Basic Stock Analysis - Know the 13 Interesting Metrics

Stock Analysis

Which metrics do you usually use when you are analyzing some stock before investing or trading it? Every trader or investor does it differently and can come to different conclusions regarding buying, selling, or holding it.

In this article, we will also show you a quick analysis, that would happen if we’d use a certain signal to enter a position. 

What Metrics you should understand, DEpending on your trading style?

Everything depends on the type of investment or style of trading. If you want to invest long-term, or you see some trading opportunity because of some news or earnings results, you should understand fundamentals and how they can affect the stock price, respectively, what they can tell you about the given company. 

Even when you trade mostly using some price patterns or technical analysis, it is always better to know some fundamentals. When you understand these basics, then just a quick look at these data can give you much broader information. 

Let’s explain why do you need to understand these basics on two examples.

I. Example – Shorting

Imagine you are a trader who wants to short a stock because of some trading signal from technical analysis, news, or you just think that the stock is overpriced. 

Have you ever looked at Short Interest before the shorting? When the number of short trades is consistently decreasing, it indicates that traders are more positive (it is just another type of sentiment). 

Think of it; this information could spare you from a bad trade (or it can tell you that you are one of the first who saw this opportunity).

But when we are in a downtrend, and the number of short positions is decreasing, it means more people are closing short trades and taking profits than opening short trades – is it not good to work with this information?

II. EXAMPLE – Implied Volatility

In the second example, you have read some news, and you believe they are crucial and can affect the stocks very strongly, but there is no movement in the price after the news release. 

You were expecting the presence of a new product for some company, but the price didn’t move after. 

How do you know that this information had already been accounted for in the price? Or there was a significant price movement after the news. How do you know that the market is calmer after this movement? 

One crucial metric can give you a better view if the information was already accounted, or if the market is quieter after this release. I talk about implied volatility, which is calculated from options contracts. 

Implied volatility, or often called a fear factor, can tell you a lot about the stock and situations like this. 

Answer to the first question – the news came out, but there was no significant price movement. When implied volatility dropped significantly, it means the market is calmer, and investors could have expected that news.

On the other hand, when IV stays high, it can indicate that the nervousness remains. It can also happen that volatility goes up, and after some news release, the stock is more volatile and riskier to trade. The second question – there was a big move in price, is the market calmer now? Again implied volatility will help you here. 

Always use more than one indicator/signal in your decision process. Stock prices reflect herd psychology, greed, and fear. 

Be smart and know what is happening over there.
stocks analysis

List Of Stocks Basic Metrics

List Of Stocks Basic Metrics

We will show you a few metrics which give you a better overview of a given stock and help you in the decision process. Then we go through a straightforward example.

1. Implied Volatility

Implied volatility for a given stock is calculated from option contracts that have an expiration in one month. 

Note that usually, you can see annualized volatility. This volatility forecasts the bigness of possible price movements, or what price movement investors expect. The higher is, the more fear and riskier the stock is. 

Compared to historical volatility, which is usually computed by standard deviation, it has some predictive value. Historical volatility has no predictive value and states how the volatility was changing during the time. 

If you are interested in different approaches to volatility, look at our article here.

2. EPS – EARNINGS PER SHARE

EPS – Earnings Per Share is company net profit divided by the outstanding shares. EPS is one of the most important metrics updated every three months by companies’ earnings announcements. These are the most important events for each stock and change the trends for days or even weeks. We can use EPS to compare the stocks and how these companies are doing with their real performance.

3. PE Ratio

PE Ratio (price/earnings) is the current price divided by EPS (earnings per share). Investors use it for relative comparison of different stocks. A higher PE ratio can indicate that investors are expecting higher earnings growth in the future. A low ratio can tell that the company is undervalued. 

4. PEG Ratio

PEG Ratio – Price/Earnings-to-Growth Ratio. It is a PE ratio divided by the growth rate of its earnings for a specified time. PEG ratio is also factoring the company’s expected earnings growth, so it provides a more complex image for a given stock. The lower the PEG ratio, the more the stock may be undervalued, given its future earnings expectations. PEG ratio indicates over-or under-pricing and can vary by industry and company type. Usually, PEG Ratio much lower than 1 indicates undervaluation and much higher than 1 overvaluation.

5. BETA

Beta is the number that tells the investor how the stock acts compared to the index (usually S&P 500). A beta higher than 1 indicates that a stock’s price swings more wildly than the index. 

For beta under 1 the stock price is steadier than the index. It can be considered as another type of volatility but compared to other stocks.

 A negative beta indicates that the stock price is anti-correlated to the market. Looking at beta in your whole portfolio is an important risk metric. The beta of your portfolio should be at the level of your risk tolerance. 

If you are like a casino player on the stock exchange, your portfolio’s beta will be around 2 or higher. If you are super risk-averse, your beta would be under 1.

6. Profit Margin

Profit Margin expresses how many cents of profit has been generated for each dollar of sale. It is calculated by dividing the net income (net profit) by revenue (sales) realized over a given time (one quarter from earning report).

Net profit is determined by subtracting all the associated expenses (raw material costs, labor, operations, rentals, interest payments, taxes). When you follow just a few stocks and trade them often, you should know how the profit margin changes over time.

7. Payout Ratio

Payout Ratio or also dividend payout ratio shows express earnings vs. dividend relationship. It is the ratio of total dividends divided by net income. It merely says how the company redistributes profits to its investors. This metric is essential to know if the dividend payment program is sustainable (over one means that the company pays more on dividends than earns)

8. Short Ratio

Short ratio is the number of opened short positions divided by the average daily volume. In other words, it is the “days to cover” ratio and tells us how many average trading days are necessary to cover all opened shorts. 

If this ratio is growing, it indicates a drop in price. It is another type of sentiment of how inventors feel about the stock. Still, it is not necessarily an accurate predictor of market direction (like every other metric, the holy grail does not exist).

On the contrary, a very high short ratio can also lead to price growth when the short sellers are closing their positions.

9. Short Interest

Short Interest is a ratio that tells us what portion of float shares (shares available for trade) are currently being shorted. 

The calculation is straightforward: the actual number of shares that have been sold is divided by the total number of available shares. 

Usually, this number does not go over 0.5 (or 50%), but it can go up to 100% theoretically. It is an excellent metric about stock sentiment (similarly as put/call ratio). But also, this metric alone does not have that predictable value as is expected.

10. Analyst Target Price

Analyst Target Price – analysts’ projections of the different stock prices (for the next 12-18 months). These projections change over time and have only an informative character!

In calculations are used earnings, fundamentals, and also intuition of analysts. They are rarely precise, so it is good to use them as another long-term sentiment.

11. BOOK VALUE

Book Value is a measure of all company’s assets (stocks, bonds, inventory, manufacturing equipment, real estate, etc.). We can consider it as a theoretical value and compare it to the total value created by supply and demand for its stocks. This measure has meaning only for companies that hold solid assets like machinery, railroads, financial instruments (banks).

12. Percent Institutions

Percent Institutions is pretty straightforward and states what percentage of outstanding shares is held by institutions. It can sometimes happen that this number is higher than 100%.

Two things can affect it: an error in data or short selling. Hedge funds as institutions can make short trades, too, and other institutions can also buy shares from traders who short the stock.

13. Percent Insiders

Percent Insiders tell us what percentage of the outstanding stock is held by insiders. The height of this number (increase or decrease) can indicate how insiders trust the company’s performance. Or NOT – it can be affected by company politics, which can redistribute shares to its management and employees – beware. If there is a significant change, rather read the news about the company before making trading decisions.

Practical example

Let’s now take a look on the following Example – occurred as a trading opportunity from our signals using the sentiment during August 2020. Let’s make a quick analysis if we use this signal and enter the position.

FTNT stock

We have some basic statistics, the OHLC plot, and the implied volatility plot (dotted line with right y-axis) on the graph.

We can see that a few days ago, there was a significant drop in price. Usually, when the price falls, we can see an increase in volatility, which indicates more fear. We see the opposite reaction. An earnings announcement on August 7th caused this. Before earnings, there was a nervousness. After the earnings announcement, the market knows better what is happening to the company, so the implied volatility has dropped.

If you are interested in some analyses on how to trade after earnings announcements, see our another acticle.

We can see only 3% of tradable shares are shorts (ShortPercentFloat), which is not a lot and indicate that most of the traders are bullish/neutral.

80% of shares are held by institutions and 16% by insiders, which is still a significant number and can also be positive. 

PEG Ratio is relatively high, which can say that the stock is overvalued, but we have seen many overvalued stocks to continue growing: TSLA, AAPL, NFLX, NVDA, etc. The concept of overvaluation or undervaluation is very personal.

We can see the price has dropped from 52 Week High just recently. By looking at these statistics and the plot, we can see kind of a support at 125-127. Definitely, because of these, I would enter into position and hold it 5-10 trading days (time comes from our strategy).Since there were earnings a few days ago, it is crucial to look at what happened. Earnings had beaten the estimates over 25% (according to ZAKS), but the price dropped by almost 10%.

It happens, too, but it is not that common. When something like this happens, have a closer look at earnings: Billings’ estimate was missed, which is an integral part of this cybersecurity company. But the news was positive, so the drop in price we can consider as a good sale.

 

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