Here is a great commentary:
So, you've heard a good story. In these difficult markets, there is a lot more to a good stock than a good story. This week, we provide a
quick checklist of things to consider
On the fundamental side:
- it is not too hard to make any stock sound good. If they have some kind of opportunity, a good promoter or publicist can
probably convince an investor that the stock deserves consideration. Listen to the story, but don't put too much trust in it.
- consider the people behind the deal. Bringing buying into a stock that
has a good story is as much about who you know as what you have. Do the people have a good track record of successful stocks?
- pay a lot of attention to share structure. Stocks that have the majority
of their shares in relatively few hands are easier to promote as selling can be better controlled. Companies that have large amounts of free trading stock in the possession of insiders have the currency to
do deals and pay promoters.
- do they have cash? This is a double edged sword as the really legitimate companies with lots of cash probably won't worry about promoting their stocks higher. However, a
promoted stock with cash has the ability to generate excitement as they acquire deals and buy publicity.
- does management have incentives? Investors often complain about the way companies distribute
cheap options to their management. However, the more they stand to gain, the better the chance the stock will go higher.
- what is the potential for a dramatic change in fundamentals? Fundamental
analysts often put too much emphasis on what is already publicly known. What matters is what will be fundamental in the future. If a company is facing a major event which can dramatically change their value,
it should be considered.
On the technical side:
- is the stock liquid? Stocks that trade a lot have a lot of investors and brokers watching them. If the company can generate good news
(or rumors), stocks that are liquid have a better chance of moving. Plus, it is easier to buy and sell a liquid stock.
- Is the stock in a downward trend? If so, forget about as the timing is not
right. Stocks in downtrends are doing so because the market's psychology has turned negative. That takes time to turn around.
- Is the stock breaking out to new highs for the first time in three
months? This is very positive, since investors have found new information to justify a valuation on the stock that has not been seen for some time. Often, these breaks come some time before the news is
- Is a beaten up stock breaking from a rising bottom? Stocks that have been in a downtrend take some time to reverse the pessimism. A stock that can form a bottom higher than the previous
one, and then make a break from that bottom may be reversing the trend.
- Has there been a period of accumulation? Those close to a deal often accumulate as much stock from the market quietly before
they push the stock higher. If a stock has been trending sideways for a long while with a few brokerage houses accumulating large positions, something could be in the works.
- Does the stock have a strong close? If so, market makers are probably
working on the stock which can be positive for the market's perception.