You can screen stocks with basic screeners from websites such as Google, Yahoo and MSN. These will allow you to define market sector, price range and volatility. However, these basic screeners don't fit the search criteria for hot penny stocks. See our recommended advanced screeners on our Resources page.
Stock Chart
A stock chart graphically represents a stock's trade data. A basic chart shows the stock price on the Y-axis vs. time on the X-axis. The chart may also carry some stock indicators that take the input data and output a result based on specific mathematical operations, allowing the trader to gain further insight into current trading. Having at least a basic understanding of the most common indicators offers you deeper insight into the trading of the given stock.
By knowing the basics of charting and technical analysis, you can narrow your hot stock scan by another factor and focus on the stock's fundamentals to find undervalued stocks.
Stock Fundamentals
Fundamentals include a company's financial reports or non-financial information that could include growth estimates for the product, demand and its competition. Investors should also look into new regulations, demographic changes and economy-wide changes.
Always examine financial reports and look for improvements in earnings per share, expense reduction, cash on hand and other variables. Not all penny stock companies publish financial reports. Even if a company publishes a report, you're still taking its word for its accuracy unless it is audited by a legitimate third party.
Interpreting Financial Statements
Financial statement analysis provides a starting point for share value evaluation, but it can't predict unexpected factors such as management changes and other significant but unpredictable events.
You can estimate the health of a company and compare it to its competitors through analyzing its financial statement. These statements show what the company owes and owns, its profits or losses over a time period, and how its position changed since the last statement. They can also help you tell the future direction of the company so you can forecast the stock's future prices with some accuracy.
Balance Sheet
A balance sheet shows a company's financial position at a specific date. Companies usually post their financial results towards the end of each quarter in quarterly reports and on the last day of their fiscal year for annual reports. The balance sheet uncovers the company's value, debt load and cash position.
One side of the balance sheet shows what the company owns: assets. The other side represents what it owes: liabilities. Shareholders' equity represents the excess of the company's assets over its liabilities. Shareholders' equity is often referred to as the book value of a company. Subtract total liabilities from total assets to come up with the value of shareholders' equity.
Earnings Statement
An earnings statement shows the revenue that a company received during the year and the expenses (wages, taxes, operating costs, etc.) it incurred. The difference between the two is the company's profit or loss for the year. The remaining amount after taxes represents net earnings.
Net earnings show how much money the company made over the course of the year. Companies may show low earnings if they invested in research and development, acquired other companies, etc. Even with low earnings, actions such as these represent a positive market growth compared to a company that had low earnings because it didn't generate revenue and had high expenses.
Statements on Changes in Financial Position
These statements show how the company's financial position changed from one year to the next. The cash flow statement details how the company generated and spent its cash. This helps in evaluating the company's liquidity, solvency and ability to generate cash internally to repay debts or reinvest.
Financial Report Sources
Investors can ask companies for their latest quarterly and annual financial reports, and most will share them. They can also go online and enter the company symbol into an online stock screener and the service will provide the most recent press releases and filings, which include past quarterly and annual reports with the financial statements. Compare previous and present statements to see the direction in which the company is moving, and look for trends such as increasing debt load, unpredictable earnings, or decreasing or erratic revenues.
Fundamentals in Action
Investors can put all of these fundamentals into action while asking these questions:
Balance Sheet: Do any of the companies have greater current liabilities than current assets? Which company has the greatest long-term debt load? How does the current share price compare to the shareholders' equity or book value?
Earnings Statement: Have revenues increased or decreased from the previous year or quarter? How much money did the company earn or lose per share in the most recent period?
Financial Position Changes Statements: Has company debt increased or decreased? What was the greatest expense the company incurred, according to the statement?
Decide
Financial statements provide investors with a partial snapshot that represents just one piece of the puzzle. While these statements can help you compare several companies, the numbers provided limit your ability to fully compare. Financial statements show that one company made money while another lost money, but you still don't know which has the better technical outlook (based on analysis of the trading chart) and which will have the best future earnings.
Read company information carefully and look at the fine print to make sure the numbers you read have been audited, rather than just being company estimates or unverified results. Even though this doesn't present a problem with most exchange-listed companies, it's still an important practice.
Don't expect a growth company to have positive earnings. These companies generally accumulate debt as they focus on research and the development of new technologies, move into new markets, etc. Understand which numbers are important and unimportant to a specific company based on its situation. Perform an industry comparison.
Financial statements serve only as a part of the research process, but familiarization with and understanding of this data pays off for an investor who takes the time and makes educated trading decisions.
