Annual Growth
Relative Price Strength
Profitability
Industry Leader
Financial Health
Debt
Management
P/E Ratio
Competitive Advantage
Institutional Sponsorship
Direction of the Market Averages
Insiders trading
Industry/Sector
Psychology of Trading
Technical Indicators: Support &
Resistance
Earning Per Share (EPS):
Current quarterly earning per share. Earning per share is
calculated by dividing a company's total after-tax profit by
the number of common shares outstanding. The percentage
change in earning per share is one of the most important
factors in stock selection. The higher the percentage
increase, the better. Always compare a company's earning per
share to the same quarter a year earlier not to the prior
quarter, to avoid any misrepresentation due to seasonality.
Earning
Per Share alone cannot be the true measure of a company's
financial performance. For a number of reasons,
accounting-based earnings per share can be made to say just
about whatever a company's management wants them to, but
there are other valuation data that are much harder to
swindle with.
Cash Flow:
The amount of cash a
company generates
and uses during a
time period. Cash
flow is calculated
by adding non-cash
charges to the net
income after taxes.
Cash flow can be
used as an
indication of a
company's financial
strength. Cash flow
is critical to
companies, having
plenty of cash
available will
guarantee that
employees,
creditors, and
others can get paid
on time.
The Statement of cash
flows records all the cash that comes into a company and all that goes
out. It can yield a ton of information about the true health of a
business, and you can spot a lot of blowups relative to earnings. For
example, if operating cash flow declines or disappears even as earnings
grow, it’s likely that something is not right.
The cash flow
statement is divided into three elements: cash flows from operating
activities, from investing activities, and from financing activities.
Annual
Growth:
Annual earning increase of a company. The growth of earning in the
past few years confirms the financial strength and stability of a
company. The higher the growth, the better. When you compare two
different companies the company with higher growth percentage and
lower P/E ratio would be a better selection.
Concentrate on stocks
with established records of considerable earnings growth in each of the
recent years plus strong quarterly progress. Remember to find out what
is the source of the growth. You can't just look at a chain of past
growth rates and believe that they'll predict the future. If investing
were that easy, money managers would be paid much less. There are four
sources that cause healthy growth for a company: selling more products
or services, raising prices, selling new products or services, and
buying another company.
Relative Price
Strength:
Relative price
strength is a benchmark in which you can compare the price
performance of different stocks. In order for a stock to be a leader
in a particular industry its price action should outperform other
stocks in that industry. When selecting a stock as a momentum play
you should look for companies with high relative price strength. The
absolute number one market leader is not the biggest company or the
one with the most known brand name; it's the one with the best
quarterly and annual growth and price action. In a bull market,
strong stocks with higher RS usually decline the least in the market
corrections.
Profitability:
You should asses the
financial health of a company before buying its stock especially if the
interest rate is increasing. Financial statements of a company provide
the information about the amount of company’s in comparison with the
earlier quarters/years.
Management:
Great management
can make a difference between an average business and an
extraordinary one. Your goal as an investor is to find management
teams that think like shareholders; executives who treat the company
as if they own a piece of it. One way to find out about the
management and how much they really care about share holders is to
check the top executive’s compensation plans. We review the
compensation detail in a document called proxy statement. Big
bonuses are always better than big base salaries. Bonuses mean a
chunk of the income is always at risk and depends on the performance
of the management.
P/E Ratio
(Price/Earning):
Most popular valuation
ratio, which can take you pretty far as long as you’re aware of its
boundaries. An easy way to use P/E is to compare it with a benchmark,
like another company in the same industry, the entire sector, or the
same company at a different point in time. A company that is trading at
a lower P/E than its industry peers could be a good value, but remember
that even companies in the same industry can have very different money
structures, risk levels, and growth rates, all of which affect the P/E
ratio.
If a company has a P/E higher than the market or industry average, this
means the market big expectation from the company over the next few
months or years. A company with a high P/E ratio will eventually have to
live up to the high rating by considerably increasing its earnings, or
the stock price will need to fall.
Competitive Advantage:
Success
attracts competition and eventually laggard companies come into
competition and cause the stock price of a company that has been a
leader for a while to drop. Generally, there are different ways that a
company can create sustainable competitive advantage:
1. Creating a real
different product (Apple iPod)
2. Creating a strong
brand (Tiffany)
3. Keeping costs down
(Dell)
4. Locking in customers
by creating high switching cost (Cisco)
5. Locking out
competitors (Using patent for drug companies)
Institutional Sponsorship:
The key to
know about the institutional sponsorship is the number of financial
institutions that have bought or sold the stock in the recent
months. Technically, it considered to be a good sign if a company
has increasing number of institutional owners over several recent
months. Financial institutions can not hide since they usually trade
huge number of shares. By following the buy and sell volume in a
daily chart you can notice if mutual funds and banks are buying a
stock.
Market Trend:
Detecting the current trend of the market is the first and most
important part of our stock pick system. More than 75% of your
trades will end up in a loss if you fight the trend. As part of
our stock pick strategy we constantly review the conditions of
the market averages.
Insiders
Trading:
It is always
good if you monitor
insider’s
transaction when you
are picking a stock.
You don’t want to
buy a stock when
insiders of the
company are selling
a significant amount
of the company’s
stocks. Insiders
usually sell their
shares for various
reasons but when the
number of shares and
the frequency of
unloading them are
unusual you should
be more careful. On
the other hand,
there can be only
one reason when they
buy their company's
shares, they want to
make money.
Insider trading is a term that most investors have heard and usually
relate with unlawful conduct. But the term actually includes both legal
and illegal conduct. The legal version is when corporate insiders such
as officers, directors, and employees buy and sell stocks in their own
companies. When corporate insiders trade in their own securities, they
must report their trades to the SEC.
Since insider trading weakens investor confidence in the fairness and
integrity of the stock markets, the SEC has treated the detection and
prosecution of insider trading violations as one of its enforcement
priorities.
Industry: Industry is a grouping used to describe a company's
main business activity. It is generally determined by the major source
of a company's income.
A hot sector is a sector of the economy experiencing a higher than
regular growth rate. If companies across an industry show solid earnings
and revenue figures, that industry may be showing signs that it is in
its growth phase. Our goal is to select securities that are a
in a hot industry.
Psychology of Trading:
By studying the psychology of the individual, as well as the psychology
of the group, we can understand how educated traders can profit by
investing against the crowd or by not following the crowd. A visionary
trader should also look for a number of psychological reasons that can
push the price of a stock higher in the future prior to buying it.
Support Resistance:
The price action
of a stock over a period of time will create strength at certain
price levels. These levels are recognized as resistance at the top
and support at the bottom end of the trading range. This trading
range may develop different time frames; it can take from weeks to
years or a support and resistance level to develop.
