Things I look for when picking a stock (hope this help some folks). First- No pink sheets.
Book Value: when I figure book value, I go to the financial filings and get the total assets listed. I take the goodwill and other intangible away from this number, to get a true understanding of the core value of the company (break up value). Next take away all liabilities to get a final true book value. Divide that number by the amount of shares issued to get the price per share value. I look for a company that trades under 3x true book value.
Revenue: look for a company that sells a product or service. There are a lot of companies out there selling ideas (known as developmental), but they are higher risk. I look for a company that has revenue from products/services and has yoy growth of 20% or more. Growth can be smaller, if they are a profitable company.
Insiders: Pay attention to what management is doing. If they are buying the open market, usually a good sign. Also, I look for management to own at least 10% of the stock. Also, look at management salaries- look for salaries to be less than 2% of marketcap or around 100K for every 100 employees as a guideline.
Institutions: I require at least one institution to be long on the stock. I figure they get paid to invest in companies- if the company I’m researching doesn’t have an institution supporting, there has to be a reason.
Cash on hand: Look for a company to have sufficient cash on hand to cover operations for at least 2 quarters. Also, if debt is way over cash and book value, I throw the red flag.
Future guidance: look at the filings (10-Q/10-K) as see what the management is saying about future guidance. Are they looking for increased revenue? Cutting/expanding costs? Improving margins, etc…
Once I’ve gathered all the information on the company, I may ask for additional info by emailing the company (and once in a position, it doesn’t hurt to email them once in a while, just don’t become a burden to management with questions they can’t answer).
Risk/reward: I look to make 20%-40% (reward) on each stock I trade, with a 10%-20% decline (risk). Example- I’m looking at a stock for $3. I’m willing to risk down to 20% (down to 2.40) for a 40% reward (up to $4.20). These once it hits the top/bottom of these number, I reevaluate to lock in a profit, add to a position or take a loss on the trade (if fundamentals changed).
The technical analysis part: This is the tool I use to maximize (in my mind) the risk to reward ratio. I look at a 6 month daily chart for short term plays, and a 2 year weekly for longer trades. I look at volume, stochastic, Williams, and money flow for buy signals (turning from a bottom from oversold conditions). The same signals will show you when the buying spree is over and to sell when overbought. This is in simple terms, and everyone has to find the indicators that work for their trading style. More another time on this subject.
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