BizAnalyst Network

A variety of factors and different ratios are fundamentally important when selecting a stock to trade or invest in with a bullish bias, but a handful are absolutely essential to understand as we do our analysis. These include things like money flow, cash flow, sales growth, earnings momentum, earnings stability, growth-to-price earnings ratio and operating margin. All these pieces of data are important when evaluating a stock on a fundamental basis.

Determining money flow helps the investor identify institutional buying pressure. When money is flowing into a stock, a stock typically starts to move independently of the market. This means that it can go up even if the rest of the stock market moves to the downside. Also, when institutions start purchasing a stock, the stock's day-to-day price swings usually begins to decrease.

Cash flow is a very important determinant as well, especially for the larger cap stocks. Since 2003, when dividend taxes were cut, investors want to know which companies have cash and are most likely to boost their dividend. As a result of this dividend tax cut over 1,400 companies have raised or declared new dividends. Since dividend taxes used to be higher than capital gain taxes, companies were holding their cash. Now there is no reason to sit on all that cash.  

When you're selecting growth stocks, make sure to analyze sales growth very closely. Sales growth has become more important because investors were getting frustrated with companies that were generating earnings growth by reducing costs versus growing their businesses. Sales growth can show which companies are making money when others are having problems.

Earnings momentum and stability are also key factors. When earnings are lagging in the market, the stocks that go against this trend become very valuable. Also, earnings stability is particularly important for large cap issues because those stocks that are posting steady and predictable earnings growth usually emerge as stock market leaders. The earnings growth to price to earnings ratio is a significant factor since if earnings growth slows down for the overall market, stocks with naturally low earnings multiples emerge as market leaders because they are less likely to be vulnerable to the barrage of profit-taking that usually plagues high-multiple stocks.

Finally, there is the operating margin expansion piece that is a crucial stock selection tool because when operating margins expand, earnings growth exceeds sales growth. Many times the very large earnings surprises are due to operating margins expanding faster than analysts initially predicted. Also, those companies that have strong operating margin expansion are very attractive to institutional investors.  

These are all real good stock selection tools and should be closely analyzed when choosing a stock on a fundamental basis. By doing so the investor will have gone a long way in helping to avoid the losers and identifying the winners in the exciting and ever changing world of the stock market.

Happy Trading.


Jeff Neal
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Jeff's Forum

• Seminar Information: Find out where, when, and how you can attend the next Optionetics.com Seminar in your area. Learn to manage risk the Optionetics way!
  
  
• Trader's Resource Store: An electronic store featuring videos, books, newsletters and software applications for the avid trader
  
  
• A Comprehensive Trading Bookstore: Utilize the extensive scope of Traders Library to find the latest best sellers, hard-to-find investment 'must reads,' and find out what critics have to say about every book in print including George's newest book, Trade Options Online.
  
  
• Stock and Options Portfolios: A portfolio is an electronic method of tracking stocks and trades as they change value due to market movement. You can track hypothetical trades for the purpose of learning or monitor real trades by receiving daily updates and news alerts concerning the stocks you are watching.
  
  
• Discussion Boards: Chat with other traders from around the world to hear what they think about specific stocks, options strategies, or upcoming event that could rock the marketplace.
  
  
• Market Commentary: Get the daily lowdown on the mood of the marketplace with specific tips on stocks on the move and profitable market strategies from the Optionetics trading team.
  
  
• Educational Articles: The trading team at the Global Investment Research Corp. provides articles and monthly columns to a variety of newspapers, magazines and webzines. Now you can read them before they hit the newsstand!