Branding and Trends
Stockscores.com Perspectives for the week ending November 24, 2006
In this week's issue:
Why do people buy Crest or Coke and eat at McDonald?. What makes the Ferrari Cavallino so recognizable to millions, if not billions of people? Why will some people pay more for a Sony TV than an unknown TV manufactured in China?
The answer is simple; Crest, Coke, Mcdonalds, Ferrari and Sony have a brand, and brands have incredible value.
Tom Cruise is not a super actor but his movies do well because of brand. There are millions of people who shop at Wal Mart out of habit, assuming that they are getting the lowest price. Often they do, but not always; Wal Mart relies on its brand to slip a few more profitable products in to the shopping cart.
Brands control the consumer market and building a brand is difficult because it is hard to unseed existing brands. Think you have a better formula for detergent that can outsell Tide? You may have a great product but good luck trying to get people to buy it without brand recognition.
Stocks have brand awareness to and the life cycle of a stock is very similar to a branded product. If you think about stocks the way you think about brands you can start to understand what it takes to make a stock go up.
It is not always the best product that wins; some times it can be the product with the best commercial. This emphasis on marketing can also affect stocks. Stocks that are widely known to investors and trading a lot of volume have a better chance of being strong performers. Stocks need buyers to go up and the more people that know about what the company is doing, the more likely it can generate the interest of new investors.
The greatest indication of a stock's brand is its trend. Does the stock have rising bottoms on its chart or falling tops? Rising bottoms mean the market recognizes the stock's brand favorably. Falling tops means the brand is not well liked.
It was over 15 years ago when Hyundai was building really lousy cars. I worked in a garage and it was laughable how poorly built they were. The cars were junk and there was a black cloud that hung over the brand. Today, Hyundai wins awards for quality yet many consumers still have no desire to purchase their cars.
If Hyundai's brand were a stock, it would be one in a down trend. Even though the fundamentals may be positive, the brand has trouble keeping up with their Japanese competitors.
The point of this discussion is to emphasize that you can not fight the mood of the market. Good stocks that are not well liked by the market will have a hard time doing well. Bad companies that have some how captured the optimism of investors can do well, defying the expectations of fundamental analysis.
Wal Mart (WMT) is a well run company. There stock has gone no where in five years.
In late 2004, Taser International (TASR) was heavily over priced according to the rules of fundamental analysis. The stock went over $30 within 8 months. Which stock would you have rather traded two years ago?
It is important to invest with the mood of the market, latch on to stocks when the market's perception of fundamentals is positive. You may be able to prove that generic cola tastes as good as Coke but good look trying to convince the masses to make a change. The same holds true with stocks, go with stocks that have rising bottoms as an indication that they are trading with positive brand recognition.Back To Top
I like stocks that do abnormal things. Trading with abnormal price change and abnormal volume is often a signal that the stock is likely to go in to a trend. The key is to look at stocks with abnormal behavior, predictive chart patterns and a good potential for reward relative to the risk that has to be taken.
I went through the top 750 most active stocks from the Nasdaq market and looked their trading activity for the week, picking out those that had both abnormal volume and abnormal price action. From this shortened list, I checked to see if the chart patterns were predictive and there was a good risk reward ratio. From this analysis, I found 3 Nasdaq stocks that I think have good potential.
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1. BIOS
BIOS broke its downward trend line on Wednesday, trading much higher volume than normal. When stocks break upward in to downtrends, they often pull back for a little while as pessimistic investors use the price jump to get out of their stock. However, the abnormal break of the downward trend has a cause, and this cause can often be the catalyst for a trend reversal. In this case, I think that BIOS has good potential to move up to the $5.65 price mark. The close on Friday was $3.26, so that gives us about $2.40 of upside. Support on the stock is at about $2.65 so there is about $0.60 of downside providing four times the potential reward for the risk. I think we may see a few more days of pull back on the stock, I would look for the first green candle day as a clue that the pull back is likely ending.
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2. TOPT
TOPT broke out of a pennant pattern on Monday with abnormal volume. There is some resistance at $6.35 which I think will slow the stock in the short term. However, if the stock can get through that price point I think it can move to $7.50. Support is at $5.71 and the stock closed on Friday at $6.18. This sets up a 1 to 2.8 risk reward ratio which is good enough to consider the trade.
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3. REDF
REDF broke from an ascending triangle pattern on Monday and has resistance at $24. the stock closed at $18.47 and support at $15.10. This gives a marginal risk reward ratio of just under 1 to 2, however, it looks like the stock may pull back some more, perhaps to $18. If the stock shows a bounce signal of a green candle around that price point, this trade starts to make sense as entry at a lower price point improves the risk reward ratio.
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References
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Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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