My Computer Ninja

For those of you into investing and stock research, you may check out Yahoo’s new Charts: Beta project. Yahoo is now offering complex charts free of charge. You used to have to be a member of an online brokerage to get access to charts such as the MACD crossover, Bollinger Band, EMA, Parabolic SAR, both slow and fast Stochastic charts and many other technical charts. Now, Yahoo offers all of these charts for free. To check them out, simply look up any ticker symbol you want, and click on the large banner that says “Try out Yahoo charts beta”. It will then take you to an AJAX page with your ticker symbol charted. The page has a “Technical Indicators” button where you can select the charts to look at. Here is a link to a Yahoo Charts: Beta page showing my personal favorite scapegoat ticker symbol “goog” in Bollinger Band and MACD crossover view. Look forward to future articles here on mycomputerninja.com where we show how to use these free technical charts to determine trends not otherwise easily seen.

Given the market volatility over the last week, I’m sure you may be ready to throw in the towel as far as speculation is concerned. This volatility is exactly the reason I created the “Stock Picking 101” series here on mycomputerninja.com. I got tired of trying to read up on “Tuesday’s Hot 5” or “Wednesday’s Big Losers” which were actually Tuesday’s Hot 5, and decided to find metrics with which I can use to find my own “hot 5”. Some well known and generally sound investing methods have already been covered here, and if you are interested, I encourage you to take a look at the investing category for a review of what we have previously covered. As I have mentioned before, all the stock picking methods explained in “Stock Picking 101” come from a set of preset screens included with the Yahoo.com free stock screener.

Today’s new lesson will cover a method of finding stocks in companies expected to exhibit uncharacteristic high growth in the foreseeable future. In particular, I am going to cover the criteria used to pick small market capitalization growth stocks. Stocks that fall into this category follow these metrics:

• Market Capitalization of $250 million to $1 billion dollars
• Price/Earnings growth ratio of less than or equal to 1.0
• Earnings growth for the last 5 years greater than or equal to 25

Market capitalization has already been covered extensively here at mycomputerninja.com, but if you would like to read up anyway, take a look at Lesson 2 and Lesson 3 for a refresher.

Price/Earnings to Growth ratio is the first new metric in this set of criteria. The metric itself is comprised of 2 separate metrics, one being forward price to earnings ratio, and the other being earnings per share growth estimates. Forward price to earnings ratio is the projected price of a share divided by the earnings per share of the stock. The growth portion of the metric is actually the annual earnings per share growth estimate of the stock. In order to calculate the P/E to growth ratio, divide P/E by the annual earnings per share estimate to arrive at the value that we will use to compare different stock’s potential for growth. In the case of this criteria, the P/E to growth ratio should be equal to or less than 1.0.

It is important to note that, as with many metrics, the potential for manipulation exists. In the case of the Price/Earnings to growth ratio, both numbers could be considered untrustworthy. These values generally come from predicted earnings per share reports submitted by the company itself, so it is easy to see that insider manipulation can effect the quality of the number being reported.

Trailing year earnings growth is the final metric that this set of criteria looks at to determine the growth potential of a company. Trailing growth is a look at the previous years net income, with emphasis on the delta year over year. If the company exhibits net earnings growth equal to or greater than 25% for the trailing 5 years, then the stock has met this requirement. This metric relies on hard data, so it is easier to trust than the P/E to growth ratio, but a wise speculator must always remember that trailing growth is no indication of future growth.

A quick glance at mycomputerninja.com’s favorite whipping boy, Google, reveals that the only criteria it does not meet for this set of metrics is the small cap part. Google, being worth $160 billion, is firmly entrenched in the large cap growth sector, which we will cover in the next “Stock Picking 101” lesson.

The admin of this site and author of this post, Jon Steege, is not a financial analyst or a stock broker. He is a Computer Scientist with a knack for data analysis. He does not own Google stock, but wishes he did. As always, a friendly reminder to buy smart, but buy at your own risk.

At market close today, Akamai Technologies closed down nearly 19%, going from $47.18 at opening to a dismal $38.27 at the closing bell. According to the press release, revenue is up 52%, and GAAP net income up 92%, year over year. And yet, their stock dropped 19% on this news. Something isn’t right.

In an article on Fool.com, it mentions possible reasons for such a significant drop in price. The article states “bottom-line results didn’t beat the Street’s expectations. Second, Akamai didn’t raise guidance. And third, free cash flow declined year-over-year.”

It seems that the market reacted to the fact that the company did not meet earnings expectations, and that their on hand cash declined significantly. These events may warrant a significant drop in price, but do they really?

Further investigation reveals that the expenditure in on hand cash seems to be in infrastructure, something that is not cheap for a major internet backbone like Akamai. What better place than to be spending money than in developing the infrastructure to support future demand. The article mentioned above goes on to talk about broadband penetration world wide, and states that “If it’s fair to assume that broadband Internet access is a global certainty, and that less than one-seventh of the world’s population has broadband … Akamai’s long-term opportunity remains, at worst, vast.” I could definitely agree that this statement seems true.

One last thing. Did I mention the price to earnings of this stock is around 100 after the price drop? Even after the drop, the price to earnings ratio is not looking pretty. Despite what you may read about this stock, its hard to say that it would be a knock out buy. The price looks good because it is trading very near a 52 week low, but, will it recover? What kind of money will need to be spent on the part of Akamai to in order to serve that percentage of unserved potential broadband customers? Questions like these are what makes this a gamblers game. Would I buy? Probably, but not very much. I know you have to bet big to win big, but its that winning big part that always seems to elude me.

The admin of this site and author of this post, Jon Steege, is not a financial analyst or a stock broker. He would love to “bet big” on Akamai, to reap the reward, but money like that doesnt grow on trees. As always, Jon has no direct financial position in any stock he mentions, he is simply a speculative observer.