I’ve made a lot of money buying and selling stocks based on their fundamentals. Fundamental stock analysis focuses on the performance of the company and the valuation of its stock based on your choice of hundreds of metrics for measuring value. P/E ratio is one of the simplest and most commonly-referenced fundamental analysis metrics. Many so-called “value investors” only buy and sell stocks based on fundamentals. In contrast, many traders that trade based on technical analysis couldn’t care less about a stocks valuation and focus exclusively on chart-derived patterns and indicators.
So which group is correct? It depends on who you ask. I say both groups are correct, and both strategies can be very profitable when used correctly. At the moment, several of the stocks I’m holding I bought at least partly because of something I saw in a chart. Today’s purchase, Marathon Petroleum (ticker MPC), is a perfect example. MPC made new all-time highs today, closing just above my purchase price of $94.38. Why is this price so attractive to me when the stock is making new all-time highs? It has to do with the technical breakout that occurred today. Take a look at the chart:
Clearly the resistance line at just above $90 has been a nuisance to MPC shareholders over the past year or so. It had been tested no less than five times over the past year (the four times indicated by the blue arrows and once again in the past week), and each time it held firm. Until today, that is, when it broke through the resistance line for the first time on heavy volume. Technical analyst tells us that the more times a resistance line is tested, the more support it provides once it is broken, and I’m hoping this rule of thumb holds true for MPC.
While this purchase was based mostly on the chart, the value investor in me likes what I see from MPC as well. MPC’s forward P/E ratio is about 9, meaning that, even at an all-time high, there is a good argument to be made that the stock is actually undervalued. We’ll see how the Marathon story plays out in the coming weeks, but this combination of technical breakout, upward momentum, and fundamental value was too good for me to pass up!
To read more about my thoughts on technical analysis and value investing, look for my upcoming book, Beating Wall Street with Common Sense: How I Achieved a 400% Return from my Dorm Room. I have entire chapters devoted to each subject, and, after reading what I have to say, you will certainly come away with an opinion of your own. Details about the book will be provided in the next couple of weeks. Stay tuned!