Syndicate
'Blood in the Streets' Theory
We subscribe to the "Blood in the Streets" theory of investing where you pick up shares in stocks when they are at their lowest. These stocks are usually down in the dumps and nobody has anything good to say about them. As Warren Buffet in one occasion said, "...be greedy when others are fearful!" the truth is that nothing tends to strike fear in the heart of an investor more than a tanking stock. Blood in the street investing is not for every person as it can be a very gut wrenching process. To buy a stock when everybody else is selling takes some strong intestinal determination. You must also be prepared to sacrifice some time. There is no telling when the stock in question is going to right its course unless you have a magic crystal ball. Since it is not possible to foresee the bottom for these stocks, we usually purchase them on a downtrend and they often continue south after we get in. That is okay because we are prepared for this. In actual fact, we expect it. Many times, if a stock continues to fall, we will do something else that many experts give an opinion against...we will average down. For those of you who don't have an idea of what averaging down is, we will give you the down and dirty. You buy more stock at a lower price to average down. Afterwards, you divide the total quantity of money that you have invested in the stock by the total number of shares that you own to get a new break-even price. Now, you must understand that we don't do these things by the seat of our pants. We do this because we are confident in the stocks that we have invested in. we gain this confidence by setting our stock screener to find stocks that have sales revenue of at least one million dollars, a positive profit margin, positive earnings growth, positive revenue growth, and a PEG ratio with a maximum of one. We like to use the PEG ratio in lieu of the P/E ratio because the PEG ratio accounts for growth. A PEG ratio of less than one typically shows that a stock is somewhat undervalued. Finally, we set our screener to look for stocks with daily volume of at least fifty thousand shares. a stock without volume is a dead stock, as we have mentioned previously.
After setting the parameters for our stock screener we afterwards examine each stock individually. We read the company's press releases, read the 10Q's, examine the balance sheet to see how much cash is in the bank versus how much debt on the books, and finally, we look al how many shares are short. We like it when at least 10% of the float is shorted. We understand that people are shorting the stock because it is down and out. However, when things turn around (if the company fits the parameters that we have set in our screener we have confidence that the company will right the ship) the shorts will eventually cover and this will add fuel to the fire when the stock recovers. Finally, we will visit a few message boards to see if there is any buzz about the stock in question.