[timonr]

Good evening

My question for today is quite relevant with regards to deciding in what stocks to trade.
I went around a process of looking at the JSE( Johannesburg Stock Exchange) in South Africa and saw that there are 300 Main public companies listed and over 50 Penny stock companies with 40Blue chip companies..

So I went around locating all the companies that trade a volume above 100 000 a day and the rest of them that did not trade 100 000 volume a day, I eliminated those stocks from my future selection. This resulted in fewer companies that I will be speculating but still there were too many in speculating everyday.

So with Blue Chips I located the companies that have a PE below 30 and with regards to the Penny Stocks I looked for companies with a trading volume of 100 000 and with a PE below 10.. This eliminated the majority of the companies that I will not consider in the future which left me with 50 Main companies and 20 penny stock companies..

My question is what do you think of that eliminating process or have I just eliminated companies that could bring huge returns in the future.. I would like to hear your feedback on PE ratio's and it's accuracy and if you trade stocks with a PE over 30 and with the trading volume whether you trade with companies below 100 000 volume a day?

Thanks so much, I hope this thread will be insightful to other intraday traders and short-term traders : )

Best regards
T

[Shaun Overton]

timon,

I generally ignore PE as a techincal trader. To quote an oft-repeated phrase of Dennis Gartman, "the markets tend to remain irrational much longer than your margin."

My favorite stock has been the Potash Corporation of Saskatchewan (POT, NYSE). It has a PE of 31, but look at this three year chart:
POT Stock Quote - Potash Corporation of Saskatchewan Inc. Stock Quote - POT Quote - POT Stock Price

Google is an even better example. I remember the PE ratio was trading above 50 at one point. It has to come back to earth again at some point, as Google has done over the past 9 months, but think about how long it took for that to happen after breaking a PE of 30. That's a lot of missed opportunity.

Regarding liquidity, I avoid illiquid stocks like the plague. A lack of participants means that not all the gaps get filled, leading to excess volatility.

Volatility works both ways. I wish I could say once bitten, twice shy. It's more like "1,000 times bitten, a million times shy" in my case.

[David Waring]

Hi Timon,

Glad to hear from you.

To build off of what Shaun has said here I would add that generally traders will focus either on trading larger "blue chip" type stocks, or smaller penny stocks but not both.

The reason for this is because these two categories of stocks tend to trade quite differently, since in general it takes a whole lot less to push around a penny stock than it does a blue chip stock.

That's not to say that trading both could not be done but as a beginner trader especially it might be wise to focus on one or the other. My opinion towards volatility is also similar to Shaun's here, as I believe as well that new traders should focus first on mastering their craft in low volatility environments as they are less likely to get burned there.

Hope that helps. If ther are any other questions or comments on this one please feel free to post them below.

Best Regards,
Dave

[timonr]

Hi all,
Yes that did help in a way however I forgot to add one more trick to my strategy and that is...

I researched all the companies (Operating income, Total debt to equity, free cash flow, interest expense and interest cover) that are listed on the JSE penny's, AltX and mainboard companies. All the companies that have an operating income(OI) of over R1000 Million I would consider in trading and companies with an OI of more than R500 Million I may consider in trading but I am a bit more skeptical with those.

All the companies that have made a loss I totally disregard them from investing.

I am trying to include my reasearch with regards to the fundamentals and the technicals.

In a nutshell what do you think of the strategy of only considering stocks that have over 100 000 trades a day, PE below 100, Operating income of over R500 Million.

Note: I am a short-term trader

Best regards
The Contrarian

[David Waring]

Hi Timonr,

Good to hear from you. I can see the value of focusing on stocks that trade over 100,000 shares a day and have operating income of over 500 Million. From reading your posts it seems that you are doing this so you can avoid stocks that you would consider not liquid enough as well as stocks with little to no operating incomes which could be more likely to turn out to be scams.

I am not sure what value you are looking to gain from focusing on stocks with a PE of less than 100 however. What is your thought process there?

Best Regards,
Dave

[timonr]

My thought process with the P/E Ratio is that it is the quickest way to figure out if a stock price is reasonable.

As an example if ABC company's stock is selling for $20.00 a share and it earned $2.00 per share last year it would have a trailing P/E of 10. ($20.00 divided by $2.00)

I have heard also from professionals that many investors will not buy a stock that has a P/E ratio higher than 15. It is said that Warren Buffett will only buy stock in companies that have a trailing P/E that is less than 10.

Also if a company has a PE greater than 100, One should start questioning why it is so high and question whether it will take >100 years just to gain one's money back..

Thanks for your time
T

[David Waring]

Hi Timonr,

Thanks for the response.

I can see where you are coming from here and I personally feel that it is ok to use PE as a filter in certain situations. With this being said I would be careful about how it is used, as often times it makes sense that the best stocks have the highest PE's and the worst stocks have the lowest PE's.

Best Regards,
Dave