P. 1

|Views: 1,076|Likes:

See more
See less

09/09/2015

pdf

text

original

## Sections

• WHAT ARE PAIRS?
• HOW DO PAIRS WORK?
• WHO USES PAIRS?
• MINDSET OF READING THIS BOOK
• COMMON SENSE
• CHINA.COM
• HOW FUNDAMENTAL ANALYSIS RELATES TO PAIRS
• GROWTH AND GROWTH RATIOS
• GROWTH, PE, AND THE PEG RATIO
• PE Ratio
• PEG Ratio
• TYING IT ALL TOGETHER
• CANDLESTICK CHARTING
• Hammer Bottoms and Hangman Tops
• Doji Star
• Shooting Stars
• Engulfing Patterns
• SUPPORT AND RESISTANCE
• TREND LINES
• MOVING AVERAGES
• STOCHASTICS
• CHAIKIN MONEY FLOW OSCILLATOR
• ON-BALANCE VOLUME
• RELATIVE STRENGTH INDEX
• UNDERSTANDING THE CORRELATION
• Differential
• Ratio
• WHAT IS A CORRELATION?
• WHERE TO FIND CORRELATIONS
• BUILDING A CORRELATION USING EXCEL
• WHY AN INDEX?
• WHAT IS BETA?
• HOW TO APPLY BETA
• WHERE TO FIND BETA
• FREQUENCY DISTRIBUTION
• MEAN/MEDIAN/MODE
• MEAN DEVIATION
• VARIANCE
• STANDARD DEVIATION
• AVERAGE, MEDIAN, MODE, AND STANDARD DEVIATION
• UNDERSTANDING THE PRESENT DATA
• HOW DO YOU KNOW WHICH STOCK TO BUY OR SHORT?
• CHARTING THE DATA
• DIFFERENTIAL
• RATIO
• DENSITY CURVE
• UNDERSTANDING THE DATA
• DIFFERENTIAL MOVING AVERAGE
• NORMALIZED STANDARD DEVIATION
• WHY MONEY MANAGEMENT?
• PSYCHOLOGY OF MONEY MANAGEMENT
• UNDERSTANDING HOW PAIRS CAN BE DANGEROUS
• FUNDAMENTAL PRINCIPLES
• KNOW YOURSELF
• THE PLAN
• DO PAIRS REALLY WORK?
• MAKING THE STYLE WORK FOR YOU
• INTRODUCTION
• HISTORICAL TIME LINE OF DIVERGENCE EVENTS
• UNDERSTANDING WHERE THE PAIR IS NOW
• Understanding Where the Pair Is Now
• Technical Analysis
• Statistics
• Fundamentals
• Earnings
• Summary
• GENERAL ELECTRIC AND EXXONMOBIL
• GENERAL ELECTRIC AND THE DIAMONDS
• EXXONMOBIL AND THE DIAMONDS
• THE THREE WISE MEN
• WHAT IS VOLATILITY?
• VOLATILITY AND THE INDIVIDUAL STOCK
• WEIGHTED VOLATILITY
• OPTION STRATEGIES FOR PAIRS
• Calls/Puts
• Covered Calls/Puts
• TECHNICAL ANALYSIS
• Moving Averages
• Stochastics and Other Indicators
• FUNDAMENTALS
• Price-to-Sales Ratio
• KBH HOMES AND TOL BROTHERS
• MOVING AVERAGES AND SUPPORT AND RESISTANCE AS STOPS
• THE MARKET BUBBLE
• WORDS OF CAUTION
• Endnotes
• Index

In making you an efficient five-minute equity analyst, it is very important
that we cover growth ratios. Growth numbers are veryimportant in under-
standing where the stock is going, not where it currently is. After all, we

There are two types of growth that we will first examine—sales growth
and income growth; both are fairly straightforward. We simply want to know
how much a company is growing and how the individual company stacks up in
its respective sector. If a company had incredible sales growth of 80 percent,
but a negative income growth rate of 10 percent, clearly there is a red flag.
If this scenario were true for a real stock, we could put an “x” in the “bad
income growth” box of our fundamental checklist.
Bottom line: If you are going to buy a stock, we want to see strong
income andsales growth numbers.
Where to find this information? The crux of fundamental analysis is learn-
ing how to be able to do it yourself, which seems much more complicated than
it actually is. When looking for earnings growth, you can do a couple of dif-
ferent things. First, it is important to remember that using any Web site is very
dangerous. The numbers are sporadically updated and can be hardly reliable
at best. Even sites like Yahoo.com can take several days to get updated after
earnings reports. You can’t blame them; you just have to remember to question
every number you come across if you are going to make sure the figures you
are examining are accurate. So let’s figure out how to find these numbers for
yourself. First, the numbers aren’t half as hard to find as you think they are, it
just takes a little research to unearth them. To find earnings growth, I would
like to use the following chart invented by Todd Shaver of BullMarket.com.

Wal-Mart

Quarter

3Q02 3Q03 % Chg

Revenue

\$56B

\$63B 13

Net Income

\$1.8B

\$2.0B 11

Earnings per Share

\$0.40

\$0.46 15

This chart is an excerpt from BullMarket.com. The amazing part is that
the numbers are right in front of you in any earnings announcement. Look at
the following Wal-Mart press release that the numbers came from. This is the
actual press release that the company put forth and can be found on any
news service, including Yahoo.com.

GK015-C03[9-20].qxd 6/10/04 7:25 PM Page 12 Virender Negi Quark07:BOOKS:GK015-Whistler:Quark files:

Market Basics

13

Press Release

Source: Wal-Mart Stores, Inc.

Wal-Mart Reports Record Sales and Earnings
Thursday November 13, 6:43 am ET

BENTONVILLE, Ark., Nov. 13/PRNewswire-FirstCall/—Wal-Mart
Stores, Inc. (NYSE: WMT - News) reported record earnings and sales
for the quarter ended October 31, 2003. Net sales were \$62.5 billion, an
increase of 13.1 percent over the similar prior year quarter. Net
income from continuing operations for the quarter was \$2.0 billion, a
13.9 percent increase from the \$1.8 billion in the similar prior year
quarter. Earnings per share from continuing operations were \$0.46
up from \$0.40 per share in the same prior year quarter.
Net sales for the nine months ended October 31, 2003, were \$181.8
billion, an increase of 11.4 percent over net sales of the similar prior
year period. Net income from continuing operations for the nine
months increased 14.4 percent to a record \$6.1 billion or \$1.40 earn-
ings per share, up from \$5.4 billion or \$1.21 earnings per share in the
same prior year period.
On May 23, 2003, Wal-Mart Stores, Inc. completed the sale of
McLane Company, Inc. (“McLane”), then a wholly-owned subsidiary,
to Berkshire Hathaway Inc. McLane has been accounted for as a dis-
continued operation in this release.
Lee Scott, President and CEO said, “The excellent results for the
quarter reflect the continued efforts by our associates to serve our cus-
tomers. Of particular note is the performance of our international and
SAM’S CLUB teams.”

You can see that all we did was take the net income, earnings per share
(EPS), and revenue numbers; round them off; and stick them in the chart.
Thus, we know immediately what the company is predicting without having
to wonder if one of the Web sites that we covet updated their numbers or not.
The issue is that looking at items like the price-to-earnings (PE) ratio
divided by the annual EPS growth (PEG ratio), there is always a discrepancy
of what numbers an analyst Web site is looking at. We can solve this prob-
lem by gathering the numbers ourselves. When looking for forward numbers
like one-year earnings growth, use a Web site like Yahoo.com to get an idea
of the projected analyst estimates. The only question is whether the esti-
mates are correct. However, using a site like Yahoo—and remembering that
there can be errors from time to time—you at least have a reasonable base
to work from.

Figure 3.3 shows the Analyst Estimates page on Yahoo.com.

GK015-C03[9-20].qxd 6/10/04 7:25 PM Page 13 Virender Negi Quark07:BOOKS:GK015-Whistler:Quark files:

14

Notice that there are three boxes highlighted: the average estimate for
the Current Year and Next Year, followed by Year Ago EPS. If we are looking
for the previous year’s growth—and we trust the Web site’s updates—then
we would simply subtract 1.81 from 2.05 and then divide the difference by
1.81, which is 13 percent. Referencing the earnings numbers in Figure 3.3, so
far so good. For a forward-looking number, subtract 2.05 from 2.34 and then
divide the difference from 2.05, which is 14 percent. Thus, our conclusion is
that (based on Yahoo’s numbers) the company—estimate-wise—is expect-
ing earnings growth of 14 percent. See how easy this is?

FIGURE 3.3 Yahoo.com—Earnings

GK015-C03[9-20].qxd 6/10/04 7:25 PM Page 14 Virender Negi Quark07:BOOKS:GK015-Whistler:Quark files:

Market Basics

15

The neat thing about growth numbers is that they can really give
investors a good snapshot of institutional thinking. Thus, if we look at two
stocks and find considerably different growth numbers, we may infer that
the two stocks will likely diverge from one another. In essence, what we are
doing is uncovering a fundamental reason behind our statistics before we
ever even begin to look at statistics. As an analogy, if you learn about sea
currents and wind patterns before you ever step foot on a sailboat, when you
finally do, you will be that much better of a sailor. Growth ratios are very
similar to sea currents. Low income and sales growth compared to a stock’s
broader industry can drag the stock price out to sea. In other words, your
pair may have a hidden riptide that is pulling one side beneath water. If you
understand how to read the tides, you will have a better chance of being able
to know when and where the currents begin to calm.

scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->