If you’re new to breaking down stocks, this might come in handy. I’ve thrown together a little list of some of the key things I consider when building my thesis. If I can get down this list and not have many red flags pop up, then I’d be a very happy investor. That said, it’s still also important to consider the current macro environment, but it’s a good place to start.
Fundamentals:
• Is the business easy to disrupt? Do they lock up their IP or have significant brand loyalty?
• Does it have more than a small selection serious competitor? 3 or less is preferred.
• Does it have a way to keep growing revenue for 5+ years?
• Is the balance sheet and income statement healthy? Is it recovering from a macro downturn or sector specific issue?
• Is cash flow good?
• Are they profitable? If they aren’t, how long can their current cash pile keep them going and how will they raise capital?
• What are their debt levels? Debt should be manageable.
• Will they be able to increase margins and net income over the next 5+ years?
• Do they regularly miss or beat expectations for earnings? I don’t like companies that miss a lot. To me it shows poor management.
• Are you confident with the company’s long-term plan?
• Are you up to date with the latest 10k, 10q and earnings conference call? Really get stuck into the investor relation page on their website.
• Are you up to date with any new press release information? Is there any new social media surrounding the company? Is it good or bad?
• How does the P/E and forward P/E compare against its peers? Ideally this would be lower.
• Has the CEO got more than 3 years’ experience? What did they achieve at their prior positions?
• Is the CEO over paid when compared to FCF? You don’t want to see them earning more than the business makes in.
• Is institutional ownership high? I would prefer to start building positions in companies with low institutional ownership and start scaling out as they scale in.
• What is their market cap? Typically, smaller caps will have larger more volatile moves. I love that. Occasionally you will get a mega cap that is VERY cheap and worth capturing though.
• Is short interest high? Highly shorted stocks can create HUGE squeezes.
• What does the insider ownership look like? I like to see the top dogs within the company loading up on shares. Don’t forget to account for regular sales though.
Technicals:
• Is price making new highs? I would typically not favour this as the risk/reward just isn’t where I would like it.
• Is there a lot of potential for high returns over the next year? I ideally, I want my positions to have the minimum potential return of 50% a year, preferably more. To find this I measure from the highest price I’m willing to pay for a stock and the take profit where I would close half my position.
• Where is resistance and support? Start off with simple horizontal points and then move on to diagonal on the weekly and daily. I want to see if price appears to be basing ready for a reversal and keeping an eye out for breakouts and retests.
• Are there any clear and obvious patterns? I like to mark out measured moves for these and have them as targets.
• Are Fibonacci levels being respected? I love trading based on these, so it’s key I have these added to my chart ASAP. This will be strong resistance and support points.
• Where are the VRVP volume profile levels? These will also act as strong support and resistance points.
• Is the RSI getting over heated? Ideally, I don’t want to enter positions when the RSI is elevated. Especially on the weekly and monthly.
• Are there any recent gap downs or ups? Price will want to fill these gaps usually, especially if a stock has a good history of filling them.
• Is there confluence at any of these points? The more of these targets that line up the better. I focus my take profits at those points.
