Stock Pick (Google) Part 1
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Author - Melynn,
Stock - Google,
US Stocks
1. Entry Point
Fundamentals
I am assessing the fundamentals based on the materials and analyst reports in MorningStar therefore to ensure consistency, I will be using their fair value estimation as well. They have come up with 2 numbers.. 1) fair value estimate, 2) target price with the margin of safety element. For my estimates, I will be probably using the latter which is at 250 now.
Technicals
Moving Average : Used 3 mv lines (14d,25d and long term 100)... This is still in experiment phase therefore numbers might not be ideal. Note that up to this point, the short period mv line crossed the longer period one which symbolizes a bullish trend.. Curently the price is trading above all three lines which is a bullish indicator
ADX : Currently at 16 which indicates a weak trend.. Strong trend if its above 40. When adx begins to strengthen from below 20 and moves above 20, it is a sign that the trading range is ending and a trend is developing.
Based on the above 2 factors, I think this stock may be gaining momentum, consolidating and an uptrend might soon prevail..
I am assessing the fundamentals based on the materials and analyst reports in MorningStar therefore to ensure consistency, I will be using their fair value estimation as well. They have come up with 2 numbers.. 1) fair value estimate, 2) target price with the margin of safety element. For my estimates, I will be probably using the latter which is at 250 now.
Technicals
Moving Average : Used 3 mv lines (14d,25d and long term 100)... This is still in experiment phase therefore numbers might not be ideal. Note that up to this point, the short period mv line crossed the longer period one which symbolizes a bullish trend.. Curently the price is trading above all three lines which is a bullish indicator
ADX : Currently at 16 which indicates a weak trend.. Strong trend if its above 40. When adx begins to strengthen from below 20 and moves above 20, it is a sign that the trading range is ending and a trend is developing.
Based on the above 2 factors, I think this stock may be gaining momentum, consolidating and an uptrend might soon prevail..
Deducting the estimated value from the current , its approximately $119.78 difference.. Its a 47% variance therefore as for now, I think I will track this under my watchlist
2. Position Sizing .
I will be using a 50d ATR to estimate the volatile and it is currently at 15.32. Below are the steps I need to take to derive the position.
- Determine the amount of money in account
Assuming I have $25 000
- Determine the amount to risk
Note that there is a 47% variance between my estimated value and the curent price .. Following is a table which I am using to set the risk.
OverValued (Estimated > Current)
<10% variance = 3% risk
>10 % and <20% variance = 2% risk
> 20% and <25% variance = 1% risk
>30 % = wont invest.
UnderValued(Estimated
<10% variance = 3.5% risk
>10 % and <20% variance = 4% risk
> 20% and <25% variance = 4.5% risk
>30 % = 5% risk
Therefore in such a case, I wont invest as the variance exceeds my predefined threshold (30%).. I will only buy if the price reaches my target (Thats assuming, the fundamentals are intact and there's a hint that momentum will be building up soon).
One downside of this is that the valuation is a laggard as this number wont be updated accordingly to the current economic situation.. In the event if I foresee the economic to recover, should I attempt to readjust the valuation accordingly? I shall think about this at a latter stage but for now, I will stick to their valuation rigidly.
Target Price
<10% variance - set 3% risk if the price is between 250 to 275
>10 % and< 20% variance - set 2% risk if the price is between276 to 300
> 20 % variance and <25% variance - set 1% risk if the price is between 300 to 312.5
I will continue my exit point and hypothesis of a good case and worst case scenario in my next post.
*Disclaimer : This analysis is personal and is not an inducement to buy or sell shares of Google. The author of this blog will not be held responsible for any losses incurred due to the reliance on this article.
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