April 28, 2004  Email this  Print this
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STOCKS
Find Your Trading Range
Buying and holding a stock is a good basic strategy for investing. But because few stocks rise in a straight line indefinitely, sometimes it pays to buy and sell some shares -- and then buy again. Take, for example, Coca-Cola. Shares of the soft drink maker have gone up and down, but they trade around the same price today as they did in 1997. Microsoft currently trades at its 1998 price. The idea is to take advantage of highs and minimize your exposure to lows. When a stock price reaches a certain level, sell and take your gains. When it drops, buy shares back at a bargain.
We're not talking about day trading or even monthly trading, but a plan for managing -- not just owning -- your stocks. Of course, this strategy isn't without risk, but that's where having a disciplined selling strategy, such as setting target prices and issuing a stop-loss order with your broker can be handy. (See Learning to Say Sell.)
You can learn more about this approach to managing your investments by reading "In and Out ... Then In Again" in the June issue of Kiplinger's Personal Finance. Below, we show you how to use the tools on Kiplinger.com to make good buying and selling decisions.
Find the stock price trading range
Trying to predict exact tops and bottoms is impossible, but you can get close. The trick is identifying the trading range. One of the easiest ways is to look for a pattern on a standard stock chart. Consider Wal-Mart for an example:
1. Go to Kiplinger.com's charting tool, enter your stock's ticker symbol (WMT) in the box provided and click "go." (You can also enter your stock's ticker symbol in the space on the Kiplinger.com banner, click "go", then select "chart" from the drop-down menu.)
2. This will bring up a 1-year price chart. To get a clearer picture of your stock's range, you'll probably want to examine a longer time period by selecting from the drop-down menu on the left.
3. You can probably see a general see-saw trend with Wal-Mart's price. An easy way to identify pricing trends and highs and lows is with a linear regression line. In the "Compare To" box beneath the chart, select "Linear Regression" under the heading "Upper Indicators."
4. You can see that Wal-Mart has risen to the upper line (about $60) five distinct times since 2000. Subsequently, it has retreated to the bottom line (mid- to high-$40s). As a rule, you can resolve to buy in the bottom half of a stock's range, sell when it gets near the top of the range and keep repeating the process, says Mark Keller, chief investment officer for A.G. Edwards Asset Management. Walmart is is currently trading near $60. Considering the trend continues, you might decide to trim your stake in Wal-Mart around $60 to $65, and buy back some shares around $45 to $50.
Identify other trading ranges
Studying historical prices isn't the only way to estimate a stock's future moves. You can also analyze other metrics of its value, such as price-to-earnings or price-to-book ratios.
1. To get a general idea of your stock's P/E ratio history, go to Kiplinger.com's Stock Research page. Type in its symbol, select "full report" and click "get information."
2. On the full report, scroll down to the box entitled "Valuation Ratios." This box gives a four-year history of key numbers for the stock and its peer group. (See The Key to Key Ratios for more on such indicators.)
Price/book ratios are a good metric for financial and insurance companies, says Keller. Looking at Progressive's (PGR) price/book ratio over the past four years, you see that it traded around 2.7 in 2000, and has gone up or down each year. It now seems to be near the top of its range, trading at 3.6 times book value -- expensive compared to its own history and the industry's average of 1.63. Now might be the time to consider trimming your stake, and then wait until book value retreats to its bottom range or closer to its peers to buy again.
Don't confuse hiccups for trends
Whenever companies issue earnings reports, their stocks can go through a volatile period. Some last longer than others. But take the opportunity to re-evaluate the company to see if your reasons for owning it still hold true, and whether the news -- good or bad -- will have a short or long-term affect on business. In other words: "Don't respond to short-term hiccups," says Peter Wall, chief investment officer of Chase Personal Financial Services. "Wait for a better reason."
In most cases, one quarter of missed earnings estimates won't throw off the course of the company long-term. Kiplinger.com's Earnings Center lets you monitor the effect positive and negative news tends to have on a particular stock.
1. Go to the Earnings Center and type in your stock's ticker symbol.
2. Click on the link "performance following a surprise."
For example, out of the last 19 negative surprises issued by Cardinal Health (CAH), the stock was lower after three months of the news in only four instances, or about 20% of the time. Cardinal's shares fell 14% in one day last July when management announced a surprise slowdown in earnings. Knowing the risk for long-term consequences is low would have come in handy in this circumstance -- the shares recently traded around $70.
For more advice on analyzing and avoiding short-term hiccups, see Learning to Say Sell and Look Beyond the Profits. | 
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