Great-Stock

IRRATIONAL SELLING CREATES GOLDEN OPPORTUNITIES FOR OUTPERFORMING STOCKS...

Why Stocks Go Up

In both bullish and bearish markets, one can find stocks with good growth potential. The key is in selecting them according to pertinent measures of valuation. In other words, screen to find what screaming Jim Cramer would call "forgotten, forlorn, and undiscovered stocks." Like an attractive debutant, they will be stars someday, yet no one dances with them now.

Useful criteria are measures such as a stock's debt to equity, price to sales, price to book, and PEG ratios. All of those should be lower than their peers. Such stocks are in companies of intrinsic value, though the share prices are relatively low. In addition, the company insiders should own a substantial amount of company stock.

Finding More Extreme Stock Bargains

Stocks listed in the table below are trading near recent lows, though fundamental data indicate that a higher price should be expected. Often the declines are a result of overall market conditions and not due to a company's financial situation. Stocks of company's with sound fundamentals tend to outperform the market when bearish sentiment prevails. When market pessimism subsides, these basically solid stocks lead in gains.

Particularly good opportunities to buy arise during "bad news days" on Wall Street. An event in the news or a negative economic report triggers panic selling, and panic is not rational. When an irrational market sell-off happens, there are extreme stock bargains available. The key to finding them is looking at fundamental valuation data and screening for the most irrationally cheap stocks.

The following simplified valuation formula indicates reasonable prices for the stocks shown in the table; stocks driven down by irrational selling will be readily apparent. Other stocks, which have undergone a correction from being overbought will actually be priced near reasonable levels after a sell-off.

Stocks that pass the initial screening should then be investigated in detail prior to purchase, and the ones without improving fundamentals eliminated from further consideration. Go with the rising stars.