Buying a Beaten-up Stock at the Right Time and Right Price
by Darrell Jobman



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Investing in individual stocks has always been a challenge but has been especially difficult during the last year when the stock market as a whole, represented by the S&P 500 Index, has stayed mostly within a range of 1,000 to 1,200.

No matter what your motivation for including stocks in your portfolio or what style of investing you use, it’s been almost impossible to get any traction with a longer-term, trend-following strategy that can produce profitable returns consistently. You only need to look at the up and down results on your 401(k) or similar account reports in recent months as the mood has shifted from bullish (April) to bearish (May-June) to bullish (July) to a mix of both (August).

And we haven’t even gotten to the September-October period, which has a reputation for volatility (mostly with bearish consequences) and this year features all kinds of dire warnings for the outlook of the stock market from analysts and pundits.

Overall market risk isn’t the only risk an investor in individual stocks faces. Even if that is favorable – a rising-tide-lifts-all-boats environment – other risks include:

Sector. If the environment is favorable, is the stock you want to buy in the “right” sector or is the sector under pressure?

Company. If the environment and sector influences are favorable, do you have the “right” company within that sector?

Currency. If everything else is in place to produce profits, will shifts in the value of the currency eat away your profit?

Government. Is government involved in your stock’s business, “stimulating” growth by pursuing an agenda that favors certain concepts or companies?

Self-imposed. Perhaps the biggest risk in any investing or trading venture is you. Do you have the money, method and mentality it takes to be a successful investor?

We can’t give an accurate answer to all of those questions, of course, but for those who want to buy individual stocks, we can take stab at a strategy to pick the right stock at the right time. It does involve some risk and some skill at timing, which some analysts dismiss as a way to invest successfully.

We can’t do much about overall economic conditions to get around the factor of market risk. Sometimes, it doesn’t matter so much what stock you choose if the attitude about the market as a whole is negative (or positive, for that matter).

Our analysis starts with selecting a sector or sectors that are most likely to offer favorable opportunities. In the late 1990s, it might have been technology. A few years later, it might have been the home builders. Then it might have been energy. What’s hot or looks like it will be? Keep in mind the government factor here and the influence it could have on prices if it wants to reach a particular goal.

Once you have narrowed the choices to a sector, identify the solid stocks in that sector that have had a strong track record historically and have good prospects for ongoing performance or may be attractive candidates for acquisition by growing companies. We are not talking penny stocks or other high-risk instruments.

Then look for those stocks that have been beaten up for one reason or another. Perhaps the sector or the company itself has fallen out of favor, and prices for a sector or company have been the victim of an overreaction to the downside by the investing public. British Petroleum might well serve as the poster child for a stock that has been beaten up after its atrocious public relations effort chopped the value of its stock in half following its Gulf oil spill (see chart below). Other stocks in the energy sector suffered sharply as well.

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Source: VantagePoint Intermarket Analysis Software
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But how many individual investors had enough nerve to buy BP at any price at that time? In hindsight, of course, it’s easy to see where you should have bought. Just think how many investors probably wish they had bought stocks at the lows in March 2009 when many stocks and the market as a whole were beaten up rather severely. Despite Warren Buffet’s admonishment, “When others are fearful, be greedy; when others are greedy, be fearful,” that’s the most difficult time to buy. And consider: Any beaten-up price may be that way for a reason – think Worldcom, Enron, Lehman Brothers and others.

If you do have some insight into company fundamentals, you may see value where other investors do not, or you may see a promising future for the company’s products or services. For many investors, however, gauging value based on fundamentals is not likely. Looking at price action on a chart is about their only recourse to spot clues.

So what are we looking for in a stock? One sector that seems to have some good possibilities for growth in the future, if we believe the views of Jim Rogers and others, is the agricultural sector. As grain and soybean prices continued to decline into June, prices for agricultural stocks also sagged.

One example is Monsanto, which also faced some issues with patents and genetically modified organisms for its seed and herbicide entities. The price of the stock dropped from nearly $90 a share at the beginning of the year to $45 by early July. So we have one beaten-up stock (see chart below) in what would seem to be an area that should prosper if one believes that agriculture offers some of the best investment opportunities in the future. 

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Source: VantagePoint Intermarket Analysis Software
Call now and you will be provided with FREE recent forecasts
that are up to 86% accurate*. 800-732-5407
If you would rather have the recent forecasts sent to you, please go here

But how low is low enough to be a buyer? The stock failed to hold lows around $65 at the bottom of a descending triangle pattern, making it hard for value buyers to determine just where a good, safe price might be. Where could they take advantage of the lowest price in four years to add a sound stock like Monsanto to their portfolio?

It takes patience to wait for the right time, but one method to get into a desirable stock at a bargain price uses VantagePoint Intermarket Analysis Software indicators.

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Source: VantagePoint Intermarket Analysis Software
Call now and you will be provided with FREE recent forecasts
that are up to 86% accurate*. 800-732-5407
If you would rather have the recent forecasts sent to you, please go here

After a long price downtrend and sideways action by VantagePoint’s predicted difference indicators (red rectangle), the U.S. Department of Agriculture report on planted acreage released June 30 provided the catalyst for upward movements in grain and soybean prices, taking with them agricultural stocks as well.

The predicted difference indicators track the difference between a predicted moving average and an actual moving average – the blue line comparing medium-term averages and the green line long-term averages. The predicted differences indicate momentum or strength/weakness of a trend. When the blue line crosses the green line, it serves as an early indicator for a shift in momentum (red arrow) and prices.

The indicators that provide specific buy/sell points are VantagePoint’s predicted next day high (orange line on price chart) and predicted next day low (purple line). To reduce the chances of fakeouts or jabs, we are requiring the price to be $2 above the predicted high to get into a long position. The predicted high on July 7 was $46.44, putting the buy order at $48.44, which was reached a couple of days later.

In this case, Monsanto took off sharply higher, and you were onboard at a good price. As prices moved into the blue rectangle area, you could have taken a quick profit by setting a profit target – for example, would $10 a share have been enough for you? Or you could have placed a stop $2 below the $60.50 predicted low on Aug. 6, getting you out at $58.50. Or you might decide to make Monsanto one of your long-term holdings and just hang on to the shares now that you are off to a good start.

Shares of other companies related to agriculture such as John Deere, ADM and Potash Corp. show a similar pattern (although Potash became a story of its own with a takeover bid by BHP Billiton).

With this strategy, you can find a stock that meets your criteria: a sector that should be strong in the months ahead, a sound company in that sector whose stock price has been beaten up and driven lower, turnaround clues from several indicators and a specific buy price that has the market moving in the direction you want when you take a position.

Note that this is an entry strategy, not a trading system. You still have to determine the size of your position, your risk limits for bailing out if the stock goes lower, your profit objectives and whether your position will be a short-term trade or a long-term holding in your portfolio.




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About the Author Formerly Editor-in-Chief of Futures Magazine, Darrell has been writing about financial markets for more than 35 years and has become an acknowledged authority on derivative markets, technical analysis and various trading techniques.Raised on a farm near the tiny southeastern Nebraska town of Virginia, Jobman graduated from Wartburg College in Iowa in 1963. He began his journalistic career as a sportswriter for the Waterloo (Iowa) Courier for several years before going into the Army. He served with the 82nd Airborne Division and as an infantry platoon leader with the Manchus in the 25th Infantry Division, including nine months in Vietnam in 1967-68, earning the Silver Star and Bronze Star. After military service, Jobman returned to the Courier, where he became farm editor in early 1969. He was introduced to futures markets when he wrote a column about how speculators were ruining farm prices and was “corrected” by Merrill Oster. That led to writing assignments for Oster and then a full-time position in 1972, where Jobman participated in the founding of Professional Farmers of America and associated newsletters. When Oster purchased Commodities Magazine in 1976, Jobman was named editor and later became editor-in-chief of Futures Magazine when the name was changed in 1983 during one of the biggest growth periods for new markets and new trading instruments in futures history. He was an editor at Futures until 1993, when he left to become an independent writer/consultant. Since 1993, he has written, collaborated, edited or otherwise participated in the publication of about a dozen books on trading, including The Handbook on Technical Analysis. He has also written or edited articles for several publications and brokerage firms as well as trading courses and educational materials for Chicago Mercantile Exchange and Chicago Board of Trade. He also served as editorial director of CME Magazine. Jobman and his wife, Lynda, live in Wisconsin, and spend a lot of time visiting with a daughter and three grandchildren also in Wisconsin, and a son and granddaughter in Florida.
Aug 26, 2010
Volume 5 Issue 9
This newsletter features articles from VantagePoint users who provide valuable information on how the software can be employed in your trading.




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