Great-Stock

OVERVALUED AND OVERBOUGHT STOCKS! WATCH OUT!

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.

Why Stocks Go Down

The table below contains stocks that are risky according to their present pricing, balance sheet, and overall market conditions. These are, in many ways, opposites of the intrinsically valuable stocks described above. Looking at the data, you will see stocks that have run their course as bargains and are now intrinsically overvalued. They have become relatively expensive; present shareholders have already seen gains and are likely to begin selling. These stocks may be good candidates for short selling. Unless a miracle occurs, expect at least price stagnation if not an all-out sell-off.

Apply the following valuation formula, which looks at company debt, equity, price, and earnings growth and note that price declines are due for stocks in the table below:

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.