Thursday, March 29, 2007

Lessons Learned

I learned some lessons yesterday so I am refining/adding to my earnings evaluating process.

Change #1: Respect High Multiples
- KMX was riding on a really high multiple (P/E ratio) which basically states that investors have priced in a significant amount of expected earnings growth into the stock price. This high multiple ultimately left a significant amount of downside pressure on the stock. The company missed the estimate and investors questioned the accuracy of the P/E ratio and sold the stock.

Change #2: Evaluation of Downside Surprises
- I was too blinded by the history of CarMax's recent successes to property forecast the consequences of an earnings miss. For future earnings plays I will attempt to retrieve a better understanding of what the stock may do if the numbers aren't so great.

Change #3: Stay Away From Cramer
- After I purchased KMX my friend mentioned that Cramer told his fellowship to buy the stock before the earnings. The stock price was highly inflated when I got in the game because of the pull Jim Cramer has on investors. Cramer has a recent history of terrible stock picks (CWTR, STZ, the list goes on) and picking a stock that he likes is a true mistake.

I will be posting potential plays later on today...

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