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Investment Advice and Planning: Strategy - Module 3.6 Managed Portfolios – Stock Picking Analytics

Edward Ketterer • Jul 11, 2022
Analytics

Stock-picking Analytics – how to find stocks that have the potential for growth at reasonable prices whilst studying price movements through trend lines and pattern recognition protocols for more immediate returns.


When it comes to investing in stocks of exchange-listed company there are various types of analytics that can be utilized in selecting a company. The two most well-known processes are Fundamental and Technical Analysis.


Fundamental Analysis can start with looking at the macro or big picture environment, commonly known as a top-down approach (conversely it is also possible to use a bottom-up approach i.e. micro to macro), in which an exchange-listed company lives as part of a process of selecting its stock for investing. This involves considering the economic environment it exists in along with its industry and of course the underlying operation of the company itself. In short, Economy – markets involved, Industry – competitors’ and business model, and Company – financial statements, are details that reflect the true value or inherent value of the listed companies’ Securities and the potential performance over time. 
Technical Analysis considers the pricing trends of an exchange-listed company and based on the pattern of historical price movements look at anticipating its possible future price. Usually, this is considered along with the trading volume of the companies listed-security and its implicit velocity through price movement. Establishing the oscillation pattern of a listed-securities price by utilizing two fixed prices over its trading pattern history is commonly utilized to provide a possible trend. Moving averages in prices is also a tool in technical analysis as it looks at the pricing trend for a fixed period by calculating the total of the prices for that fixed period and dividing it by the period selected.

Ratios, Trend Lines, and Pattern Types are used in abundance when selecting an Exchange-Listed Company to invest in i.e. 

Ratios = Fundamental Analysis
  • Price/Earning (P/E) ratio: values a company based on its share price to net earnings over 12 months. This ratio helps determine whether a company’s security is overvalued or undervalued and is commonly used when considering mature companies and industries.
  • Price/Sales (P/S) ratio: values a company based on its share price to sales over 12 months. This ratio works well with companies that have operating losses or are in a start-up phase of their development.
  • Profit Margin ratio: provides an indication of how much each dollar generated through sales represents profit after deducting related expenses into net income.
  • Dividend Payout ratio: is the percentage of net earnings which are paid out to shareholders. This ratio establishes the ability of a company to pay out a dividend from net income. Percentages can vary from 30% to 90% depending on the industry and the maturity of the company.
  • Price-free cash flow ratio: compares the total market cap of a company to its free cash and can signify whether a company is undervalued or overvalued as this ratio provides an indication of a company’s ability to grow business.
  • Debit-equity (D/E) ratio: shows how much debt a company is using to finance its growth and possibly its operations. The risk attached to debt is better accessed when looking at the variance between long-term and short-term debt.
  • Quick and current ratios: are liquidity ratios that gauge a company's ability to meet its short-term debt and operational expenses.
  • EBITDA-to-sales (earnings before interest, taxes, depreciation & amortization) ratio: is an earnings ratio that provides an indication of the company’s profitability through cash flow and operations.


Trend Lines & Pattern Types = Technical Analysis 
  • Trend Lines: Candlestick chart of price movements in a stock over a measured period of time from which 2 prices are selected to create a channel of its movement between a top (also known as resistance) and bottom (also known as support) trend line. Breakouts below or above these lines indicate a potentially significant price movement of a stock and such movements can be notably affected by the volume of trades and the time measured as outlined by the top and bottom trend lines.
  • Pattern Types: 
    • Triangle:
      • Ascending: breakout bullish market uptrend 
      • Descending: breakout bearish market downtrend
      • Symmetrical: breakout can be either bullish or bearish
    • Pennant: two trend lines meet at a point and breakout to continue a trend
    • Flag: two trend lines forming a downward sloping rectangle with a breakout in the opposite direction
    • Wedge: two trend lines either downward sloping or upward sloping indicating a possible breakout in the opposite direction
    • Double Bottom / Top: are represented by a W and M letter configuration after 2 failed attempts to either break resistance or support and continuing with the previous trend by breaking through support or resistance.
    • Rounding Bottom / Top: is an upward or downward trend as it breaks through resistance or support levels
    • Head and Shoulders: where a price reaches 3 times the same support or resistance line indicating a potential for a breakthrough.
    • Cup and handle: a combination of a Rounding Bottom followed by a Flag or Pennant indicating a breakout.

Fundamental Analysis vs Technical Analysis - to compare these two forms of analysis to each other is perhaps inappropriate as they use different analytics regarding the potential performance of an exchange-listed company as measured over time i.e. fundamental analysis tends to look at the long-term potential performance whereas technical analysis looks at the short to immediate term potential performance. It is not unusual to use both types of analytics when selecting an exchange-listed company. More information on both can be found online including examples.

It should be noted that this article and all articles published by Creative Coach Online are for information purposes only and should not be taken as advice. It is essential to discuss the appropriateness of any Strategy with a licensed / registered professional. For more details, please visit https://www.creativecoachonline.com/disclaimer

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Copyright © Edward Ketterer 2022

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