus liabilities and can be thought of as similar to the BV of your car. You wouldn’t want to pay $10,000 for a car with a book value of $5,000, right? Sort of similar with stock valuations.
Let me explain. If a stock has a price to book value of 1, if they sold all their assets and paid all their bills, they would end up with an amount of money equal to the number of outstanding shares times the current price. This is parity, or BV of 1. If the price of the stock is double the BV, then the price to book would be 2, and so on. As price moves up, the price to book goes up; if they lose money for the year or quarter, the price to book would go down. However, many growth stocks will have a high price to book since they are counting on future earnings, so be careful using this valuation alone.
You wouldn’t want to pay $10,000 for a car with a book value of $5,000, right? Sort of similar with stock valuations.On to the technicals (charts, long and short term, moving averages, and so forth). We use the phrase “Fundamentals tell you what to buy, technicals tell you when to buy” — or sell. Remember we can make money both ways, but most investors tend to be buy only. Then there are other statistics, which tell us how often, and how much; I mean things like dividend yield, price/earnings ratios, and the like. Support and resistance are always good to keep in mind, and this aspect shouldn’t be overcomplicated. Simply draw a horizontal line on one-year and five-year charts, where you see the lowest prices for the stock, same for the highest prices. Often, you’ll see that the resistance point is where the dividend yield is no longer attractive, and the support level is where it beats current returns on the Street.
Another thing we do is compare the stock we’re interested in with others in the same sector. We use this in our trading of correlated pairs, buying the best stock, shorting the weaker stock, based on all this criteria. We do this for everything, from simple daytrading to long-term investments.
Finally, there are analysts’ reports. Everyday, we see upgrades and downgrades for dozens of stocks. This can have an impact on stock price, especially in the short term. However, I have seen so many occasions where one bank or analyst will upgrade, and another downgrade, the same day for the same tradable. How is that possible? Aren’t they reviewing the same information? Since I have seen this disparity so often, I can’t put too much faith in them. So in a 1 to 10 scale, I place analyst reports at about a 4 or so. Hope this helps. —DB
Now, if my editors will indulge me, I would like to announce the first “outside of the Bright family” officer in Bright Trading, LLC. We have appointed Rob Friesen, a 15-year Bright veteran trader, educator/mentor, and hard-working man from our Langley, British Columbia, location, as our new president and chief operating officer. Congratulations, Rob! (For more information, go to www.stocktrading.com)