I like to have a good set of rules when it comes to trading stocks.
I start with the most conservative trading strategy I have…
At the beginning of each month, I examine three unique metrics to help build a list of low-risk, high-upside stocks with rock-solid balance sheets.
It can be a good strategy for first-time investors and options traders. That said, I know plenty of advanced traders who also love to employ this strategy in positive momentum markets.
This is free — I know people who charge thousands of dollars for some of this analysis! Which is silly because it’s quick and simple… You just need to know how the data works.
And by sharing my research with you, it helps me master it. So let’s take a look at our metrics.
- The Piotroski F-score.
- The Altman Z-score.
- A valuation rank.
It also helps if there’s an options chain for these stocks.
Our first metric — the Piotroski F-score — gives us a clue into positive financial growth and low debt exposure.
The F-score is a nine-point system that rewards each company for meeting a certain criterion on its balance sheet. It was created by a Stanford University and University of Chicago professor named Joseph Piotroski.
If the company meets all nine criteria, it has an F-score of 9. That means its balance sheet has greatly improved year over year.
Then we have the Altman Z-score…
This measurement is a weighted average of five different metrics to determine whether a company might go out of business.
If a company falls below 2.6, it has a risky balance sheet. That risk is tied to lots of debt or weak cash flow.
I like to look for stocks with a Z-score of 3 or higher. That severely reduces any credit concerns I have.
Finally, there’s a valuation metric. Different industries require different valuation methods. So, I’m not going to share this because it’s my secret sauce.
These stocks are cheap compared to their own historical valuation and/or to their sector rivals.
Here Is My Lovely 11
Below is a list of 11 names, and their metrics at the start of the month.
|Exxon Mobil Corp. (NYSE: XOM)||9||3.82|
|CF Industries Holdings Inc. (NYSE: CF)||9||4.86|
|Valero Energy Corp. (NYSE: VLO)||9||5.41|
|Huntsman Corp. (NYSE: HUN)||9||3.32|
|Matson Inc. (NYSE: MATX)||9||3.75|
|Alliance Resource Partners L.P. (Nasdaq: ARLP)||9||3.45|
|Photronics Inc. (Nasdaq: PLAB)||9||3.98|
|Epsilon Energy Ltd. (Nasdaq: EPSN)||9||6.01|
|FutureFuel Corp. (NYSE: FF)||9||5.78|
|Dillard’s Inc. (NYSE: DDS)||9||4.95|
|Marathon Oil Corp. (NYSE: MRO)||9||3.74|
How I Trade These Stocks
If I want to start trading these great names, I don’t have to buy the stock or call options. I could go deep out of the money on puts and trade credit spreads.
I’ve discussed various approaches to these stocks that offer unique upside and reduced risk. Again, with these trades, I can improve my probability of profit, generate large income payments from a small position, and pick my preferred entry buying price.
And what happens with these trades?
If the stocks go higher, I’ll make money.
I’ll also make money if the stocks don’t reach the strike price.
And if the stock falls to the strike price, I’ll get a great stock at a much cheaper valuation than today.
It’s win, win, win.
Friday, I’ll find a trade for one or two of these stocks. I prefer to focus on the Energy sector, although I’m expecting a bit of a pullback — a buying opportunity — due to recent overbought conditions in the sector.
Enjoy your day,
P.S. And don’t forget to let me know if you have any feedback, questions about today’s issue or anything else. Just email us at email@example.com.