The PE ratio gives Karen a sense of how expensive a company is relative to its earnings. If it has debt, the question is: how much? Debt isn’t necessarily bad but Karen looks for companies with low debt or enough cash flow to pay it down.
Market share is important because it shows how dominant a company is in its industry. More market share equals more pricing power. And insider ownership is key because a company whose brass has “skin in the game” is more likely to be an effective manager, Karen said. She called it a red flag when a company’s CEO doesn’t own shares.
1) Pattern Recognition
2) Use Volume to Follow “Mob Mentality” Plays
3) Some Valuation ‘High’ For a Reason
Pattern recognition is important, Guy said, because past trends can often predict the future. As a value trader, he also likes to gauge the “mob mentality” in a stock. When volume is high it means people are piling in and there’s no sense getting in their way.
Volume can also indicate when the move is over on the upside (euphoria) or on the downside (capitulation). When Apple soared on huge volume it was a euphoric move and indicated to Guy that the move wouldn’t last.
Don’t balk at a stock just because the valuation is high, Guy said. Sometimes a high valuation just means the stock is truly the best in the space.
Style: Value & Growth
1) Fundamentals: What’s the Consumer Experience?
2) Price Matters: Technicals Are Your Tell
3) Market Sentiment: Who’s On the Other Side of the Trade?
Jeff’s first approach is about getting dirty, hitting the pavement and kicking the tires. Sometimes the best trades can be found walking through the mall or checking out a new restaurant. Is the customer service experience above par relative to competitors? Shopping at Wal-Mart is expected to be a different experience from shopping at Saks , for instance – but is it better than shopping at Target ? The companies hitting on all cylinders are the ones to watch, Jeff said.
Technicals help to tell when a stock is in an established trend. Jeff looks for trends that look like they’re just starting as times to get in. Don’t chase stocks on their highs for an entry point, he said. Instead, use simple trend lines and trailing averages to make a time to buy. “Patience pays.”
Jeff also uses market sentiment to determine who is on the other side of a trade. He noted one of his best investments, McDonald’s , was a stock no one believed in when he bought it in 2004. A new CEO had just taken the helm, the company was suffering from bad PR on the heels of the release of Super Size Me and the stock price was near its low. But Jeff thought the confluence of its technicals (a 5-year trend) and fundamentals (consistent service) pointed to a run higher and he was right.
1) High Short Interest Ratio
2) Sudden Jumps In Volume
3) Overall Industry Shows Momentum Too
Pete clarified that he’s actually the opposite of a momentum trader in the sense that he looks for the counterintuitive trade when the market is going in a single direction. Momentum plays start with a catalyst, Pete said. Often it’s a massive short interest that triggers interest among momentum players.
Style: Risk Assessment
Tim’s Types of Risk
1) Asset Class Risk
2) Commodity Factor Risk
3) Country Risk (Political Instability, Currency Fluctuation)
4) Company-Specific Risk
As a specialist in emerging markets, Tim treats investing in a slightly different, more flexible way. The issues that determine emerging market opportunities change constantly and investors must be able to reassess all the time, Tim said. Manage your risk by monitoring inherent risk within countries or specific companies and reevaluating your investment model if that risk changes. Emerging markets are volatile by nature and trading them can be too. Tim’s style is to manage that volatility.
> Buy Like Buffett
> The Fastest Money: Options
> Charting the Momentum
> What Makes the Best Traders Tick?
> Finding Your Style: Final Tips
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Trader disclosure: On Feb.12, 2008, the day of taping, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (INTC), (YHOO), (DIS); Najarian Owns (BIIB), (C), (CSCO), (MCD), (MS), (MSFT), (YHOO), (XLF); Najarian Owns (AAPL) Calls; Najarian Owns (FRE) Puts; Finerman Owns (GS); Finerman's Firm Owns (AAPL), (GE), (MSFT), (WMT), (YHOO); Finerman's Firm And Finerman Own (HD); Finerman's Firm Is Short (SPY), (IJR), (IYR), (MDY), (IWM); Finerman's Firm Is Short (LEH) And Owns (LEH) Puts; Seymour Is Short (VIP) Puts