My entire focus is in determining what is the best stock to buy right now. Have you noticed that there is a big difference between market commentators versus those who actually trade for a living?
It seems like everyone wants to be a “mini-John Murphy” or something. But I have a question for you. Have you ever heard John Murphy or Arthur Hill mentioned as one of the top traders on Wall Street? This is not an insult to John Murphy. I have mad respect for John Murphy.
Best Stocks To Invest In
The best stocks to invest in are going to be what are called “story stocks”. You can know nothing about reading a chart but if you can pick story stocks, you can become a billionaire.
Think about what the best stocks to invest in meant for Warren Buffett or Peter Lynch. Neither of these investing legends had a need for charting software or stock screeners. All they had was the uncanny ability to pick story stocks and to know which stories could turn into millions of dollars.
Consider one of Warren Buffett's most famous quotes, “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
In other words chartist or technical analysts believe that the best stock to buy today is the one whose price is oversold and at a bargain. The company financials are secondary to the chartist. For the chartist it's all about price and the patterns on the chart. Warren Buffett put price second and the fundamentals of a company first. In other words, for Warren Buffett, it's all about the “story” of the company that the financials and broader industry tell.
When you think about it, the best penny stock to buy right now is determined by the “story”. Penny stock pump and dumps are all based on “stories” and very little on financials. Penny stock promoters know how to tell the story behind a penny stock, even if they have to make it up.
Warren Buffett made a lot of money in penny stocks when he was younger, according to the book The Snowball. He loved investing in cheap stocks at discounted prices. He made a lot of money buying penny stocks. Warren Buffett could find the best penny stocks to invest in because he knew how to evaluate the “story”.
Best Stock To Buy Right Now
As modern traders we have to be good at both determining the story of a stock and at chart reading. This is a balance that you need to establish within your own mind. In earlier lessons I have showed you how to use a stock screener to find stocks but that is not where you should end your learning. You need to get good, I mean REAL good, at determining what a good story is. Again, you could know nothing about stock screeners and charting and still become a billionaire, like Warren Buffett, if you can get good at determining the story behind a stock.
Determining the “Story”
Here is how to find stocks by determining the story. Go to Finviz here and signup for a free account.
Notice the list of stocks that are the top gaining stocks for the current day. Start going down the list by clicking on each ticker then going to the news section to determine what the “story” was that caused the stock to explode higher. This is the best way to determine what a good “story” is.
For example, Pernix Therapeutics (PTX). For months (since June 2013) the stock had been going down on fears of a delisting from the Nasdaq for failure to comply with the Marketplace Rule 5605 which requires that the Audit Committee be comprised of at least three independent directors. The company filed a Form 8-K on November 6th 2013 which stated, “On November 4, 2013, Pernix Therapeutics Holdings, Inc. (“the Company”) received notice from the Listing Qualifications Department of the Nasdaq Stock Market that the Company has regained compliance with the Nasdaq Listing Standard.” This caused the stock to explode higher as short sellers who were betting the company would be delisted covered their positions after a massive short squeeze began. We can verify this by looking up the short interest on PTX on the Nasdaq's short interest page here.
Anything over 3 days to cover is a short squeeze candidate so at 9 days to cover, we know that the Form 8-K caused a massive short squeeze in PTX making it the #1 gaining stock of the day as short sellers raced for the exit.
Therefore, when a Nasdaq listing requirement is broke and a company is served notice of a delisting, this can be a great “story” for you to play for awesome profits. If you think the company is fairly decent and is not going out of business then, at some point, they will comply. Watch the stock for short sellers to pile in. Track the short interest days to cover metric. If it goes above 3 days to cover, the higher the better, you can take a long position and go for a short squeeze against the short sellers.
Let's look at the next stock on this list: Santarus (SNTS). Biotech competitor Salix Pharmaceuticals made a $32 per share bid to buy the company. The stock jumped up over $8 in a single day because a new value has been set for this stock by Salix. While being able to predict that this would have happened in SNTS would have been impossible, there are some earlier indicators we could have used. Companies with a low debt/equity ratio are always buyout candidates. I talked about this in the lesson I did on screening for stocks here. I said that you should set your stock screen for “debt/equity < 0.1”. Guess what the debt/equity was on SNTS? A smoking hot 0.05 because they have over $142 million in cash and less than $10 million in debt. Another early indicator was that the FDA approved its Uceris treatment for ulcerative colitis earlier this year. FDA approvals are another “story” you can make money from. When a smaller company (market cap of less than $2 billion) with a lot of cash and little debt gets a drug approved, it is often a buyout play.
I rarely give homework assignments but I feel that determining story stocks is so critical to your future success that a small homework assignment is warranted.
Everyday for the next week, go to Finviz and click on each of the top performing stocks and go to the news release section and try to determine what the catalyst or story for the stock was that resulted in the huge gains. I have attached a worksheet you can print and use for your homework assignment here.
Frequently Asked Questions
What is form 8k?
Form 8-K is mandatory and enforced by the Securities and Exchange Commission (SEC). A publicly traded company must report any significant and unscheduled material events or corporate changes that could be of importance to shareholders or the SEC. Examples of events reported on an 8-K include listing or de-listing notices from the exchanges on which the company trades, stock offerings and shares issued, bankruptcy, resignation of directors, acquisitions, and so on.
Traders who practice fundamental analysis often track form 8-K filings. To track form 8-K filings with the SEC, go to http://www.sec.gov/edgar/searchedgar/companysearch.html
In the “Fast Search” box, enter a ticker symbol, then click the “Search” button:
Scroll down and on the far left under “Filings” you will find “8-K”. Click the “Documents” button to the right to view that 8-K filing:
MoneyWatch posted the excellent video below about reading SEC filings.
BizTraining posted the great educational video below called CIBA | The SEC Filings The 8K Current Report.
What stocks are cheap right now?
To find what stocks are cheap right now, traders doing fundamental analysis look at the P/E ratio and the P/B ratio.
The P/E ratio is the Price to Earnings ratio. It is calculated as follows:
The P/E ratio is a valuation ratio of a company's current share price compared to its earnings.
Company's with a low P/E ratio are said to be cheap; however, there is usually a good reason for why a company is cheap and investors are not buying it.
The P/B ratio is the Price to Book ratio. It is calculated as follows:
The P/B ratio is a valuation ratio of a company's current share price compared to its book value. The book value is, if the company went bankrupt and all its assets were sold off, how much money would be left.
Company's with a low P/B ratio are said to be cheap; however, it could also mean that something is wrong with the company which is why investors are staying away.
Wall Street Survivor posted the excellent video below called What is P/E Ratio.
Martin Mazorra posted the video below where he applies the P/E ratio, on a larger perspective, to the S&P 500 as a whole.
Investopedia posted the excellent video below called Understanding Book Value.
Moneycontent posted the great video below called What is the price to book ratio?
What is insider buying?
Insider buying is when someone who is employed by the company, buys shares of stock in that company. Insider buying is legal because it's based on public information. Do not confuse legal insider buying with illegal insider trading. Insider trading is when corporate insiders trade on information that has not yet been released to the public.
Traders using fundamental analysis will often track insider buying. The idea is that someone who is employed by the company has insider knowledge of new products or sales that could cause the stock price to rise. In nano cap and micro cap stocks, it's not uncommon for insiders to purposely buy their stock with the intent of marketing that insider buying to penny stock promoters. In this scenario, insider buying is simply used to attract more investors. This makes following insider buying a risky strategy because it's often impossible to determine if the insider buying is from new products or sales, or is simply a con job used to suck more investors into a stock so that insiders can dump their shares.
Traders track insider buying by reading form 4 filings on the SEC website.
What is a good amount of stock to buy?
A good amount of stock to buy is $1,000 or more because amounts lower than $1,000, the cost per trade with your online broker makes your cost basis too high.
For example, say you buy $300 worth of stock ABCD at $1.50 and your cost per trade is $8 for a buy and $8 for a sell. $8 / $300 = 2.7% x 2 (cost of a buy and sell) = 5.4%. In other words, stock ABCD has to go up 5.4% from your entry just to break even when you close out the trade! For swing trading where the goal is 5% from your entry, you would actually lose money buying only $300 worth of stock.
A good amount of money to start investing with is around $5,000. The reason is that you don't want to start with $1,000 then put all that money into just one stock because if you're wrong about the direction of the stock, or the entire market goes down, you are wiped out.
ehowfinance posted the excellent video below called How Much Money Do You Need to Start Investing?
What are the best stocks to hold?
The best stocks to hold long term are stocks that stock gurus like Warren Buffett, John Paulson, and Carl Icahn buy.
These stock market gurus have made billions of dollars with their buy and hold strategies. Stock market gurus also help push the price of a stock up when they buy it, as is often the case with the investor activist Carl Icahn, because they push for changes at the company with the goal of increasing share price.