Market Beat: Stock market analysis
Analysis of stocks falls largely into two basic categories, fundamental analysis and technical analysis.
Fundamental analysts study a company’s books and reports and consider a variety of metrics. Technical analysts study past price movement and analyze historical data in several ways.
Both methods are very useful and can be combined for in-depth analysis.
Fundamental analysts will look at a company’s earnings, profits and cash flow. One common metric is known as the PE or price to earnings ratio. It is calculated by dividing the share price of a stock by the earnings per share. If a company has a low PE it might be considered a better value than a stock with a higher PE. Sometimes stocks with high PE ratios are desirable because they may have some very popular products but are not producing much profit yet.
The price to book value is another good metric. The book value of a company is calculated by totaling all the company’s assets and subtracting their liabilities. This number is then divided by the share price. A low number means the company is a better value than a company with a higher price to book ratio. Some very good high growth potential stocks will have high valuations.
Price to cash flow is another good one. It is calculated by dividing the share price by the company’s cash flow. Another good way to look at this is to use the free cash flow, which is their cash flow that is not committed to expenses.
Technical analysts study past price movement and use charts to see how a stock has performed in the past. They’ll study the volume of shares that have traded and use common statistical analysis to calculate moving averages and a wide variety of other metrics.
Moving averages like the 200 day moving average and the 50 day moving average are widely used. Some traders use moving average crossovers as a decision making tool. They’ll become bullish when then 50 day average crosses above the 200 day moving average and bearish if it crosses below.
Double tops and double bottoms are common as well as chart patterns known as head and shoulders and a wide variety more. Technical analysis is useful for studying historical data and can be very helpful for discipline but I’d be careful using it as a predictive tool. Anything can happen at any time.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.