One of the most challenging aspects of value investing is refraining from buying a stock before the full distress of other investors is over.
Take Sprint Nextel, for example. Investors that bought the stock a little over a year ago had a long and painful road in front of them. Once the market understood that Sprint was oversold and held much greater value than its sub-$3 share price, the stock moved up quickly. Even so, many investors are just breaking even or worse, despite the exuberant increase in share price since June.
Sprint demonstrates that being right about a stock is never enough. You must also have the correct timing, or risk a price drop shaking you out of your position. It may be nearly impossible to time your entries perfectly every time, but that doesn't mean you can’t give your portfolio every advantage possible.
Over the long run, fundamentals dictate the value of any given stock or security. But in the short run, prices are ruled by emotions. Fortunately, the emotions of investors are rather predictable and technical analysis helps us predict the odds.
Once you combine technical analysis with fundamentals, you have a potentially very powerful and alpha-creating edge for your portfolio. Once discipline and effort are added, the deck becomes stacked in your favor. It’s no easy feat aligning everything, but it can be done.
The biggest problem with chart reading is that it’s a lot like sex. Most people think they are a lot better at it than they really are. It doesn’t need to be that way, though. With study, effort and by taking the time to learn the skills needed, instead of rushing in, technical analysis can be very satisfying.
Consider these four stocks, which came to my attention through a screening process that weighs a combination of company fundamental factors and my own variation of technical analysis, based in part on DeMark market-timing indicators:
Background:RadioShack is one of the largest consumer electronics retailers in the U.S., offering both online and in-store shopping. RadioShack sells more wireless telephones, telecommunications products, and electronic parts and accessories than any other retailer.
An estimated 94 percent of Americans live or work within five minutes of a RadioShack store or dealer. The company was founded in 1899 and is headquartered in Fort Worth, Texas. RadioShack trades an average of 2.5 million shares a day and has a market cap of $254 million.
52-Week High: $13.94
52-Week Low: $2.36
Book Value: $7.09
RadioShack has zero “buy” recommendations out of 20 analysts covering the company. RadioShack may prove to be a great value at this price level, but I would consider looking at it as a much higher-risk investment than most other rapid decliners. There is a real bankruptcy risk in the near future, and RadioShack faces “ongoing” challenges.
If you want to allocate some of your high-risk portfolio to RadioShack, I believe we are at a price that supports the idea of true value investing, without rushing into it.
Based on technical analysis, RadioShack is in a very obvious bear trend, but also an oversold state. If RadioShack turns it around, the shares may bounce higher by a large percentage relative to other higher-priced stocks.
Its shares have traded slightly lower in the last month and are near breakeven, losing 1.2 percent less than a month ago.
The short interest is altitudinous at 46.5 percent and is a strong warning that short sellers (learn more) expect the share price to fall considerably. I believe they are wrong to continue to hold short, at least in the short run. Look for short covering to boost the share price back up above $3 a share.
Background: Petroleo Brasileiro is an integrated company operating in exploration, production, refining, retailing and transportation of petroleum and its byproducts. The company was founded in 1953 and is based in Rio de Janeiro. Petrobras trades an average of 11 million shares a day and has a market cap of $81 billion.
52-Week High: $32.60
52-Week Low: $17.27
Book Value: $28.29
Petrobras shares have moved higher in the last month, up 6.2 percent. I would not try to chase PBR, but I would consider a dip below $21 to be a very good entry point.
Right now, PBR has three “buy” recommendations out of seven analysts covering the company, and the average analyst target price is $30.44.
Technically, the chart is starting to look barely oversold. Shares have recovered nicely from the recent dips under $18 and the short nine-day moving average has turned the corner and is headed higher.
The price-to-earnings ratio (P/E) has moved lower from last year. The trailing 12-month P/E ratio is 12.4, the mean fiscal year price-to-earnings ratio is 8.7, based on estimated earnings of $2.51 per share. And the company currently pays 11 cents per share in dividends for a yield of 0.49 percent.
Background:Hewlett-Packard is one of the leading global providers of computing and imaging solutions and services for business and home. The company is focused on capitalizing on the opportunities of the Internet and the proliferation of electronic services. Its major businesses include imaging and printing systems, computing systems, and information technology services. Hewlett-Packard trades an average of 23.8 million shares per day and has a market cap of $34.7 billion.
52-Week High: $30
52-Week Low: $17.41
Book Value: $16.03
From a technical perspective, the chart is bearish and ugly with all the major moving averages pointing almost straight down. HPQ is not likely to continue “breaking bad,” with a major oversold timing indication on the daily and weekly charts. It took Sprint over a year to regain its footing, and I would not expect Hewlett-Packard to take any less time.
Fundamentally, the shares are attractive from an expected-earnings point of view. The mean fiscal year price-to-earnings ratio is 4.3, based on estimated earnings of $4.05 per share.
Especially attractive is the dividend yield. With the share price depressed, the yield has moved up to 3 percent. The company currently has an annualized dividend of 53 cents. Even with a big drop in earnings, the dividend appears safe for now.
Over the last month of trading, HPQ lost about 5.3 percent, placing it near 52-week lows. Management has improved year-over-year revenue. Revenue was $127.25 billion in fiscal year 2011, compared to $126.03 billion the previous year.
Currently, the short interest based on the float is small and not a big concern at 2.8 percent. This indicates that short sellers don’t believe there’s much more downside potential with Hewlett-Packard shares.
Background:Nokia is a leading supplier of mobile phones and mobile, fixed, and IP networks. The company was founded in 1865 and is headquartered in Espoo, Finland. Nokia trades an average of 47.2 million shares a day and has a market cap of $11.5 billion.
52-Week High: $7.38
52-Week Low: $1.63
Book Value: $3.01
Right now, Nokia has a grand total of two “buy” recommendations out of 23 analysts covering the company.
From a fundamental perspective, Nokia looks interesting. While sharing some similarities with Sprint, Nokia depends almost exclusively on the sale of hardware for revenue and profits.
After Apple entered into the space in a big way, Nokia’s future appeared to be sealed. But Microsoft has more or less become Nokia’s sugar daddy and is backstopping the Finnish company with money and an operating system platform.
In the last month, the stock has moved much higher, gaining 46 percent. I don’t believe the upside has been fully met, but I would buy on dips and not try to chase it.
From a technical perspective, the chart is very bearish with all the major moving averages traveling from the upper left to the lower right. This extreme bearishness makes Nokia an oversold stock.
Shareholders receive 18 cents annually in dividend payments. The yield, based on a recent price, is 5.74 percent. Looking back at the three-year history of declared dividends, this company has paid an average of 39 cents a share each year. Over the last five years, the dividend has grown by an average of 4.6 percent a year.
Revenue growth relative to last year appears to be problematic for management. Comparing fiscal years, revenue declined to $50.2 billion in fiscal 2011 from $57 billion in the previous year.
With short interest above 5 percent, investors will want to monitor changes to see if short sellers turn up the warning signals. Otherwise, the current 5.4 percent of the float short is relatively small and not a major concern. If Nokia begins to move higher, the short interest may add fuel to the ride up.
—By TheStreet.com Contributor Robert Weinstein
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At the time of publication, Robert Weinstein held no positions in any of the stocks mentioned.