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Which one did you pick? Stock A Syntex Corp, see below was the right one to buy. The small arrow pointing down above the weekly prices in July shows the same buy point at the end of Stock A in July on the previous page. Stock B and Stock C both declined. The consolidation base-building period in price could normally last anywhere from seven or eight weeks up to fifteen months. As the stock emerges from its price adjustment phase, slowly resumes an uptrend, and is approaching new high ground, this is, believe it or not, the correct time to consider buying.

The stock should be bought just as it's starting to break out of its price base. Therefore, your job is to buy when a stock looks high to the majority of conventional investors and to sell after it moves substantially higher and finally begins to look attractive to some of those same investors. And most importantly, companies whose stocks are emerging from price consolidation patterns and are close to, or actually touching, new 4 highs in price are usually your best buy candidates. There will always be something new occurring in America every year. In alone, there were nearly 1, initial public offerings.

Dynamic, innovative new companies—a bundle of future, potential big winners. When you go to the grocery store and buy fresh lettuce, tomatoes, eggs, or beef, supply and demand affects the price. The law of supply and demand even impacted the price of food and consumer goods in former Communist, dictator-controlled countries where these state-owned items were always in short supply and frequently available only to the privileged class of higher officials in the bureaucracy or in the black market to comrades who could pay exorbitant prices.

The stock market does not escape this basic price principle.

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The law of supply and demand is more important than all the analyst opinions on Wall Street. Big Is Not Always Better The price of a common stock with million shares outstanding is hard to budge up because of the large supply of stock available. A tremendous volume of buying demand is needed to create a rousing price increase.

On the other hand, if a company has only 2 or 3 million shares of common stock outstanding, a reasonable amount of buying can push the stock up rapidly because of the small available supply. If you are choosing between two stocks to buy, one with 10 million shares outstanding and the other with 60 million, the smaller one will usually be the rip-roaring performer if other factors are equal.

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The stock's "floating supply" is also frequently considered by market professionals. It measures the number of common shares left for possi- ble purchase after subtracting the quantity of stock that is closely held by company management.


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Stocks that have a large percentage of ownership by top management are generally your best prospects. There is another fundamental reason, besides supply and demand, that companies with large capitalizations number of shares outstand- ing as a rule produce dreadful price appreciation results in the stock market. The companies themselves are simply too big and sluggish. Pick Entrepreneurial Managements Rather Than Caretakers Giant size may create seeming power and influence, but size in corporations can also produce lack of imagination from older, more conservative "caretaker managements" less willing to innovate, take risks, and keep up with the times.

In most cases, top management of large companies does not own a meaningful portion of the company's common stock.

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This is a serious defect large companies should attempt to correct. Also, too many layers of management separate the senior executive from what's really going on out in the field at the customer level.

And in the real world, the ultimate boss in a company is the customer. Times are changing at a quickening pace. A corporation with a fastselling, hot new product today will find sales slipping within three years if it doesn't continue to have important new products coming to market. Most of today's inventions and exciting new products and services are created by hungry, innovative, small- and medium-sized young companies with entrepreneurial-type management. As a result, these organizations grow much faster and create most of the new jobs for all Americans.

This is where the great future growth of America lies. Many of these companies will be in the services or technology industries. If a mammoth-sized company occasionally creates an important new product, it still may not materially help the company's stock because the new product will probably only account for a small percentage of the gigantic company's sales and earnings. The product is simply a little drop in a bucket that's just too big. This automatically eliminates from consideration most of the true growth companies. It also practically guarantees inadequate performance because these investors may restrict their selections mainly to slowly decaying, inefficient, fully matured companies.

As an individual investor, you don't have this limitation. If I were a large institutional investor, I would rather own of the most outstanding, small- to medium-sized growth companies than 50 to old, overgrown, large-capitalization stocks that appear on everyone's "favorite fifty" list. The average capitalization of top-performing listed stocks from through was The median stock exhibited 4.

Foolish Stock Splits Can Hurt Corporate management at times makes the mistake of excessively splitting its company's stock. This is sometimes done based upon questionable advice from the company's Wall Street investment bankers. In rny opinion, it is usually better for a company to split its shares 2-' for-1 or 3-for-2, rather than 3-for-l or 5-for-l.


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When a stock splits 2-for1, you get two shares for each one previously held, but the new shares sell for half the price. Overabundant stock splits create a substantially larger supply and may put a company in the more lethargic performance, or "big cap," status sooner. It is particularly foolish for a company whose stock has gone up in price for a year or two to have an extravagant stock split near the end of a bull market or in the early stage of a bear market.

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Yet this is exactly what most corporations do. They think the stock will attract more buyers if it sells for a cheaper price per share.

This may occur, but may have the opposite result the 32 A Winning System: C-A-N S-L-l-M company wants, particularly if it's the second split in the last couple of years. Knowledgeable professionals and a few shrewd traders will probably use the oversized split as an opportunity to sell into the obvious "good news" and excitement, and take their profits. Many times a stock's price will top around the second or third time it splits. Large holders who are thinking of selling might feel it easier to sell some of their , shares before the split takes effect than to have to sell , shares after a 3-for-l split.

And smart short sellers a rather infinitesimal group pick on stocks that are beginning to falter after enormous price runups—three-, five-, and ten-fold increases—and which are heavily owned by funds. The funds could, after an unreasonable stock split, find the number of their shares tripled, thereby dramatically increasing the potential number of shares for sale. Look for Companies Buying Their Own Stock in the Open Market One fairly positive sign, particularly in small- to medium-sized companies, is for the concern to be acquiring its own stock in the open marketplace over a consistent period of time.

This reduces the number of shares of common stock in the capital structure and implies the corporation expects improved sales and earnings in the future. Total company earnings will, as a result, usually be divided among a smaller number of shares, which will automatically increase the earnings per share. And as we've discussed, the percentage increase in earnings per share is one of the principal driving forces behind outstanding stocks. Tandy Corp. All three companies produced notable results in their earnings-per-share growth and in the price advance of their stock.

Usually the lower the debt ratio, the safer and better the company. Earnings per share of companies with high debt-to-equity ratios can be clobbered in difficult periods of high interest rates. These highly leveraged companies generally are deemed to be of poorer quality and higher risk.

A corporation that has been reducing its debt as a percent of equity over the last two or three years is well worth considering. If nothing else, the company's interest expense will be materially reduced and should result in increased earnings per share. The presence of convertible bonds in a concern's capital structure could dilute corporate earnings if and when the bonds are converted into shares of common stock. It should be understood that smaller capitalization stocks are less liquid, are substantially more volatile, and will tend to go up and down faster; therefore, they involve additional risk as well as greater opportunity.

There are, however, definite ways of minimizing your risks, which will be discussed in Chapter 9. Lower-priced stocks with thin small capitalization and no institutional sponsorship or ownership should be avoided, since they have poor liquidity and a lower-grade following. A stock's daily trading volume is our best measure of its supply and demand. Trading volume should dry up on corrections and increase significantly on rallies.

In summary, remember: stocks with a small or reasonable number of shares outstanding will, other things being equal, usually outperform older, large capitalization companies. Most of the time, people buy stocks they like, stocks they feel good about, or stocks they feel comfortable with, like an old friend, old shoes, or an old dog. These securities are frequently sentimental, draggy slowpokes rather than leaping leaders in the overall exciting stock market. Let's suppose you want to buy a stock in the computer industry.

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If you buy the leading security in the group and your timing is sound, you have a crack at real price appreciation. If, on the other hand, you buy equities that haven't yet moved or are down the most in price, because you feel safer with them and think you're getting a real bargain, you're probably buying the sleepy losers of the group.