Tuesday, March 8, 2011

Qualities of Winning Stocks

Our goal in this section is to understand the differentiating factors between the "Winning" stocks and the rest of the market.  We will do this by analyzing groups of stocks and their respective qualities.  The groups of stocks will be the following:
  • Top 5 YoY 
  • Top 10 YoY 
  • Stocks with best 3yr historical performance
  • Stocks with best 5 yr historical performance
  • Stocks in 75th percentile or above
The qualities we will be looking into will be based off of theory.  The theory should start with Stock price and be able to work itself down to each of the important ratios that matter for a stock. I have broken down what I believe to be the levers on individual stock price into the tree format to focus on the ratios that "SHOULD" have the largest impact on performance

I know many might disagree that these are the ONLY factors that influence stock price/share, but mathematically they are the ONLY factors by their inherent definition.

  • Stock Price/Share = P/E Ratio * Earnings/Share

This is useful for the following reasons:

  1. Earnings/share encompasses all fundamental performance of a stock
    • It is not the ONLY useful value of measure for a stock, but if earnings are not good then you would expect poor price performance
    • Sales growth and profit margin are secondary indicators of fundamental performance
  2. Price/Earnings Ratio encompasses all technical performance of a stock
Based on the above we will look at the following at the beginning and end of the periods for those groups of stocks:
  • P/E Ratios
    • Starting P/E Ratio
    • Ending P/E Ratio
  • Earnings/Share
    • Initial Earnings/Share
    • Ending Earnings/Share
  • Market Capitalization (Stock Price*Outstanding Shares)
    • Initial Market Cap
    • Ending Market Cap
There are additional indicators I know have an effect on a stock, but they seem to all fit into the two categories of earnings/share or P/E ratio.  I expect the results will be in the next post which I will hopefully have time to put together for tomorrow March 9th.

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