Shares Research & Stock Recommendations

The different ways of valuing companies

We've discussed before how 'value' means different things to different market participants.

But it's not just perception of value that changes - actual valuations are also calculated differently according the circumstances of both those using the valuation and the company that's being valued.

This can initially be frustrating for many new investors. How can you decide whether to invest in Gold Miner Corp or Media Giant Limited if they are valued in different ways? Moreover, should you place more confidence in one valuation method over the other?

The simple answer is that valuations are a matter of 'horses for courses'. Valuation methods should change according to the circumstances. In the first instance, the purpose of the valuation needs to be understood.

Why EPS growth is vital for share price gains

We all know technical analysis is all about momentum, but you might be surprised by how much impact momentum has on fundamental analysis.

Specifically, one of the major fundamental drivers of share prices in the short term is a company's ability to increase its earnings.

When it comes to any company's financial picture, earnings are the single most important factor. Earnings are most often expressed as earnings per share (EPS).

Net Tangible Assets or NTA

One of the terms you might see in our Key Data tables below our fundamental analysis, like you find in our Feature Stocks and Focus Stocks sections, is NTA.

But what is this term, and what does it mean?

NTA stands for "Net Tangible Assets". NTA is also sometimes called "book value".

NTA is calculated by looking at the total assets of a company, like trucks, plant equipment, inventories and cash in the bank, and then subtracting any intangible assets, like goodwill or trademarks. This gives you tangible assets. From here, you need to subtract total liabilities, and this gives you NTA.

The double bottom formation

The double bottom is a major reversal pattern - a pattern that is, in fact, one of the most common patterns.

The double bottom reversal forms after a downtrend. As its name implies, the pattern is made up of two consecutive troughs with a moderate peak. The double bottom looks like the letter "W", as shown left. The twice-touched low is considered a support level.

Of course, at this point in time, knowing how to identify the double bottom will be one crucial piece of the puzzle that helps us know when the best time will be to get back into the market.

Relative Strength Index

Today we'll take a look at the RSI indicator and how it can be used to strengthen your opinion and help your analysis of a share trade.

For those into theory, the RSI is a member of the Momentum Oscillators. Primarily, momentum oscillators are used to pick the end of short-term trends. The RSI can indicate to the trader when a move has run out of puff.

That means there could be money to be made with the changing trend, hence its strong use by some technical traders.

The main purpose of the RSI is to measure the market's strength and weakness. In theory an RSI above 50 is bullish and below 50 is bearish.

However, a more practical application of the RSI is that a value of over 70 suggests an over bought or weakening bull market.

Conversely a low RSI, below 30, implies an oversold market or dying bear market.

How recessions work

A recession is a normal but unpleasant part of the business cycle.

While these things are hardly clockwork, a recession generally lasts six to eighteen months, and is usually spaced 10 years apart.

In the US and around the world many traders can identify the so called "black days" that are often the first signs of a recession - for instance, the 1987 sharemarket crash or the 1997 Asian crisis.

The technical definition is two consecutive quarters with negative economic growth, but some economists now argue that the speed of change in modern society means we should accept that one quarter is enough to signal a slowdown.

Cyclicals and defensives

No matter what shape the market is in, we hear the terms "cyclical" and "defensive" (or "non-cyclical") thrown around, in regard to either stocks, sectors or industries.

These two terms represent, as you can probably guess, two types of industry or stock that are at stark odds with the other.

Let's take a deeper look at what these terms mean, and how they interplay with the stockmarket.

The terms cyclical and defensive are used to show how closely corrected a company's share price, or a sector's performance, is to fluctuations in the economy.

Always use stops. Always!

Do you want to know where 9 out of 10 novice traders fail with their strategies?

It's from the lack of use of stop losses.

Now, investors may either simply not know that they exist, or choose not to use them. Either is a recipe for disaster.

Other investors try to do the right thing by using stop losses, only to end up with frustrating results.

It seems that every time they set a stop loss on an investment, the price make a b-line straight for their stop loss - then simply goes back up again!

Don't get into a trade just to get into a trade

Buying stocks on impulse is a mistake we've all made. Often. The market's going up, you don't have a position, so you're willing to buy anything to get involved.

This is typical group psychology. The fear of missing out on what the other humans have.

It's the same reason you smoked your first cigarette in high school - and how did that make you feel?

That's right. A slight headache, a touch dizzy and an upset stomach.

You won't feel much better if you jump into trades for fear of missing out.

What's the solution?

The solution is easy: only get into trades that meet your entry criteria. Discipline is critical when trading. And it is most critical for entry and exit points.

Dividend stripping

This is the closest the financial markets come to offering a free hand out, so it is worth getting your head around the concept in theory and in practice. However, such so-called simple strategies sound good in theory but can result in a loss if not executed correctly.

In theory, the aim of dividend stripping is to simultaneously acquire a share's dividend, imputation credit and capital gain.

The share is bought before ex-dividend (ex-div) date, thereby collecting the dividend and associated franking credits, then selling the share shortly after ex-div date with the aim of collecting a capital gain. That is, the share is bought and sold over a few days purely to strip the dividend.

Using breakouts to maximise profits

Markets go up. And markets go down. But markets actually spend most of the time moving sideways - not that you'd believe it the way the local market is currently going. But, it's true: markets spend around 70% of their time trading sideways.

However, these sideways periods aren't disappointing periods in which it's harder to trade. These periods will often precede sudden price movements, so you'd be well advised to pay attention to what the market is telling you when nothing much appears to be going on.

The time that markets spend moving sideways are known as period of "distribution" or "consolidation". In general terms, price ranges tend to do one of two things: expand or contract. These periods of sideways movements are the contraction phases.

Trading Lessons