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So many people I speak to, seem to believe there are some magic numbers out there that equate to stock picking success. Two things in particular that I hear over and over again when Im helping people with their screening strategies, relates to P/E Ratios and Price/Book Values.
For some reason, many people believe that P/E Ratios of 20 or less and Price/Book Values of 1 or less are these so-called magic numbers.
Unfortunately, statistics prove otherwise.
Thats more than 1 1/2 times the magic P/E numbers that people too often look for. And the average P/E ratio for those stocks now is over 41. More than twice that of the magic numbers.
True, there were/are stocks in there with P/Es under 20, but you wouldve missed a lot of fantastic winners if you excluded those with P/Es over 20.
As for the average Price/Book Value, the best performing stocks showed values over 4 at the beginning of the period and now more than 5. (Thats right, 5!)
In fact, only 1 stock out of the 67 stocks on that list, currently has a Price/Book Value of 1 or less.
So if you insist on looking for stocks with low valuations (P/E, P/B), try looking for low valuations as compared to their Industries. Why? Because 70% of the stocks on that list of winners had P/Es under the average for their Industry and close to 60% had P/Bs under the average for their Industry.
So instead of thinking about low valuations as an absolute number, try thinking about them as a relative measure. And Ive found that companies that are outperforming their Industries on earnings but are undervalued to their group in terms of valuations are great candidates.
So this week Im looking for companies with upward price momentum that are trading over $5, have a minimum average trading volume of 50,000 shares a day, have shown greater EPS growth over the last 2 quarters than their Industrys average and have lower P/Es and Price/Book Values than their Industrys average.
Heres a few from that screen that look ready to breakout;
Try incorporating some of these ideas into your own stock picking strategies. And while relative valuations arent available in most screeners, they are available in the Research Wizard. (Not to mention 650 other items too).
Click here to learn more about the Research Wizard stock picking and backtesting software and our free trial offer. Click here and find out how .
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