A Note on Technical Stock Analysis

Technical Analysis

1. Support and Resistance Levels: derived from human behavior
   
2. Resistance levels are found at previous highs and previous lows: when a stock goes above highs; it has "broken out". When a stock goes below lows; it has "broken down"
   
3. Conservative clients should stay away from volatile stocks
   
4. Stock Traders thrive on volatility for buying and selling opportunities
   
5. Helps establish psychology influences of stock performance

Technical analysis tends to only be useful for making short term decsions such as establishing entry and exit points in the near term. For investors with a long term focus the emphasis should be on Fundamental Analysis.

Another use of technical analysis is for options pricing. When looking at the (VIX) - Stock Market Volitility Index - an options trader can establish whether option premium levels are good or bad. Good premiums are usually afforded by high volitiliy and Bad from stability.

Most Important Qualitative Analysis For Stock Picking

Qualitative Analysis to pick the "best stocks"

The Key to winning stock picks is an investors ability to seek outstanding companies at sensible prices, not mediocre ones at bargain prices!


The top 13 Questions to use to find Red Hot Stocks:

1. What is companies primary business?
   
2. Do you understand that business?
3. Are future results predictable?
   
4. Is the company a leader (number one or two) in its industry?
5. Does the company have a record of generating substantial free cash flow? (allows company to with stand slumps, seize investment opportunities, increase dividends, or repurchase shares)
6. Does the company produce an attractive product(s) or service(s) that are needed and likely to be needed for a long time in the Future?
7. Lack competition?
8. Low overhead?
9. Portable?
   
10. Free of regulation?
11. Management competent?
12. Likely to become better, not just bigger?
13. Can you buy it below intrinsic value?

Basic Stock Evaluation

How to do a Basic Stock Evaluation

There are a few common variables to assess when evaluating a stock:

1) Profitability: Does the company make a lot of money?
2) Growth: past, present, future—major driver of stock price
3) Financial Health: Strong Balance Sheet—the company can weather a storm.
4) Value: the stock is available at a discount (on sale) compared to its historical value, compared to its competitors, compared to its intrinsic value.

1) Profitability: (Return on Capital and Return on Equity) (ROC) & (ROE)

Return on Equity (ROE)
(ROE) Low numbers (> 12%), especially if declining, (Look elsewhere)
Steadily increasing ROE speaks well of company management.

Measure of profitability
Also indicates internal growth potential (ability to self-finance growth without borrowing money or issuing new common shares)

2) Growth:
Earnings and Sales Per Share (EPS)
Primary determinant of share price movement
Rapid and consistent growth is highly desired
(harder to manipulate through accounting practices than earnings)
Look at Value Line Charts (visual of cash flow growth)
issue of more common stock (dilutes EPS)

Dividend Growth
Some companies pay out too much in a good year and then reduce them in a bad year (can hammer stock)

3) Financial Strength
Capital Structure: Excessive debt? Shareholder risk increases with the proportion of debt in a company’s capitalization
A company with zero debt can’t go bankrupt!
(Free Cash Flow Per Share): Cash Flow – (dividends + Capital spending): Capital Spending requirements that deplete CF over long haul is bad, Short term good.

Long Term Debt:
Examine long-term debt load in terms of absolute numbers and its trendàstable or declining trend suggests good financial health

Current Position
To asses solvency: pay attention to cash and marketable securities; monitor receivables closely. Receivables increasing at rate faster than sales (perhaps some money owed to company is not being collected)
Inventories: should not grow faster than sales (Red Flag)

4) Value:
High/Low
The valuation of a stock relative to its own history: P/E, Price/Cash Flow, Price/Sales, Price/Book Value compare past 5 years (Watch out for cyclical companies)
The valuation of a stock relative to others in its peer group: compare to see if stock is above of below where it traditionally sites in terms of the entire market of stocks
Quickest way to evaluateà compare cash flow line (the value line) or earnings line to see if company is above or below the line (stocks at or near line may be undervalued)