Main»Stock Picking Notes

Stock Picking Notes

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Notes for picking stocks

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  • Indices:
- DJI = industry. 30 companies.
- S&P = 500 of the largest, capital-weighted corporations (McDonald's, G&E)
- Nasdaq = smaller cap market, electronic exchange

  • GDP = Gross Domestic Product. 2 quarters in decline = a recession.
  • the VIP is a stock that mimics the S&P500, so at least you'll get an average of 11%/year. Maybe good to have at least one, a bit less volatile.

Rules

  • Buy what you know - what's in your fridge? Who owns your shampoo company?
  • Industry: What's the potential for growth? Is the company on the cutting edge?
Look into organics, alternate fuels, green products, wind power, biotech, aerospace
  • Leader in its field: as Hershey's is to chocolate.
  • repeat profitability: things that are bought often, not big once-a-year purchases.
  • Buy on sale: below the average of the 52-week high and low.

  • Mass Market, Repeat purchase
- 2 points: purchased more than 1ce/month
- 1 point: purchased from 1x/month to 1x/year
- 0 points: less than 1x/year
  • Gross Margins
- 2 points: above 60%
- 1 point: from 40-60%
- 0 points: below 40%
  • Net Margins
- 2: above 10%
- 1: from 7-10%
- 0:: below 7%
  • Sales Growth:
- 2: above 10%
- 1: from 5-10
- 0: less than 5
  • Cash-to-debt ratio
- 2: 1.5 times more cash than long-term debt
- 1: from 1-1.5 times
- 0: less than 1
  • Foolish Flow
- 2: below 1
- 1: 1-1.25
- 0: above 1.25
  • Familiarity and Interest
- 2: user of products and interested
- 1. familiar and curious
- 0: unfamiliar and uninterested

Financial analysis

Numbers you will need from the company's SEC filings:

  • income statement (most recent quarter, 10Q):
sales (revenue)
cost of good sold (cost of sales)
net income
  • Balance sheet (long-term, 10 years)
Cash
long-term debt
current assets
current liabilities

  • P/E = price/earnings. Costs $100, earns $10.
Should be < 10.
Must be < growth rate
check growth rate to determine if price will rise.

  • GPM = Gross Profit Margin/Gross margin. How expensive it is to make a product compared to the price it can be sold for.
(sales-costs)/sales = ? * 100 = %
at least 60%
the higher the better!

  • Operating Profit Margin
costs/sales

  • Net Profit Margin: how much profit a company is making after you subtract all its expenses (advertising, research, etc).
(net income [after taxes & expenses])/sales
greater than 10%

  • Earnings Growth: to compare each quarter with last quarter, and last year's quarter.
(This Year's net income - Last Year's net) / Last Year's net income
Should be between 15-50%.
Should be > P/E

  • Sales Growth:
(This year's sales - last year's sales)/ last year's sales
Should exceed 10%/year

  • Current Ratio/Cash to long-term debt: companies should have all their debts taken care of, should be ready to spend money on growth, not debts.
greater than 1.5 - 2 indicates financial health
assets / liabilities (or in other words, Cash/Long-term Debt)

  • acid test ratio: look for > 1.5
(assets - inventories) / liabilities

  • Foolish Flow Ratio: from the Motley Fool.
(Current assets - cash or easily cashable things)/(current liabilities - shortterm debt)
Should be less than 1.5 : they shouldn't have a lot of unsold inventory.
take the cash out to determine the merchandise they haven't yet sold.

  • Book value / return on equity : cents earned on the dollar
net income / shareholder equity

Technical analysis

  • for a Bull Market: the DJIA (industrial) and DJTA (transportation) must complement each other.

  • Line charts, 3 phases:
accumulation phase: level, price low. BUY.
second phase, bull phase: starts to rise slowly.
distribution phase: sharp rise. High volume. SELL.

  • Trendline: draw a line through the two highest (downtrend) or two lowest (uptrend) points on a line chart. Compare current price to where the line says it should end up.
- daily penetration means very little, as long as it generally stays above the line.
- however: if it begins to penetrate more and more and tends to stay penetrated at closing, indicative that trend is ending.

  • relative strength line must be strong, or a high price indicates negative divergence.
- check the S&P for the sector: it should also be going up.
- READ MORE - WHAT IS IT EXACTLY?

  • volume:
- high volume indicative of uptrend.
- breakouts require at least double volume on an uptrend.
- below trendline on closing: slippage

  • check other companies as well: if 4 or 5 in one industry are making new highs together, it may be a trend!