Homeworks to do before actions
1. The most important thing is the prospect of the product of
a company.
- The growth rate of the whole sector? Any possible over
production?
- The position of a company in the sector, i.e. is it a
leading or trailing company?
- What management strategy or technique make this company
different from the others? Will this prevail?
- Will its stategy or technique ensure its success?
- Is it able to survive in depression?
- Does the management team has a good record? Are they
honest and reliable?
2. Valuation of this stock
- Price/earning ratio (P/E), price per sale (P/S) and
price/book value. A P/E above average would be considered
a growth stock. The P/E ratio comparing to the average
reflects the expected growth in revenue and earning. In
explaining P/E, the projected earning is more important
than previous earning. P/S indicates the ability to
generate revenue comparing to competitors.
- Growth and risk. Higher growth means higher valuation. On
the other hand, higer risk render lower valuation.
- The time needed for growth to be significant. Most
investors don't have the patience to wait and take risks
for several years. The hypes in biotechnology companies
are typical. The lab results requires years to be
utilized in clinic and they have a high risk of failure
during the years.
- Undervalued stocks. For a small-cap or mid-cap company,
they could be overlooked and has a low P/E. If your
homework indicates that it has a higher than expected
growth rate, it is a candidate to buy.
- Overvalued stocks. Some stocks like Amazon and
Priceline.com are obviously overvalue. Amazon's
established bussiness is online book sale. If all books
in the US was sold by Amazon, the revenue (not the
profit) is less than amazon's market capital. In the hype
of early this year, priceline.com was valued with a
market capital larger than that of several airline
company including American Airline and Continental.
Consider the bussiness, Priceline.com is doing, it was
clearly overvalued. However, in this situation caution
should be taken before short sell it because of the
overall market mood which was and still is crazy about
dot com.
3. Look at the other fundamentals of a company
- Debt/equity ratio. Avoid a stock with a debt/equity ratio
more than 0.2.
- Earning history
- Market capital
- Cash as a reserve for adverse situation and R&D. It
is also important in predict the life-span of
losing-money company before it turns to profit.
- Revenue and earning growth of the past years. It is
better to compare this data with the general economical
situation.
- High and low of the last 1 years.
4. News and past news on a stock.
5. Technical analysis
- Technical chart
- Option
- Short ratio
6. Other people's opinion