EBay was incorporated in 1995, had its initial public offering in September 1998, and the stock proceeded to skyrocket from a split-adjusted $6 to a peak of $230 in only 7-1/2 months.
The years 1998 and 1999 represented a once-in-a-lifetime wild market period. EBay stock then went back and forth sideways while investors suffered for 3-1/2 years. In 2000, from eBay's peak to its low, it lost 80% (no one should ever sit through corrections like this). That's why you must have buy rules and sell rules and follow them.
Then when nearly everyone was beat, battered and negative, a classic 16-week double bottom formed on eBay stock that a good chartist should have recognized. And the breakout day occurred with volume up 124%, only three days after the Oct. 15, 2002, follow-through day appeared on the S&P 500.
You will always miss big opportunities like this if you don't learn to read weekly charts and daily general market charts like the S&P 500 or Nasdaq. Ninety percent of investors will never buy in situations like this because they go by their personal opinions about how bad all the news is and how poor the prior market has been.
Learn To Read The Market From eBay Stock's Example
You must learn not to go by how you feel but by what the market is actually doing and telling you. Don't argue with the market; learn to read it with skill and rules based on history.
Here are some key facts known at the beginning buy point for eBay stock:
• Buy point on a classic double bottom.
• The pattern was similar to Delta Air Lines in November 1962 and Cisco in November 1990.
• Last 3 quarters of earnings per share were accelerating from 56% to 64%, 58% and 83%.
• Last quarter of sales up 49%.
• Quarterly after-tax profit margins at 21.7%, a new high.
• Number of mutual funds owning eBay up 15 quarters in a row.
• At least five of the better-performing mutual funds owned eBay.
• Price-to-Earnings Ratio was 82; don't let this stop you from buying. Its high had been 270 and its low was 58. The best stocks typically command higher P-E ratios.
• Annual EPS growth rate last 3 years +152% (that explains the higher P-E).
• 10% of sales spent on Research and Development.
• Only 1% debt.
• Annual Sales Growth rate +78%.
• Earnings estimates next quarter +92%.
• Up-Down Volume 1.3 and Accumulation-Distribution Rating B.
• Beta of 1.03.
• Management owned 28% of eBay.
This column originally ran in Investor's Business Daily as part of a 2013-14 series on America's greatest stock opportunities written by IBD's founder, the late William J. O'Neil. See more stories in this series.
