Investing is all about...
Buy low, Sell high
pretty simple right?
But how can you find good stocks to buy?
Specifically, how can you find those good stocks right before they make huge moves?
Today we'll go over a 3-step process to find good stocks to buy using a case study that involved two large pharmaceutical companies.
Our team alerted Red Acre Premium subscribers about a stock that was poised to fall by $9 or more. We told our subscribers about this situation more than two weeks before the stock took a nose dive. By reading this article you'll get some ideas of how you can spot these types of special situations on your own.
Step 1 - Pay Attention to the News
A lot of ideas about good stocks to buy can be found simply by keeping a close watch on the news. Particularly, the business and economic news headlines will go over the major developments that are happening at large companies - most of which have stocks you can buy on the stock market.
For example, recently, the giant pharmaceutical company Pfizer (NYSE:PFE) indicated that it wanted to buy a rival company, Astra-Zeneca (NYSE:AZN) for about $100 billion - or roughly $80 per share. See the middle of this Red Acre video insight for details on Pfizer's bid for AZN. When Pfizer's interest in Astra Zeneca became public, AZN shares were trading for about $68. Once a potential deal at $80 was announced, the stock immediately shot up to that price, and even beyond it.
The only ways to have made money on the way up are to have been a long-term share holder of AZN stock, or to have insider information (which is illegal). For more short term investing, we need a system that can help us identify profitable situations as they happen. Note, we do not recommend that investors waste their time trying to obtain insider information: again, it's illegal and it's unnecessary.
Once AZN shares shot up, there was an easy way to be positioned to make money when the stock eventually crashed back down as it did just a few weeks after the Pfizer buyout offer news.
Step 2 - Know (or Learn) Some Relevant Background
When AZN shares shot up to $80 and then even higher on a raised Pfizer bid, at Red Acre we KNEW that there was a very high likelihood that the shares would come tumbling down once again.
How did we know? Astra Zeneca is a British company. According to British takeover law, once a buyer's interest in a company becomes public, the buyer has 30 days to make an offer that either is accepted by the other party, or that causes both parties to come to the table and negotiate. This means that once the Pfizer bid was made public, the clock started ticking on a deal needing to be struck.
Even if you didn't know a thing about British takeover laws, between the many press articles and Pfizer's own press releases about the potential deal, you could have figured out that the clock was ticking.
In general, step 2 involves knowing some kind of relevant background information that can affect the outcome of the situation identified in step 1. This could be relevant laws, some underlying science or technology, or factors about a particular industry. This knowledge will help you with step 3.
Step 3 - Skate to Where the Puck is Going
The final piece you need in order to research good stocks to buy is the ability to see just a little bit into the future. We are not talking about some superhuman powers here. But it's like hockey legend Wayne Gretzsky used to say when asked why he was such a good player "I skate to where the puck is going - not where it is."
In investing this means understanding the current news, some relevant information that applies to and affects the situation, and then seeing the inevitable conclusion that these things make apparent.
Back to our example. When Pfizer first indicated that it wanted to buy Astra Zeneca, Astra Zeneca said "NO". Pfizer sweetened the offer by raising the price a little, offering more of the deal in cash instead of stock, and making promises to keep jobs in England. Astra Zeneca still said "NO". This dance went on a few more steps. But meanwhile, remember that ticking clock because of British takeover rules?
At Red Acre Investments, we saw the logical conclusion of this situation back in the beginning of May - weeks before the Pfizer clock ran out. Here is what we wrote to subscribers of Red Acre Premium:
...since PFE must either make a firm offer and enter negotiations, or walk away by May 26th. AZN may see some volatile trading [between now and then].
We're looking in to the AZN puts on the theory that, if Pfizer walks away come May 26th, AZN's stock price may be headed back to where it was before the takeover talk started. ... it's a scenario worth thinking about.
Notice what we did there? In the beginning of May we were skating to where the puck was going by May 26th. Namely, that if AZN continued to say "NO" to Pfizer's offers, then, logically, AZN's stock price should go back to where it was before all the takeover talk started.
Indeed that is exactly what happened. Once Astra Zeneca rejected Pfizer's final bid, the stock dropped $9 in an instant.
Savvy investors who took the time to do the proper stock research (and of course subscribers to Red Acre Premium fall into that group) were able to make a handsome profit either by buying AZN PUT options (options which make money when a stock's price drops), or by shorting AZN stock outright (selling shares borrowed from someone else and buying them back later at a lower price).
Wrap Up
To summarize, finding good stocks to buy often takes patience, and a keen attention to the news as it develops. This does not have to take a lot of time, but 15 to 20 minutes per day to stay on top of what's going on is a minimum.
Once a potential story catches your interest, do some background reading in the form of deeper news articles and company press releases. Always with the question in mind: "What does this mean for the stock?"
Finally, use this collection of information to "Skate to where the puck is going". Put together the logical pieces and see if an investment conclusion becomes clear. It may not always be as cut and dried as the Pfizer/Astra-Zeneca example above, but if you use this 3-step process often enough, you'll start to see profitable patterns emerge.
Here's to profitable investing.
Case Studies
To see how we have successfully applied this 3-Step process over and over again, Check out our case study on 4 Ultra-successful trades in 4 months.
