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Company fundamentals research A great way to research company fundamentals is to use Yahoo! Finance. I'll show how to quickly and simply look at a handful of fundamentals of companies to judge if that company is a guaranteed loser or in decent shape. The point is that the chances of a successful stock trade are greatly increased if you buy shares of an healthy company. Enter any symbol at the top of the Yahoo! Finance page, e.g. MSFT. This shows the quotes & info page with news, business summary, analyst opinion, and some quick fundamentals. I always read through the latest news, check the P/E, the volume and price, and read the business summary if I don't know the company. On the left is a column with links. I mostly use 2 links, the "Key Statistics" and the "Analyst Estimates" links. Analyst Estimates Page: Let's look at the Analyst Estimates page. The most important thing is to determine if the Next Earnings Date (shown below the Earning Est. table) is within the next days or weeks. If earnings are scheduled soon, you would see something like this (There is a "Next Earnings Date" notice at the bottom):
 Set a
ReminderOtherwise you would see something like this:
IMPORTANT: The days and weeks before the earnings date are usually days of volatility (insecurity) which decreases the chances of a successful trade. ONLY trade a stock right before the earnings date IF you are sure the earnings will be good. You can look at the other numbers on the Analyst Estimates page if you're interested and want to delve deeper into fundamentals, but there's nothing you really need for a quick judgment of the fundamentals. Key Statistics Page: The Key Statistics page is filled with goodies. Remember, we're trying to reject losers and try to select decent companies. At the bottom of the page is a link for "Key Statistics Help", make sure to read that page if you're not familiar with all the economic terms. P/E: A P/E of 10 - 30 is good. Be wary of P/E's below 10, reject anything below 5. P/E 30 - 50 is okay if this company is growing well. Price/Sales: A lower Price/Sales ratio means the stock price is cheap compared to the sales level of a company. A P/S of 1.0 or less means the stock is very cheap for some reason, 2 - 5 is about normal, 7 or higher means the stock is fat and not likely to go up steeply. Price/Book: Price/Book is useful to judge if a stock is in trouble, say if the Price/Book is less than 1.0 meaning the company's assets are worth more than its Number of Shares Times the Stock Price. That makes the company a take over target. Profit Margins: Look for healthy double digit profit margins, 10% but 20 or 30% or higher is better. Why? With a small profit margin, a company has no reserves, any failure will cause losses. Don't touch any company with negative margins. Return on Assets and Equity: Again, look for double digits here, and never touch any company with negative returns. Net income: There HAS to be positive income. Immediately reject ANY company that has no (or negative) income. Quarterly growth: Look at the quarterly revenue and earnings growth to judge if the company is thriving or not doing as well last year. If the P/E is high, there better be a nice growth, if not, the price is probably too high right now. Favor stocks that have good growth. Cash and Debt: Cash is good, look for cash of a dollar per share or better. Debt is bad, look for minimal or zero debt. Either reject any company with any debt (if you want to play it safe), or reject any company with too much debt, say a debt/equity ratio of 0.5 or higher, or a total debt higher than total cash. Why is debt bad? The debt plus the interest on the debt has to be paid off first before any profits can be taken. Cash Flow: Positive Cash Flow is good, it means the company is making money! Stay away from companies with negative cash flow (they're eating into their savings). Volume and Shares outstanding: This gives you an idea of how fluid the stock is. Stay away from low fluidity stocks, stocks with low volume and/or few shares outstanding. Why? Buying or selling shares will affect the price more easily in those cases. Look for trading levels of more than several hundreds of thousands a day (preferably several millions), and more than 50 million shares outstanding. % Held by Insiders and Institutions: It's not that important how much is held by Insiders and Institutions, it's more important how much is being bought or sold by them. See the "Insider Transaction" link in the left column. Still, most of this information is "old" by the time it's reported on Yahoo!. At least, look for some institutional ownership, say more than 20% so you know the stock is taken seriously. Shares Short: There is always some short interest, but less shorts is good. Look for a small Short Ratio (the number of days to cover the short interest), say less than several days. Okay, let's recap, to spot loser stocks, reject any stock with ANY of the following: - very low or high P/E - negative profit margin - negative return on equity/assets - no or negative income - more than minimal debt - negative cash flow - few shares outstanding or low daily volume - no institutional support - high short interest Instead look for healthy stocks with MOST of the following traits: - reasonable P/E (10 - 30) - double digit profit margin - double digit return on equity/assets - positive income - more than a dollar cash per share - no or hardly any debt - positive cash flow - 200K shares or higher daily volume - 50 M or more shares outstanding - at least 20% institutional support - low short interests (less than several days) |
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