Monday, January 09, 2006

Blog of the Week: Catablast

Opening the Books: How We Pick Stocks

Ever wonder how we pick our buy/sell recommendations?

Us too. So we thought we'd use today to open the books and show you how we do it.

For the most part, we implement a top-down approach to investing.

Every company operates within a certain environment, so the first thing we try to do is understand a given company's industry/sector.

Know the climate.

Let's use the beleaguered airline industry as an example.

It's characterized by bloated pension/health care costs, cutthroat competition, and high energy prices.

Those sorts of ills cripple margins, eat into profits, and even bring industries under regulatory scrutiny.

If the milieu is ugly, the stock is probably ugly. This is why you avoid the financials when rates climb and elude export-heavy stocks when the dollar's high.

Stocks only move for three reasons: corporate profits, interest rates, or exogenous shocks. Exogenous shocks, as you can imagine, include everything from earthquakes to lawsuits to a CEO's unexpected death.

After we digest macrowave data like economic sentiment and industry mood, we dig into the micro-specifics...



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