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U.S. stocks are taking a beating. And ‘bottom feeder’ investors are on the hunt for a turning point. Rick Pendergraft at Investors Daily Edge says you have to be selective if you want to fish around the bottom. Just because a stock has slumped doesn’t mean it can’t sink further. Rick says the trick is finding a company with strong fundamentals (plenty of cash in hand) and bearish market sentiment…

So the question becomes, how do you know what you are going to catch when you go bottom fishing? Now, if I am fishing, where I am fishing will have a big influence on what I catch, as will the bait that I am using.

In stock investing, if you are going to go bottom fishing there had better be something compelling before you invest. In most cases, stocks that are so beaten up that they qualify for consideration as a “bottom feeder” are not going to have anything compelling to offer from a technical perspective. You are more likely to find a bullish case in a combination of the fundamentals and the sentiment analysis.

I mentioned that a caller from a recent radio interview asked about General Motors (GM). If I were choosing a domestic automaker, I would be more inclined to choose Ford. The reason is simple, the cash on hand for Ford is $25.27 billion and fewer perceived problems than GM.

The sentiment towards Ford (F) is a little more bearish than that of GM. As a contrarian, the more bearish the sentiment the better. The reason behind this thinking is the more bearish the sentiment, the better the chance of the stock being at a bottom because the sellers have been exhausted. For Ford, the short interest ratio is at 7.5 and the analyst ratings show one “buy”, eight “holds” and three “sell” ratings.

The bottom line is this: if you are going to go bottom fishing, you have to be careful. Be selective about the waters you fish. If you are fishing with a net and just hauling in anything you drag in off the bottom you will catch the occasional lobster, but you are going to catch a lot of carp and catfish too.

Source: When You Bottom Fish, You Can Catch Carp, Catfish, Or Lobster

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About the Author

Rick is currently the Editor-in-Chief of The ETF Options Trader and the Triple Wave Investor. At the age of 23, on the third options trade he had ever placed, Rick turned $1,800 into $22,000 in less than a week, when the company he bought became the target of a takeover. He admits it was a stroke of luck, but it was a memorable education as to the leverage that options can provide. He lives near Delray Beach, FL with his wife and three children.

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Investor's Daily Edge is a free investment e-letter delivered every day before the market opens. In each issue you'll receive clear recommendations and practical strategies for protecting your portfolio and multiplying your money, whether the market is rising or falling.

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