Yesterday we talked about what to consider when evaluating a potential investment or trade. When we perform due diligence on a potential investment, we need to look at three different factors, stock fundamentals, stock technical price and volume behaviour, and stock and market sentiment. Today, we will discuss earnings. Ultimately, a stock can only sustain an increase in price if it has consistent earnings and revenues. Fundamental analysts often look at a metric called the Price Earnings Ratio (P/E) as a measure of value. An often accepted rule of thumb is that stocks with a low P/E are “cheaper” and a better value. However, this has to be taken in context for what the normal range is for the industry that the stock is in. In addition, it is also important to look at earnings growth from quarter to quarter. Improving earnings on this basis are often an indication that stock price may rise. Finally, it is also important to be aware of earnings expectations. Sometimes, expectations can drive a stock price up in a velocity or momentum move. Zacks.com is a website that applies the methodology created by the founder Len Zacks, a mathematician, whose research is based on the premise that earnings estimates are a good predictor of future price growth. This is a good site to get ideas for some potential investments in US stocks and has many free features that you can use. For Canadian stocks, the Globeinvestor.com site provides information on earnings estimates and upgrades or downgrades that you can utilize to apply this methodology for developing a list of stocks to trade or invest in. In general, you want to see improving earnings quarter over quarter and/or earnings upgrades by analysts. Using this as part of your fundamental stock selection criteria tends to focus you on the stocks that have the better potential. Of course there are a few other fundamental factors you may also want to consider and we will continue to discuss these in future posts.
Futures this morning are relatively flat and the DAX is positive, indicating a flat open. The markets continue to see-saw back forth in a choppy manner frustrating both traders and investors. Market bias indicators are neutral, along with the market condition scans, indicating more of the same.
Index | Change | %Change | Level | Phase |
TSX | -143.74 | -1.40% | 10142.16 | Recovery |
DJIA | -173.47 | -2.05% | 8300.02 | Recovery |
Nasdaq | -19.35 | -1.11% | 1731.06 | Recovery |
SP 500 | -17.27 | -1.90% | 893.06 | Recovery |
Russell 2000 | -10.45 | -2.09% | 489.86 | Recovery |
NYSE | -113.02 | -1.90% | 5823.56 | Recovery |
Source: Telechart
Short Term market outlook:
Bias: Scans showing a neutral bias
Energy: moderate to weak
Primary Trend: Remains down to sideways
Sector | Phase |
Consumer Staples | Recovery |
Healthcare | Recovery |
Technology | Recovery |
Utilities | Recovery |
Energy | Recovery |
Financials | Recovery |
Industrials | Recovery |
Materials | Recovery |
Consumer Discretionary | Recovery |
Source: Telechart
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