Yesterday I mentioned three qualitative factors that make a stock great. Today I will delve into the some of the financial factors I look for in an awesome stock. Again, these are only three of my favorites, and there are literally thousands of others that one could examine.
By The Numbers
Earnings are the mother’s milk that make the stock market go round. In the short run, anything from sentiment to weather can influence stock prices, but over the long term, it is all about earnings. But what about earnings? I love looking at earnings estimate revisions. Len Zacks did a mathematical study and learned that these estimate revisions are crucial in determining which way stocks move. When analysts come together and raise their collective estimates, it usually portends good things for the company’s stock price. This is partly due to the fact that earnings trends have momentum and when estimates go up, it usually lasts for some time.
Valuations will always be an integral part of my stock picking process. The bottom line is that price matters. I might hate a stock at $50, but love it if it trades down to $30 with no change in fundamentals. Of course I look at price/earnings multiples, but also pay attention to price/book, price/cash flow, and price/sales. Each one of these ratios have their strengths and weaknesses, so I feel extra confident if a stock is cheap by all of these measures. Again, in the short-run, valuations might not matter much, especially with momentum stocks, but stocks usually revert to their mean valuations over time. This goes for individual stocks as well as the broader market.
I will title the third category “balance sheet items� in terms of what I look for. Debt levels should be manageable and the company should throw off enough cash flow to pay off its debt load. If not, the company risks the possibility of bankruptcy. Make sure the company can handle its short-term operations. This can be found by examining the current ratio, which is defined as the company’s short-term assets divided by the short-term liabilities. This metric should be comfortably over 1.0, or liquidity problems could be on the horizon.
This two-part series was amazingly short, but I think a great guide to quickly determine what to look for in great stocks. Mastering these concepts will take you a long way to your investing goals.
What I Look For In a Stock – Part II is an article from: 
