- U.S. Stocks 2012: Will Third-Quarter Earnings Kill Rally?
- U.S. Stocks 2012: Can Bulls Keep the Charge Into Q4?
- Top Stock Picks of Billionaire Hedge Funds May Surprise You
- How to Find the Best Undervalued Stocks
- U.S. Stocks 2012: Five High-Value Stocks at Bargain Prices
U.S. stocks 2012
But a noticeable trend is emerging.
In the past seven Septembers, the Dow Jones Industrial Average has risen five times. And while the last trading day of September 2012 ended down, it was an up month for the Dow.
In fact, the Dow has now risen in 11 of the past 12 months (May saw a 6% decline). The last time markets enjoyed that kind of stellar streak was in 1959.
For the third quarter, the Dow tacked on 4.3%, the Standard & Poor's 500 Index rose 5.8% and the Nasdaq climbed 6.2%
Year-to-date, all three major indexes have enjoyed robust gains. They headed into the fourth quarter up 10%, 14.6% and 19.6% year-to-date, respectively.
Commodities also ran higher in the third quarter. Gold glowed, gaining 8%, oil gushed higher by 8%, and the Dow Jones-UBS Commodity Index surged 15%. Gold, up 11% in 2012, and silver, up a sterling 24% so far this year, are both expected to benefit further as the Fed's free monetary stance weighs on the value of the dollar and inflation worries are amplified.
Most of September's gains came during the first two weeks as markets anticipated a third round of quantitative easing. The Fed delivered at the Sept. 13 Federal Open Market Committee (FOMC) meeting, and stocks muddled through the rest of the month suffering from a case of buy on the rumor and sell on the news.
"The third quarter story was really simple. The performance was propelled by the generosity of global central bankers," Rex Macey, chief investment officer at Wilmington Trust told USA Today.
Now let's take a look at if this momentum will surge into the fourth quarter.
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But Buffett isn't the only successful billionaire investor. Dozens of billion-dollar hedge fund managers and other extremely wealthy investors also know how to pick winning stocks.
Fortunately for the retail investor, the Securities and Exchange Commission (SEC) requires that such heavy hitters file a report on their long positions every quarter.
While the reports (called a Form 13F) lag the actual holdings of the billionaire investors and hedge funds, they serve as a useful window into the thinking of the country's most highly rewarded investors.
Several Websites track the Form 13F filings and look for patterns that retail investors can use.
One such site, Insider Monkey, tracks the 13F filings from 400 top hedge funds and billionaire investors.
In addition to Buffett's Berkshire Hathaway (NYSE: BRK.A, BRK.B), Insider Monkey tracks such well-known hedge fund managers as Carl Icahn (Icahn Capital Lp), David Einhorn (Greenlight Capital), John Paulson (Paulson & Co.), and George Soros (Soros Fund Management).
Although hedge funds have had a difficult year overall, the stocks they buy and hold have generally outperformed the market, the site notes.
Earlier this year Insider Monkey filtered out the 30 most popular stocks among these high-octane investors, to create what it calls the Billionaire Hedge Fund Index. That index is up 25.3% for the year, besting the 18% gain of the Standard & Poor's 500 Index.
Let's take a look at these winning top stock picks.
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Today, however, with the S&P 500 resting atop the 1,400 level and the Nasdaq just over 3,010, finding undervalued issues isn't as easy as it was a few months back.
Fortunately, there are tools that can help you more easily ferret out some of the market's remaining hidden gems and find the best undervalued stocks.
They're called "stock screeners." There are at least a half dozen free ones that you can access online to help you search for value among the more than 8,000 companies traded on the various U.S. stock exchanges and electronic networks.
Some are fairly basic, allowing you to analyze stocks based on just 10 or 12 different criteria, while a couple are quite comprehensive. They let you request data in up to 60 different fundamental, technical and descriptive categories.
Some allow you to enter a range of values - e.g., a price/earnings (P/E) ratio between 12 and 20. Others utilize an over/under format asking you to enter absolute numbers - e.g., a P/E "<18" (18 or less). All allow you to pick only the indicators you're interested in for a given screening.
However, before you can use any screener - and I'll provide links to several of the leading free ones in just a minute - you need to know which fundamental and technical measures are most useful in finding undervalued stocks poised to grow.
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Picking stocks with low prices is not enough. Thanks to the market's May swoon and seven-for-eight losing streak earlier this month, there's no shortage of low-priced U.S. stocks in 2012. But many of those are destined to chug along forever with low prices - or go bust altogether.
At the same time, some U.S. stocks priced at $100-plus per share could be considered bargains.
The key in both cases, of course, is value.
Only by comparing a stock's price to its underlying value can you decide whether it's a "bargain."
Unfortunately, it's not quite as easy as it sounds. There are almost as many definitions of "value" as there are securities analysts.
However, most agree on the following fundamental measures of intrinsic worth:
- The stock has a low price/earnings (P/E) ratio relative to other companies in its industry segment or the market as a whole.
- The P/E ratio is below the stock's own average P/E over the past 10 years or so.
- The company's earnings history is stable - i.e., the low P/E is not due to unusual capital gains or some other one-time revenue event.
- The company's earnings have increased for the past three years on stable or rising cash flow.
- The stock is selling at a price below book value - i.e., the company's tangible assets are worth more than the value of the outstanding common stock.
- The company has little or no debt - and, if there is debt, it is rated "A" or better.
- The current low stock price is not the result of a sharp drop in operating margins, management shake-ups or some kind of financial scandal.
- In spite of its solid fundamentals, the stock price is lagging others in the same industry segment.