Personal tools

The Nasdaq Dozen

 
Blair Arch, Princeton University
(Blair Arch, Princeton University - Kimberly Chen)
 
 
Stock investing requires careful analysis of financial data to find out the company's true worth. This is generally done by examining the company's profit and loss account, balance sheet and cash flow statement. This can be time-consuming and cumbersome. An easier way to find out about a company's performance is to look at its financial ratios, most of which are freely available on the internet.
 

The Nasdaq Dozen: Analyze a Stock in 12 Easy Steps

 
[Nasdaq]: You can actually conduct a thorough analysis of any stock in 12 easy steps: a process we call the Nasdaq Dozen. By looking at 12 key aspects of any stock you are interested in, you can quickly determine if the stock is one worth pursuing or one better left alone.
 
To score the 12 factors of the Nasdaq Dozen, you need to assign each factor either a passing or a failing grade. After you have scored all 12 factors, add up the passing grades and compare them to the failing grades. If you have a high ratio of passing grades compared to failing grades, you can be more confident in the stock. Conversely, if you have a low ratio of passing grades compared to failing grades, you would be less confident in the stock.

For instance, you would feel more comfortable investing in a stock that had 10 passing grades and only two failing grades-a ratio of 10:2-than you would investing in a stock that only had four passing grades and eight failing grades-a ratio of 4:8.
 

1. Revenue

Stock growth starts with a company making money. Fundamentally, if a company isn't bringing in any money, it can't pass profits along to its shareholders. In other words, it all starts with revenue. 
 
Revenue will give you an idea of how much money the company is making. If revenue is consistently increasing, this means the company is growing. As the company continues to grow, the stock price will appreciate in value.
 
How to Score Revenue:
  • Pass: Give revenue a passing score if revenue (annual totals) is increasing. 
  • Fail: Give revenue (annual totals) a failing score if revenue is decreasing.

2. Earnings Per Share (EPS)

If revenue tells us how much money is flowing into the company, EPS tells us how much of that money is flowing down to stock holders. EPS tells you how much money the company is making in profits per every outstanding share of stock. The higher the EPS is, the more money your shares of stock will be worth because investors are willing to pay more for higher profits.
 
How to Score EPS:
  • Pass: Give EPS a passing score if the EPS are increasing. 
  • Fail: Give EPS a failing score if the EPS are decreasing.

 3. Return on Equity (ROE)

Return on Equity (ROE) gives us a glimpse into how efficiently company management is producing a return for the owners of the company - based on the amount of equity in the company. To calculate ROE, divide the average shareholder’s equity during the past 12 months by the net profit the company has made during those same 12 months.

How to Score Return on Equity:
  • Pass: Give ROE a passing score if ROE has been increasing for two consecutive years.
  • Fail: Give ROE a failing score if ROE is decreasing. 

4. Analyst Recommendations

Analysts conduct extensive research on a stock and then issue a recommendation as to what they think the future holds for the company. If the company's future outlook is positive, the analysts recommend a "buy." If the company's future outlook is poor, then the analysts recommend a "sell."

How to Score Analyst Recommendations:
  • Pass: Give analyst recommendations a passing score if the consensus recommendation is a buy or strong buy.
  • Fail: Give analyst recommendations a failing score if the consensus recommendation is less than a buy.

5. Positive Earnings Surprises

Companies announce their earnings every quarter. Leading up to this event, analysts will make predictions as to what they think the earnings per share (EPS) will be. These predictions are often used as a benchmark by market participants. If the actual EPS comes in higher than the expected amount, this is generally good for the stock price. If the actual EPS comes in lower than the expected amount, this is generally bad for the stock price. When analyzing a company's earnings surprise track record, you want to see that the company is consistently meeting or beating its expectations.

How to Score Earnings Surprises: 

  • Pass: Give the earnings surprises a passing score if the EPS surprises during the past four quarters have all been positive.
  • Fail: Give the earnings surprises a failing score if any of the EPS surprises during the past four quarters have been negative. 

6. Earnings Forecast

While it is very important to research a stock's past earnings reports, it is also important to look at the future earnings forecasts to insure that the future profitability of the stock in question is strong.

How to Score Earnings Forecast:
  • Pass: Give the earnings forecast a passing score if the consensus EPS forecast numbers increase year over year.
  • Fail: Give the earnings forecast a failing score if the consensus EPS forecast numbers do not increase year over year.

7. Earnings Growth

The earnings growth number gives you an idea of how much analysts believe earnings are going to grow per year for the next five years.

How to Score Earnings Growth:
  • Pass: Give earnings growth a passing score if the Long Term 5-year number is greater than 8%.
  • Fail: Give earnings growth a failing score if the Long Term 5-year number is less than 8%.

8. PEG Ratio

One of the more popular ratios stock analysts look at is the P/E, or price to earnings, ratio. The drawback to a P/E ratio is that it does not account for growth. A low P/E may seem like a positive sign for the stock, but if the company is not growing, its stock's value is also not likely to rise. The PEG ratio solves this problem by including a growth factor into its calculation. PEG is calculated by dividing the stock's P/E ratio by its expected 12 month growth rate.

How to Score the PEG Ratio

  • Pass: Give the PEG Ratio a passing score if its value is less than 1.0.
  • Fail: Give the PEG Ratio a failing score if its value is greater than 1.0.

9. Industry Price-Earnings

Most investors are interested not only in how much the company is earning but also how the company's earnings compare to the average earnings of companies in the industry. Typically, if a company is earning more than the average for the industry, it is a good sign for the company's stock.

How to Score Industry Earnings:
  • Pass: Give Industry Earnings a passing score if the company's P/E are higher than the industry's earnings.
  • Fail: Give Industry Earnings a failing score if the company's P/E are lower than the industry's earnings.

10. Days to Cover

Short interest is the number of shares that investors are currently short on a particular stock. Days to cover is the number of days---based on the average trading volume of the stock---that it would take all short sellers to cover their short positions. For instance, if a stock has a short interest of 20 million shares and an average trading volume of 10 million shares, days to cover would be two days (20 million / 10 million = 2 days).

How to Score Days to Cover:
  • Pass: Give Days to Cover a passing score if the number of days is less than 2 days.
  • Fail: Give Days to Cover a failing score if the number of days is more than 2 days.

11. Insider Trading

Insider trading can give you a glimpse into how confident the managers of the company are in the prospects for the company. If managers are confident in the company, chances are good that they will be buying stock in the company. Anytime you see insiders buying stock, it is typically a good sign.

How to Score Insider Trading:
  • Pass: Give Insider Trading a passing score if the net activity for the past 3 months has been positive.
  • Fail: Give Insider Trading a failing score if the net activity for the past 3 months has been negative.

12. Weighted Alpha

Weighted Alpha is a measure of one year growth with an emphasis on the most recent price activity. A positive Weighted Alpha indicates the stock price is moving higher and a negative Weighted Alpha indicates the stock price is moving lower. Naturally, when you are looking at buying a stock, you want to see a stock that is increasing in value, not decreasing in value.

How to Score Weighted Alpha:
  • Pass: Give Weighted Alpha a passing score if the number is positive.
  • Fail: Give Weighted Alpha a failing score if the number is negative. 
 
 
 

[More to come ...]


Document Actions