The key to success in the stock market is knowing how to recognize the value. Here is the successful approach of Robert Ravitz, director of research at the investment management firm David J. Greene & Co.
At the Greene operation, value has little to do with a good company versus a bad company. A top-quality large company selling at a high price/earnings multiple is less attractive than a lesser-quality company trading at a depressed price in terms of its past and future earning power, working capital, book value, and historical prices. Here is where Greene's analysts look for value:
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Stocks that have just made a new low for the last 12 months. Companies that are likely to be liquidated. In the process of liquidation, shareholders may get paid considerably more than the stock is selling for now.
Unsuccessful merger candidates. If one buyer thinks a company's stock is a good value, it's possible that others may also come to the same conclusion.
Companies that have just reduced or eliminated their dividends. The stock is usually hit with a selling wave, often creating a good buying opportunity.
New management comes on board with an established track record of success with turnaround situations.
Management begins buying the company's stock in the open market. Also, follow 13d statements filed with the Securities and Exchange Commission (SEC). A company or individual owning 5% or more of a public company must report such holdings to the SEC. If any substantial company is acquiring a major position in a company, it's possible a tender offer at a much higher price is in the wind.
Three Ways to Determine
Sector characteristics
Sectors are represented by the stocks in your portfolios. Sectors are simply groups of publicly traded companies and stocks from the same industry.
Price and quantity
Once you've identified your stock's sector, some other indicators can give you confidence that it's nearing a bottom.
Keep an Ear to the Ground
The general public's perception of a stock may be an overlooked indicator of when it is about to bottom.
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Bottom line
Ideally, investors want to know when price trends are about to shift significantly in either direction, whether they are approaching tops or bottoms.
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