When to Buy
[vc_row][vc_column][vc_video link="https://www.youtube.com/watch?v=z4fldls0f10"][vc_column_text]When to Buy
Welcome to the Purple Chips Tutorial for “When to Buy”. I am John Schwinghamer, the author of Purple Chips published by John Wiley & Sons and available everywhere.
Please pause your screens so that you can read our disclaimer. Thank you very much.
Today, in the ‘when to buy’ Tutorial what I would like to show you is when and where to buy a Purple Chips Stock. The base of Purple Chips is that the stock prices follow the shape of the earnings curve and I am going to show you that today and how to choose the entry points and where to buy.
There is really three main things and I will show you.( some examples shortly)
You have to use at least the last 2,3 years of the stock’s trading range,
You take the earnings per share (EPS) line and you overlay on the low of the trading range. That’s how you determine where your entry point is.
The low valuation which is the low risk entry point is where you want to buy and that’s where the EPS line ends up on the stock price scale.
Let’s go into an example; I am going to show you on our screen here. We are going to use Becton Dickinson (BDX) and then we are going to use Oracle (ORCL).
Here we have the actual chart about Becton Dickinson (BDX) as we stand here. Today its November, 29th; 2012 and Becton Dickinson is trading at $77.60 and a market is going to open in about 10 minutes or so. That’s where to closed on November, 28th actually. You can see the earnings per share line. There is a very nice earnings per share line, the white heavy line is the earnings per share line. Basically the stock trading range follows the shape of the earnings per share line. The way that you use this is, in my case, I can grab this line on this system that I have here and I am going to move it and you can see and you notice how the earnings per share line is actually following the bottoms. I am going to take the little drawing pen and you see how the bottoms there. Its following the bottoms of the trading ranges which is the premise for Purple Chips is that this earnings per share line dictates the range in valuations. So, you take the last two or three years of a stock’s trading range which would be this period here. We are using that to estimate where the stock’s trading range or the valuation range should be. So I am going to raise this here and essentially by using the earnings per share line, I am just tracing it here and I am going to say that in the case of Becton Dickinson if I moved that earnings per share line up its going to be somewhere close to $90 and on the bottom that earnings per share line would look something like this and that means that you want to buy Becton Dickinson or the low end of the range would be around $73, $74 and on the high end of the range where you would take your profits would be around $88 may be $90. So now I am just going to raise that and I am going to grab the earnings per share line and you can see that this matches with the bottoms for the last two, three years and this is approximately where the high end of the trading range would be so that’s the valuation range and that where your entry point is and that is where your exit point is.
Let’s move to a second example and I am going to use Oracle (ORCL) in this case. For Oracle you see again we have a very nice earnings per share pattern and this is a very good example here. I move the earnings per share line down to the recent low. I will show you the recent lows over here so that tells me that if I was going to buy Oracle anytime soon, based on the current earnings per share line I would be buying Oracle at $28. If Oracle was to move up then what I would be looking for is for Oracle I would be selling Oracle somewhere north of $38 and that corresponds with the high valuations that we have seen here. That’s the base of the Purple Chips Model is that the earnings per share line is essentially telling you what the shape of the trading range will be and that is the key. So, once you understand that then you can actually choose your entry points, the low risk entry points and your points for taking profits. That’s how Purple Chips works; so you find good quality stocks and then you determine those points so that’s how it works.
The last point that I want to make is that the earnings per share line, depending upon the shape, is going to tell you where your entry and exit points are but also be aware that if the shape of the earnings per share let’s say if the earnings per share flattens out then what will happen? Then let’s say if this curve has to go and stead up like that if you want it like that than your entry point is got to get lower and your exit point gets lower too. If the earnings per share line was to go higher let’s say like that and if the earnings accelerated it means that your selling target actually gets higher and your entry point would get higher too because it would follow the new shape, the evolving shape of the earnings per share line.
That’s all for today and that concludes today’s when to buy tutorial; I am John Schwinghamer the author of Purple Chips and thank you for watching[/vc_column_text][/vc_column][/vc_row]