FUNDAMENTAL ANALYSIS - MANAGEMENT EFFECTIVENESS

Return On Assets (ROA) shows how profitable a company's assets are in generating revenue.  ROA gives an idea as to how efficient management is at using its assets to generate earnings. Sometimes this is referred to as ROI "Return On Investment".

The formula for Return On Assets is equal to a Fiscal Year’s Net Income divided by Total Assets.

Return on assets is a common figure used for comparing performance of financial institutions (such as banks), because the majority of their assets will have a carrying value that is close to their actual market value. Return on assets is not useful for comparisons between industries because of factors of scale and peculiar capital requirements (such as reserve requirements in the insurance and banking industries).

Return On Equity (ROE) measures the rate of return on the ownership interest (shareholder’s equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth. ROEs between 15% and 20% are generally considered good.

The formula for ROE is equal to a Fiscal Year’s Net Income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage. As with many financial ratios, ROE is best used to compare companies in the same industry.

FUNDAMENTAL ANALYSIS - VALUATION MEASURE

 
Price-to-Earnings:

P/E ratio (Price-to-Earnings ratio) of a share (also called its "P/E", or simply "multiple") is the market price of that share divided by the annual Earnings per Share (EPS).

The P/E ratio can be regarded as being expressed in years: the price is in currency per share, while earnings are in currency per share per year, so the P/E ratio shows the number of years of earnings which would be required to pay back the purchase price, ignoring inflation, earnings growth and the time value of money.

For example, if Apple is currently trading at $574 a share and earnings over the last 12 months were $41.00 per share, the P/E ratio for the stock would be 14 ($574/$41).

EPS is usually from the last four quarters (trailing (ttm) P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E).

In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E.

The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 14, the interpretation is that an investor is willing to pay $14 for $1 of current earnings.

 
Since 1900, the average P/E ratio for the S&P 500 has ranged from 4.78 in Dec 1920 to 44.20 in Dec 1999.  However, except for some brief periods, during 1920-1990 the market P/E ratio was mostly between 10 and 20.

Price-to-Book:

The Price-to-Book ratio, or P/B ratio, is a financial ratio used to compare a company's current market price to its book value.  The calculation can be performed in two ways, but the result should be the same each way. In the first way, the company's market capitalization can be divided by the company's total book value from its balance sheet. The second way, using per-share values, is to divide the company's current share price by the book value per share (i.e. its book value divided by the number of outstanding shares).

Industries that require more infrastructure capital (for each dollar of profit) will usually trade at P/B ratios much lower than, for example, consulting firms. P/B ratios are commonly used to compare banks, because most assets and liabilities of banks are constantly valued at market values. A higher P/B ratio implies that investors expect management to create more value from a given set of assets.

This ratio also gives some idea of whether an investor is paying too much for what would be left if the company went bankrupt immediately. For companies in distress, the book value is usually calculated without the intangible assets that would have no resale value. In such cases, P/B should also be calculated on a "diluted" basis, because stock options may well vest on sale of the company or change of control or firing of management.

Book value or carrying value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation amortization or impairment costs made against the asset. Traditionally, a company's book value is its total assets minus intangible assets and liabilities.  However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both.  When intangible assets and goodwill are explicitly excluded, the metric is often specified to be "tangible book value".

Price-to-Sales:

The Price-to-Sales Ratio - Price/Sales is a ratio for valuing a stock relative to its own past performance, other companies or the market itself. Price to sales is calculated by dividing a stock's current price by its revenue per share for the trailing 12 months (ttm).

The price-to-sales ratio can vary substantially across industries; therefore, it's useful mainly when comparing similar companies. Because it doesn't take any expenses or debt into account, the ratio is somewhat limited in the story it tells.

REAL TIME WATCH

Premarket:

From a universe of over 6600 stocks in FINVIZ, I glean a list of over 200 stocks that meet a “specific minimum fundamental criteria” and load into a Single Real Time Watch.  For "Premarket" I sort by VOLUME  so all those with “premarket activity” perculate to the top like cream.  I then compare the current premarket “BID” to yesterday’s closing price “LAST” for candidates that are trading above yesterday’s close that could run in the Regular Trading Session.

Regular Trading Session:
After the opening bell, I change the sort to % CHANGE and the winners perculate to the top like cream on the Watch during the Regular Trading Session.

 

 Try loading your list of stocks that pass your minimum requirements into a Single Real Time Watch or you may want to load several lists by “Industry Sector” and flip through them for both “Premarket Sector Trend and Volume candidates” and “Regular Trading Session Trend and % Change leaders”.

Note:  you may need to contact your broker for access to real time premarket trading.

AVERAGE DAILY VOLUME (ADV)

The theory behind Average Daily Volume is for execution.

The chances for a significant breakout or breakdown is enhanced by achieving around 50% of the average daily volume in the first hour of trading for the trend of your position. 

 

In another respect, if prices have been rising up to noon and the volume is only about 25% of the average daily volume, it is a signal that demand (buying) is drying up.  When the volume dries up on the buying (new highs on lower than average volume due to lack of demand), it is the signal for a reversal in the Bull trend; as prices seep downward, it will eventually trigger the stops of the Bulls creating a domino effect downward.  Likewise, if prices have been declining up to noon and the volume is only about 25% of the average daily volume, it is a signal that supply (selling) is drying up.

 

MARKET MAKERS

Market Maker (MM) is a brokerage or bank that maintains a firm bid and ask price in a given security by standing ready, willing, and able to buy or sell at publicly quoted prices (called making a market). These firms display bid and offer prices for specific numbers of specific securities, and if these prices are met, they will immediately buy for or sell from their own accounts. Market makers are very important for maintaining liquidity and efficiency for the particular securities that they make markets in. At most firms, there is a strict separation of the market-making side and the brokerage side, since otherwise there might be an incentive for brokers to recommend securities simply because the firm makes a market in that security.

Market Makers test the highs and lows in the first hour of the trading session for market direction. This is the rudder for the day. After the first hour, prices can be highly erratic from the publics' emotional trading, even to a point outside of the first hour's channel. The last hour is the confirmation of the direction where prices normally settle back to a sensible range. This is why you sell in the first hour trying to capture the peak of the MM's range test, and buy in the last hour or check your mental stop at the confirmation price.

A hard stop loss with your broker is like a For Sale Sign to the market makers and they will spike toward the stop and flick it off like a frog's tongue on a mosquito, then return to the base trading range immediately afterward; you can see this event every day at the open and close on a minute real time chart.

MM's are repeatedly triggering your stops.  They can't see a Trailing Stop, but they know how the public thinks, and spike up and down within the ranges of typical stops every day during the first hour of the trading session and at the close.

EMOTIONAL COMPONENT OF THE MARKET-TECHNICAL INDICATORS

TECHNICAL INDICATORS: Technical analysis is the only way to measure the emotional component of the market.

MOMENTUM:

Rate of Change (ROC)
Stochastics (%K,%D)
Relative Strength Index (RSI)
Commodity Channel Index (CCI)
Williams %R (Wm%R)
StochRSI
TRIX
Ultimate Oscillator (ULT)
Aroon

TREND:

Moving Averages
Moving Average Convergence Divergence (MACD)
Average True Range (ATR)
Wilder's DMI (ADX)
Price Oscillator (PPO)

VOLUME:

Accumulation Distribution
Chaikin Money Flow (CMF)
Volume Rate of Change
Volume Oscillator (PVO)
Demand Index
On Balance Volume (OBV)
Money Flow Index (MFI)

PULL-BACKS, CORRECTIONS, AND BEAR MARKETS

A Pull-Back is a move where the market interrupts the prevailing bullish trend, or retraces from a breakout, but does not retrace beyond the start of the trend or the beginning of the breakout. A pull-back which declines further to the beginning of the trend or the breakout would instead become a reversal or a breakout failure and becomes a Correction when the decline exceeds 10% and a   Bear Market when the decline exceeds 20%. 

DISTRIBUTION: Distribution is indicated by one or more of the major market indexes decline on increased volume from the previous day. Churning in the market indexes is also a sign of distribution. This occurs when a day's attempted advance stalls (shows very little change in price) on greater volume than the day before. 

BEAR MARKET CONFIRMATION: Four days of distribution, if correctly spotted over a two or three week period are often enough to turn a previous advancing market into a decline. The beginnings of a bear market usually follow a "test" of the previous bull market high on low volume followed by sharp declines on high volume. The confirmation date of a bear market is the date prices on both the DOW and TRANSPORTS break below the low point of the last bull market correction and continue to move downward.