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The Magic Formula for Stock PickingBy Jeff ClarkTuesday, June 5, 2007 There are still lots of good buys in the stock market.
Yes, the stock market is overextended. Yes, it's vulnerable to a sharp correction that could happen at any time. Yes, there's lots of risk. And yes, I'm still leaning bearish...
But if you look hard enough, you can still find plenty of good, low-risk opportunities for new money. The key phrase there, of course, is "low-risk."
You can't eliminate risk completely. But you can knock it down to manageable levels if you stick to stocks with the following characteristics...
It's as close to a magic formula as you're ever going to find...
Cash + No Debt + Stock Buyback + Temporary Setback = Winning Stock Trade
For the past few months, we've been applying this formula to new recommendations in The Big Trend Report. And it's working quite well.
In March, we bought shares of OmniVision (OVTI) at $11.70. The company had more than 50% of its capitalization sitting in cash. It had no debt. Management increased the stock repurchase program. And shares were depressed because of some short-term adverse business conditions.
Last Friday, OVTI closed at $16.30 – a gain of almost 40% from our original purchase price. That's not too bad for three months. And there's more to come.
The stock we bought two months ago is up 9%. And last month's recommendation has already gained 4%.
Another stock that fit the formula, but ran up before we could jump in, is Albany Molecular (AMRI). Six weeks ago, AMRI was trading at about $10 per share. It had $3.40 per share in cash, no debt to speak of, a modest repurchase program, and a depressed share price.
Like OVTI, today, AMRI is 40% higher.
Here are a few more debt-free stocks that fit into the formula:
When you're looking to put money into a stock market that's a bit overheated, you need to focus on low-risk ideas. I can't think of a better strategy than to look for companies with lots of cash, no debt, a stock buyback program, and a share price that's been hurt because of a temporary business setback.
We have five stocks in the Big Trend portfolio that fit into this formula. And I'm adding another in the next issue. If you'd like to learn which one, you can become a Big Trend Report subscriber here.
Best regards and good trading,
Jeff Clark
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