It is not everyday that you can find a company that is hit with such bad news that its stock price crumbles apart. You have to be patient and strike only at the right opportunity.
By regularly reading business news on CNN.com, Briefing. com and watching CNBC, you will be alerted to these investment opportunities as they happen. While there is no sure way to guarantee that a stock will fall below our breakeven point, there are 4 key criteria that I use to increase my chances?
1. Screen for Stocks that Decline Significantly on High Volume
I screen for stocks that suffer a significant one-day (intra-day) decline on high volume. Usually, stocks that suffer such a drastic fall in one day experience some kind of significant negative news.
I also look for stocks that decline by more than 20%-30% with volume exceeding at least 300,000 shares. The easiest way to screen such stocks is to go to www.moneycentral.com.
Use their “Power Search” tool to screen for “Intraday High Volume Losers” or “Gapping Down Today”. If you can not find any on that particular day, select “Weekly High Volume Losers” or “One Month Volume Losers” to see if any stocks fit the bill over the last week.
2. Ensure Bad News with Sustainable Effects
Remember that we are only interested in news that has the potential to create long-term or permanent damage to the company’s financial stability or profitability. Again, the ideal bearish play would be an accounting scandal that could drag on for months and result in a long lasting sell-off in the stock. Sometimes, a major strategic miscalculation could lead to a company losing its competitive advantage and cause long-term effects on its profitability.
A good example is when Ford Motor Company made a strategic mistake (failing to focus on smaller, fuel efficient cars) that caused its market share to decline consecutively over 10 years, sending its stock price down from $16 in 2004 to as low as $6 in 2006.
By going to http://finance.google.com or any other business news site, you can read about the news that has triggered the price fall. Bear in mind that it is not every day or every month that you can find a stock that fits these criteria.
3. Fundamental Criteria
You would also want to ensure that the stock that you are betting on is highly overvalued, giving a good reason for the market to correct the stock downwards.
Applying what you have learnt in the chapter on value investing, use the “Intrinsic Value Calculator” (found on www.thewaytomakemoney. com) and calculate the intrinsic value of the stock. You will want to make sure that the current share price is higher than the intrinsic value. It is also important that the current share price is above $8.
4. Technical Criteria
Screening for potential momentum stocks that would move up in price, we need to ensure that “Technical Indicators” are strong indicating a “buy signal”. In the case of buying Puts on falling stocks, we are looking at the opposite. We are looking for weak indicators that signal a “sell signal”.
With these 4 indicators, you are now able to estimate when a stock may dive.
Article Source: Articles Engine
Adam Khoo is an entrepreneur, best-selling author and a self-made millionaire by the age of 26. Discover his millionaire investing secrets and claim your FREE bonus chapter of his latest bestselling book ‘Secrets Of Millionaire Investors’ at Secrets Of Millionaire Investors.