Trading Olympics: Event 2: Valuation


For all the excitement around Michael Phelps the truly exhilarating stories from the Olympics usually come from the underdogs. There’s Stephanie Brown-Trafton, this year’s discus winner or remember Mary Lou Retton an unexpected sensation in 1984.

Well, fast money is kind of like that too; that is, the best trades are often underdogs. And the way to uncover them is through something called valuation.

Simply put, valuation is the process of estimating what a stock is really worth. It sounds simple, but when millions of investors are trying to do it at the same time, it gets rather complex.

You can do it by discounting future cash flows or comparing P/E's among an industry, or a hundred other ways. But whatever the method, they all share one theme in common. It’s critical to have the patience to wait the trade out.

But patience is a virtue and in the end - whether you’re trading or training - over time you’ll come up a winner!

Of all the Fast Money traders Karen Finerman plays valuation most often. Following are the criteria she uses most.

Finerman’s Valuation Criteria

* P/E Historical and vs. Peers
* Cash Flow
* Balance Sheet: Debt
* Market Share

“Of all those criteria P/E is the most difficult to determine,” says Finerman. “What can a company earn on a normalized basis, that’s the key.”

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Trader disclosure: On Aug 19, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (C), (AGU), (BTU), (GS), (INTC), (MSFT), (NUE); Macke Is Short (TM); Macke Owns (MSFT), (WMT), (DIS), (CY); Najarian Owns (AAPL) And Is Short (AAPL) Calls; Najarian Owns (CSCO) Call Spread; Finerman Owns (GS); Finerman's Firm And Finerman Own (C) Leap; Finerman's Firm Owns (MSFT), (SUN), (TSO), (VLO); Finerman's Firm Is Short (SPG), (COF), (IYR), (IWM), (IJR), (SPY), (MDY), (BBT)