Fundamental Stock Analysis

 

 

What	Why	Action
One-year Price chart with 50-day moving average	Buying a stock while it's in a downtrend is dangerous, as it will likely move lower. A stock is in a downtrend if its price is below its MA, and in an uptrend if above. Use the 50-day MA.	O.K. to buy if stock price is above its 50-day moving average.
Price/Sales ratio (P/S)	Valuation check. A stock with a P/S above 10 is momentum priced. Buying momentum priced stocks is only recommended in a strong market.	O.K. to buy if P/S is less than 10. P/S ratios between 3 and 5 are best for growth stocks. Ratios below 2 reflect value priced stocks.
Cash Flow per share	Companies with positive operating cash flow are safer investments than cash burners (negative cash flow).	O.K. to buy if Cash Flow per share is a positive number.
Average Daily Volume (shares)	Institutional buying is an important catalyst for stock price growth.  Institutions buy hundreds of thousands of shares and prefer stocks with large daily trading volumes so they can easily move in and out of positions.	O.K. to buy if Average Daily Volume is 100,000 shares or higher (0.1 mil), and above one million shares is best.
Financial Health Grade	Invest, don't gamble! Stick with companies with solid financials.	O.K. to buy if Financial Health Grade = A, B or C

 

Growth Grade	Consistent strong sales growth over extended periods translates to long-term stock price appreciation.	O.K. to buy if Growth Grade = "A" or "B"
Institutional Ownership	Lack of institutional ownership means mutual funds, pension plans and other institutional buyers don't think they will make money owning the stock. Why would you want to own it?	O.K. to buy if institutions own at least 30% of shares outstanding.
Number of Analysts Making Buy/Hold/Sell Recommendations	A company's performance can go unrewarded if nobody knows about it.  Sufficient analyst coverage is necessary to create investor interest, especially from institutions.	O.K. to buy if a total of at least four analysts are listed as currently making strong buy, buy, hold, underperform, or sell recommendations.  Look only at the total number of analysts making recommendations, not whether there are more buys than holds, etc.

 

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Gross Margin Trend	Changes in gross margin percentages from quarter to quarter point to changes in a company's competitive position in its marketplace.  Increasing gross margins signal an improving competitive position, and declining margins warn of increasing competition.	Gross margin (GM) is the "Gross Profit" divided by "Total Revenue," expressed as a percentage. Calculate the GM for each of the past five quarters, and observe the GM trend. O.K. to buy if the trend is flat or increasing. Ignore variations of less than 1%, e.g. from 41% to 40.5%.
Revenue Growth Rate Latest Quarter compared to year-ago quarter	Slowing revenue (sales) growth is an important "red flag" signaling danger ahead.	Use your calculator to compute the most recent quarter's (MRQ) revenue growth rate (percentage) vs. the year-ago quarter. Compare that figure to the "1 Year" sales growth listed in the Growth Rate section. Ideally, the MRQ growth should exceed the 1-year figure, signaling accelerating growth. But, it's O.K. to buy if MRQ growth is at least 85 % of "1-Year" growth.
Forecast Revenue Growth Rate	Look at consensus revenue forecasts to determine if historical growth rates are expected to continue.	Check the forecast revenue growth percentage for the current quarter vs. the corresponding year-ago quarter.  Ideally, the growth rate should be accelerating but it's O.K. to buy if the forecast year-over-year revenue growth is at least 80% of the "1-Year" growth from the previous step.
Accounts Receivables Growth vs. Sales Growth	Accounts receivables are monies owed by a company's customers for goods received.  The Accounts Receivables Ratio (ratio) is the net receivables divided by the revenue for the same quarter.  A significantly higher ratio vs. year-ago is a red flag pointing to future problems.	Compute the ratio for the most recent and the year-ago quarters. Ideally the most recent ratio would be less than year-ago, but it's O.K. to buy if the ratio is the same or lower than year-ago. Ignore increases that are less than 5%, e.g. from 60% to 64%.