JS-Masterclass #3: Fundamentals
In the recent tutorial 'Trading with the Trend - Stage Analysis', we have explained the importance of identifying stocks in a confirmed stage 2 uptrend using the 'Trend-Template'.
What are the Fundamentals doing in a confirmed stage 2 Uptrend?
The best stocks and buying opportunities available in the market meet the technical requirements according to Minervini's Trend-Template and have very healthy Fundamentals.
Best Candidates
- Growth
- Accelerating EPS and Revenues
- Explosive Market Position
- Sustainable Trends
- Scalable Business Model
Worst Candidates
- Capital Intensive
- Limited Pricing Power
- Heavily Regulated
- Margin Pressure
- Eroding Industry Position
Watch out for these 3 key fundamentals – Earnings, Sales and Margins
1) Earnings in most recent 2-3 quarters +20% or more – the bigger the better; look for earnings acceleration – quarter to quarter sequential. Look at a 2
quarter average (up 20%)
2) Sales acceleration: sales increasing in most recent 2-3 quarters
3) Check profit margins – are they expanding or contracting?
4) Combination of sales and margins = earnings: gauge current growth versus 3-5 year growth rate (look for acceleration), Look for a breakout year
How Do You Know if an Earnings Report is Really Great?
1. Results are better than the consensus of analysts’ estimates or, even better, earnings come in above
the highest analyst estimate. Why? This will get the stock on the radar screens of big institutions.
2. The company raises its guidance for the upcoming quarter and the fiscal year significantly.
3. The stock price reacts positively to the earnings report and/or company issued guidance and
resists meaningful profit taking over a number of days or weeks.
4. Analysts promptly raise estimates. (More than a 5% change from 30-days earlier is meaningful).
5. Revenue is reported above the consensus estimate (preferably above the highest estimate) and is
also revised upward.
6. Earnings are “quality” – profit improvement comes from increased sales as opposed to a one-time
gain or non-operating/non-recurring income. Keep in mind, cost cutting or “productivity
enhancements” have a limited life span.
7. You can check Return on Equity to get an idea how good management is doing. You should compare
this number to other companies in the same industry. 15-17% is a good cutoff for most stocks.
Red Flags
• Material earnings deceleration is a warning
• Eroding margins is a warning
• Positive earnings with negative sales – limited life span
• A company showing strong earnings but not paying much in taxes is a red flag
Even if you have found a stock with great Fundamentals:
- Never trust the story
- Never trust the numbers
- Unless confirmed by price action
What are the Fundamentals doing in a confirmed stage 2 Uptrend?
The best stocks and buying opportunities available in the market meet the technical requirements according to Minervini's Trend-Template and have very healthy Fundamentals.
Best Candidates
- Growth
- Accelerating EPS and Revenues
- Explosive Market Position
- Sustainable Trends
- Scalable Business Model
Worst Candidates
- Capital Intensive
- Limited Pricing Power
- Heavily Regulated
- Margin Pressure
- Eroding Industry Position
Watch out for these 3 key fundamentals – Earnings, Sales and Margins
1) Earnings in most recent 2-3 quarters +20% or more – the bigger the better; look for earnings acceleration – quarter to quarter sequential. Look at a 2
quarter average (up 20%)
2) Sales acceleration: sales increasing in most recent 2-3 quarters
3) Check profit margins – are they expanding or contracting?
4) Combination of sales and margins = earnings: gauge current growth versus 3-5 year growth rate (look for acceleration), Look for a breakout year
How Do You Know if an Earnings Report is Really Great?
1. Results are better than the consensus of analysts’ estimates or, even better, earnings come in above
the highest analyst estimate. Why? This will get the stock on the radar screens of big institutions.
2. The company raises its guidance for the upcoming quarter and the fiscal year significantly.
3. The stock price reacts positively to the earnings report and/or company issued guidance and
resists meaningful profit taking over a number of days or weeks.
4. Analysts promptly raise estimates. (More than a 5% change from 30-days earlier is meaningful).
5. Revenue is reported above the consensus estimate (preferably above the highest estimate) and is
also revised upward.
6. Earnings are “quality” – profit improvement comes from increased sales as opposed to a one-time
gain or non-operating/non-recurring income. Keep in mind, cost cutting or “productivity
enhancements” have a limited life span.
7. You can check Return on Equity to get an idea how good management is doing. You should compare
this number to other companies in the same industry. 15-17% is a good cutoff for most stocks.
Red Flags
• Material earnings deceleration is a warning
• Eroding margins is a warning
• Positive earnings with negative sales – limited life span
• A company showing strong earnings but not paying much in taxes is a red flag
Even if you have found a stock with great Fundamentals:
- Never trust the story
- Never trust the numbers
- Unless confirmed by price action
Combing the BEST of two WORLD's: Cathie Wood & Mark Minervini
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