MicrocapMillionaires as a distinctively unique penny stock newsletter that focuses on specific clues that lead to winning picks.

"Social-Misfit White Kid From 'The Burbs' Risks EVERYTHING, Loses It....Then Comes Roaring Back After Discovering 3 Secrets of Small Cap Stock Trading That He Shares In This Presentation..."

Click and Let's Start Now

STORY OF A BAD PENNY STOCK TRADE CAUSED BY TECHNICAL ANALYSIS…

Before I get all the hard core chartists worked up into a tizzy, let me say that I do not think chart reading a.k.a. technical analysis is worthless. In fact I use it every day the market is open in some capacity. Different indicators such as stochastics, the relative strength index and levels of support and resistance are things I look to glean insight from more often than not. So there you have it, I do use technical indicators and I wouldn’t think about making a trade without at least studying a stock’s chart for a New York minute.

The problem that I have seen people creating for themselves is one of over reliance on technical analysis. And I say this from experience. The scenario usually plays out something like this: A newbie trader makes a few trades. He gets nowhere fast, and has likely lost some money since he started his trading adventure. He starts to get a little discouraged but still thinks he can make it as a trader. Then, one day he sees a micro cap stock make a huge one or two day move. The type of a move that can turn $1,000 into $5,000…maybe even more. Get the picture? A huge “breakout”.

He suspects that there may have been one magical technical indicator that could have “tipped him off” about the impending move in that stock. After taking a look at that particular stock chart, his eyes light up! “There it is”, he thinks to himself, “If I would have just saw that stochastic curling up over the 40 level, I could have made bank!” Then, with a renewed sense of optimism, he goes and buys the first stock he thinks is about to make a move based on the chart observation I just mentioned (stochastic).

Result? It doesn’t work out like he hoped for. The newbie trader I am speaking of is not some imaginary persona I conjured up to make myself look smart. Nope. That novice young man was ME. Yes indeed. But it was a lesson learned. A very useful and important one. It helped me to realize there are many variables as to why a micro cap stock (penny stock) makes a big short term move to the upside-and to the downside as well in some cases.

I don’t remember the exact scenario with that stock. I actually tried to dig up what stock it was…to no avail.

So what’s my point? Glad you asked.

It is simply this: Technical analysis should only be considered as a “tool in your tool belt”. Why? Because there are other forces at work, especially in micro cap stocks that you need to pay more attention to than technical analysis. What other things? I can’t possibly name them all in list format. Maybe if I drank a 64 oz. of Dunkin’ Donuts Turbo coffee I could, but I’d like to go to bed tonight at some point.

But I will tell you one very important thing to familiarize yourself with on any stock you are considering making a trade on, whether it’s a microcap stock or not. Ready? Here it is:

The story line of a stock.

Vague enough for you? Well, have no fear because my next article will go more in depth about it. Basically, it is taking the time and effort to understand what recent events have had an impact on a stock’s value, and equally as important, what current and future events will likely have an impact on a stock. More details in the next article from me.

To conclude, I want to say that there really is no magic bullet type technical analysis strategy. It is helpful. But it is just a tool. Growing a small trading account into a life changing sum of money requires you to position yourself better than someone who is only willing to look at stock charts. You have to dig deeper.

Get access to my penny stock newsletter and take the guesswork out of your trades.

Matt

Microcapmillionaires.com

Click and Let's Start Now

An Analysis Of Overstock.com (OSTK)

Why is a value investor writing about an unprofitable internet company? Because value investing is about finding dollars that trade for fifty cents; with a market cap of less than 75% of sales, Overstock.com (OSTK) looks like it may be exactly that.

But isn’t it too risky?

The greatest risk in any investment is the risk of overpaying. So, the real question is: what is Overstock worth? I think it’s worth at least $1.5 billion. With Overstock’s market cap currently sitting around $500 million, my valuation certainly looks far fetched. But, there’s only one way to know for sure. Let’s take apart my argument piece by piece, and see if any of my assumptions are unreasonable.

First Assumption: Over the next five years, Overstock will neither generate truly free cash flow nor consume cash. In other words, its free cash flow margin will average 0%. Cash generation in some years will exactly offset cash consumption in other years. Obviously, this assumption is unreasonable, because there is almost no chance the cash flows will exactly offset.

That’s not a problem if it turns out Overstock does generate some free cash flow over the next five years. In that case, my assumption simply errs on the side of caution. If, however, it turns out Overstock actually consumes cash over the next five years, there is a problem – possibly a very big problem. So, which scenario is more likely?

Overstock’s revenues are growing quickly. Gross margins look solid at 13.3% in 2004 and 14.9% over the last twelve months. Overstock’s unprofitability is the result of its selling, general, and administrative expenses (SG&A) which have been growing exponentially. Will these expenses continue to grow? 

Yes, but not as fast as revenues. Over the last twelve months, Overstock’s spending on cap ex has been 5.6% of sales. That number is an aberration. In the long run, spending on cap ex should not exceed 3% of sales. 

Considering the business Overstock is in and the expected sales growth, the company will, more likely than not, generate some free cash flow over the next five years. Therefore, the assumption that Overstock will be cash flow neutral over the next five years is not overly optimistic.

Second Assumption: Over the next five years, Overstock’s sales will grow by 15% annually. Is this an unreasonable assumption? Again, I don’t think it is. 

Very few industries are expected to grow as fast as eCommerce. Overstock’s revenue growth in 2003 and 2004 was over 100%. In the past year, that growth has slowed. However, it is still closer to 50% than it is to 15%. Overstock isn’t in a cyclical business. So, there is no reason to believe current sales are abnormally high.

Also, all that spending on advertising is increasing consumers’ awareness of Overstock. A review of Overstock’s traffic data shows it has not only been gaining more visitors; it has also been climbing the ranks of the most popular web sites. 

While it is a long, long way from the Amazons, Yahoos, and eBays of the world (and will never reach those heights) Overstock is becoming a well known internet destination. This fact was most clearly evident in the weeks leading up to Christmas. Shoppers who visited Overstock during the holiday season obviously know it exists, and may very well return at some other point in the year. 

Analysts are predicting very high growth rates for Overstock; however, they are also recommending you sell the stock. I don’t put any weight in their estimates. But, for the other reasons given, I believe the assumption that Overstock will grow sales at 15% a year for the next five years is not unreasonable.

Third Assumption: Six to ten years from today, Overstock will have a free cash flow margin of 3%. Ten years from today, Overstock’s free cash flow margin will rise to 4% and remain at that level. Now, of all the assumptions I’ve made, this one is the most questionable. 

Sure, Amazon has that kind of free cash flow margin, but Overstock isn’t Amazon, and it never will be Amazon. Overstock’s gross margins are less than Amazon’s. In fact, Overstock’s gross margins are less than Wal – Mart’s. However, Overstock’s fixed costs will eat up a much smaller portion of its sales than is the case over at Wal - Mart.

If you compare Overstock to other online retailers, you will see that if Overstock does experience strong sales growth, a 3% free cash flow margin six years from now is not unreasonable. I assumed Overstock’s sustainable free cash flow margin will be 4%. There’s a case to be made that 4% is too high. 

I won’t make that case, because I don’t believe in it. Remember, that 4% number comes ten years out. That gives Overstock plenty of time to grow sales and thus reduce SG&A as a percentage of sales.

Fourth Assumption: Six to ten years from today, Overstock will be growing sales by 12% a year; eleven to fifteen years from today, Overstock will be growing sales by 8% a year; thereafter, Overstock will grow sales by 4% a year. Let’s see what this really means. According to these assumptions, Overstock’s sales will be as follows:

Today: $707 million

2011: $1.59 billion

2016: $2.71 billion

2021: $3.83 billion

2026: $4.66 billion

2031: $5.67 billion

2036: $6.90 billion

Seven billion dollars is not an unreasonable target – if you have thirty years to achieve it. To put that figure in perspective, Amazon.com currently has sales of about $8 billion. So, even after thirty years, these assumptions don’t lead to Overstock reaching the same size as today’s Amazon. Don’t forget these numbers assume some inflation. 

For instance, if inflation averages 3% a year over the next thirty years, Overstock’s projected $6.90 billion in sales only translates to $2.84 billion in today’s dollars. So, these assumptions only lead to a fourfold increase in Overstock’s real sales over a period of thirty years. I think that’s pretty reasonable.

If you take these four assumptions together, you get a value of $1.5 billion for Overstock. Today, Mr. Market is offering it for $500 million – that’s why I’m writing about an unprofitable internet company.

Learn more about the Ten Steps To Profitable Trading, the best trading strategy at http://besttradingstrategy.com

5 Steps To Researching a Stock Trade Before Investing

Once you determine which business cycle the economy is currently in you can start researching for a trade. It is best to have some sort of a system in place that will be used before EACH trade. Here is a simple 5 Step formula to help get you started.

5 Steps to Investing Online:

1. Find a stock

This is the most obvious and most difficult step in stock trading. With well over 10,000 stocks to trade a good rule of thumb to consider is time of the year.  For example, as I write this, it is the beginning of spring. It would make sense to consider stocks that traditionally make runs, or slide if you are bearish, during this time of year.

2. Fundamental Analysis

Many short term traders may disagree with the need to do ANY Fundamental Analysis, however knowing the chart patterns from the past and the news regarding the stock is relevant. An example would be earnings season.  If you are planningon playing a stock to the upside that has missed its earnings target the last 3 quarters, caution could be in order.

3. Technical Analysis

This is the part where indicators come in. Stochastics, the MACD, volume, moving averages, RSI, CCI, support levels, resistance levels and all the rest. The batch of indicators you choose, whether lagging or leading, may depend on where you get your education.

Keep it simple when first starting out, using too many indicators in the beginning is a ticket to the land of big losses.  Get very comfortable using one or two indicators first.  Learn their intricacies and you'll be sure to make better trades.

4.  Follow your picks

Once you have placed a few stock trades you should be managing them properly. If the trade is meant to be a short term trade watch it closely for your exit signal.  If it's a swing trade, watch for the indicators that tell you the trend is shifting.  If it's a long term trade remember to set weekly or monthly checkups on the stock. 

Use this time to keep abreast of the news, determine your price targets, set stop losses, and keep an eye on other stocks that you may want to own as well.

5. The big picture

As the saying goes, all ships rise and fall with the tide. Knowing which sectors are heating up stacks the chips in your favor.

For example, if you are long (expecting price to go up) on an oil stock and most of the oil sector is rising then more likely than not you are on the right side of the trade.  Several trading platforms will give you access to sector-wide information so that you can get the education you need.

Learn more about the Ten Steps To Profitable Trading, the best trading strategy at http://besttradingstrategy.com

3 Steps To Profitable Stock Picking

Stock picking is a very complicated process and investors have different approaches. However, it is wise to follow general steps to minimize the risk of the investments. This article will outline these basic steps for picking high performance stocks. 

Step 1. Decide on the time frame and the general strategy of the investment. This step is very important because it will dictate the type of stocks you buy. 

Suppose you decide to be a long term investor, you would want to find stocks that have sustainable competitive advantages along with stable growth. The key for finding these stocks is by looking at the historical performance of each stock over the past decades and do a simple business S.W.O.T. (Strength-weakness-opportunity-threat) analysis on the company. 

If you decide to be a short term investor, you would like to adhere to one of the following strategies: 

a. Momentum Trading. 

This strategy is to look for stocks that increase in both price and volume over the recent past. Most technical analyses support this trading strategy. My advice on this strategy is to look for stocks that have demonstrated stable and smooth rises in their prices. The idea is that when the stocks are not volatile, you can simply ride the up-trend until the trend breaks. 

b. Contrarian Strategy. 

This strategy is to look for over-reactions in the stock market. Researches show that stock market is not always efficient, which means prices do not always accurately represent the values of the stocks. When a company announces a bad news, people panic and price often drops below the stock's fair value. To decide whether a stock over-reacted to a news, you should look at the possibility of recovery from the impact of the bad news. For example, if the stock drops 20% after the company loses a legal case that has no permanent damage to the business's brand and product, you can be confident that the market over-reacted. My advice on this strategy is to find a list of stocks that have recent drops in prices, analyze the potential for a reversal (through candlestick analysis). If the stocks demonstrate candlestick reversal patterns, I will go through the recent news to analyze the causes of the recent price drops to determine the existence of over-sold opportunities. 

Step 2. Conduct researches that give you a selection of stocks that is consistent to your investment time frame and strategy. There are numerous stock screeners on the web that can help you find stocks according to your needs. 

Step 3. Once you have a list of stocks to buy, you would need to diversify them in a way that gives the greatest reward/risk ratio. One way to do this is conduct a Markowitz analysis for your portfolio. The analysis will give you the proportions of money you should allocate to each stock. This step is crucial because diversification is one of the free-lunches in the investment world. 

These three steps should get you started in your quest to consistently make money in the stock market. They will deepen your knowledge about the financial markets, and would provide a sense of confidence that helps you to make better trading decisions.

Learn more about the Ten Steps To Profitable Trading, the best trading strategy at http://besttradingstrategy.com