There are two long awaited IPOs after LinkedIn’s: Groupon’s and Facebook’s. We know that the latter is somewhere in the distant future, but for Groupon, its IPO will be in a matter of months, if not weeks.

But how much is Groupon worth in real life? I’m not talking about buying the rumor and selling the news. I’m talking about facts. Anyone over the age of 18 will tell you that any company is worth something if one of the following is true:

- It is profitable
- It is making money, but not yet profitable. But it will be profitable in the near future.
- It is not making money, but will make money in the near future, and will be profitable in the medium to distant future.

If anyone knows of another scenario by which a company is worth something, then by all means, share!

Looking at the list above, where do you think Groupon falls? Obviosuly nowhere. Here are some facts:

- Groupon is not profitable – in fact, it lost $540 million in user acquisition and other operational costs since its inception in 2008.

- Groupon is making money, and is not yet profitable, but will it be profitable in the future? I don’t think there’s even the slightest chance. There are some heavyweight companies seeing a lot of value in the coupon business (I think this is any oxymoron by the way, “value in the coupon business?”), these companies include Google and Facebook. Not only that, Groupon has spawned a myriad of smaller clones (some say more than 400), a dozen of them are serious about the business (they spend a lot of money in user acquisition), such as LivingSocial, DealFind, etc… It’s amazing, I never ever thought that the coupon business is that lucrative, even when offering one coupon/day, which may or may not be something people want.

Anyway, I don’t want to discuss the business model, all I want to know if Groupon is actually worth something when it becomes public. Let’s examine more facts:

- Customer acquisition costs are increasing: Groupon knows about this and says that once a customer is acquired, it no longer needs to spend money on that customer, and that customer will be a “cash cow” for the rest of his miserable1 life. This may be true if you overlook an important factor in any business: competition. I remember that the same month I knew that Groupon existed, and that was less than a year ago, I started seeing ads for LivingSocial, and afterwards, I started seeing local ads for other coupon websites (that seemed to be available only in my area). The problem with Groupon is that the website can easily be cloned, and it was, hundreds of times! It’s only one pie, that used to belong exclusively to Groupon, but now you have many other websites that want a share of that pie too! But why are customer acquisition costs increasing? If you have ever used Google Adwords (Groupon’s main advertising platform), you will know that when you advertise for something, your cost per click is based on how much money other people are willing to pay to get that same click. In other words, when more people are advertising for the word “coupon” or “coupon website”, then the higher the cost per click is. Just search for the word coupon on Google and see how many ads you will see.

- Groupon is not changing in this ever-changing world: When Groupon was launched, it was a fresh concept that took everyone by surprise, everyone liked its sleak (and intelligent) interface. But now when you go to the Groupon website, it’s still the same, the same concept, the same features, the same everything. Groupon is not Google (and even Google is changing by the way), so it cannot afford to remain static.

- Facebook will kill Groupon: Unfortunately for Google, Groupon, LinkedIn, and other websites, there is a company that operates from California called Facebook that has hundreds of millions of real users. People go to Facebook every day, and it won’t cost Facebook a penny to advertise its own “Deals” service to its users, and it doesn’t need to guess who they are, where they are, what their interests are, what their background is, it already knows all these things! It has a huge advantage over anyone else. Imagine what would that do to Groupon. Oh, and in case you don’t believe me, check how Facebook has already shaken management at Google.

- Money delays the catastrophe but it doesn’t avoid it: Why am I saying this? Groupon is asking for $750 million from the investors? Why? So that they can spend more money on advertising, but what will happen if all the money is spent, and the company is still not profitable. That’s a very likely scenario, in fact, that is the only scenario.

- The coupon market will soon be saturated: And this is not only because of the increasing competition, but because people (yes I know it should be money) do not grow on trees. Groupon’s clickthrough rate will start going down at one point, as people who are interested in coupons will be already with Groupon (or one of its many competitors), and those who aren’t were never and will be never coupon users anyway. This reminds by the way of the stockholders’ expectations when it comes to Netflix: they think that the market is infinite even when the Netflix’s market penetration rate is already very high.

I’m sure that the most junior accountant will be able to see that the numbers won’t work. This company will never make money to cover its operating costs. Do the Groupon people know this? Unless the company is run by morons, I’m sure they do. But guess what, the real moron is the person who’s going to buy and hold that Groupon stock even for a few days after the IPO, because the money he’s going to spend will be in fact going to Groupon’s initial investors and executives, who are going to jump ship at the first opportunity. Oh, and while jumping, they’re going to yell “Suckers” at all the investors who bought this worthless, if not scammy, stock.

Yesterday LinkedIn, tomorrow Groupon, and after tomorrow Facebook2: NASDAQ crash of 2013, here we come!

1: If you’re going to spend your whole life searching for coupons, then you definitely lead a miserable life.
2: I believe that Facebook has real value, but it will be hugely overvalued by investors, who will probably pay 200% more (of the initial offering price) at IPO just to acquire the stock.

BAC (a stock that I loathe and thankfully have stopped trading for a while) is currently trading $10.93, which is just 2 cents above the 52 week low. Will it break this $10.91 barrier today?

I think if it does, then there’s a huge potential that BAC will be trading in the single digit (below $10) by the end of this month, and this is where the real panic starts.

C is also not doing great. It has fallen below the $40 level last week (below $4 before the split, which is always attractive). At the current price of $38.44, C is trading just $2.24 (5.82%) above the 52 week low.

I don’t know where and when all this bearish trend will end, but I know for sure that C is at a very attractive price at the moment, but it still has the potential of going lower.

June of last year wasn’t great for both stocks!

The whole point behind the LinkedIn IPO was not to expand the company, it was about making a few people running this website (I’m saying website because I don’t think we should even consider it a business) rich by cashing in.

How many investors were able to buy LNKD at $45? Just a few, these “few” people happen to be executives in LNKD.

Now there’s nothing wrong with making a quick buck because you went public, but let’s examine some of the trades:

Reid Hoffman (LinkedIn’s director) bought at 115,535 shares at $0 (I assume they were just given to him) and sold immediately, the minute LNKD became public. The selling price was $41.85. The total money made is: $4,835,139.75. Weiner Jeffrey, the CEO, did exactly the same trade. We all know that LNKD went to $122 the same day of trade so they basically sold at 1/3 of the price.

What does that tell us? It tells us clearly that LinkedIn’s executives believe that the stock is overpriced even at $41.85. They didn’t wait until the first day ended, they sold their shares first thing in the morning. It probably came as a surprise to them when the stock went up, 3 times their selling price. Both could have made $14.5 million from that morning trade, but they were satisfied with the $4.83 million (good, they’re not greedy).

As an investor myself, I wouldn’t touch this stock, in fact, LNKD is one of the very few stocks that I would recommend shorting. It is way overvalued from its company’s perspectives. LNKD in my opinion, is worth at $1 billion, which means that LNKD’s price should be $7.

I feel really sorry for those who got suckered into buying the stock above the $100 level. Wait until we see June’s insider trades, I bet you they’re all going to be “SELL”, and this is when LNKD will collapse.

This IPO, in my opinion, is one big scam. LinkedIn doesn’t need the money as a company, they make money from ads and from overpriced subscriptions that very few buy.

After my previous list of one letter stock symbols, I have decided to find which stock has the longest ticker symbol. I thought I’m going to find a stock with 10 characters, something like ABCDEFGHIJ, but I was wrong. The longest ticker symbol for any stock listed in any of the two main US markets (NYSE and NASDAQ) is only 5 characters long, and guess what, there are 1,522 stocks that are 5 characters long, most of them are traded on the NASDAQ.

In my little research, I have discovered the following facts:

- There are 1,474 stocks (out of 7,745) that are 5 characters long that are listed on the NASDAQ.
- There are only 48 stocks that are 5 characters long that are listed on the NYSE.
- The shortest ticker symbol for any stock listed on the NASDAQ is 4 characters long, which means that there are 6,271 (7,745 – 1,474) NASDAQ stocks that have a stock ticker length of 4.
- The are only 9 NYSE stocks (out of 3,000) that have a 4 characters long stock ticker, and all of these stocks have dashes in them. These stocks are: BF-A, BF-B, CW-B, IT-B, KV-A, KV-B, JW-A, JW-B, TI-A.
- The absolute majority of NYSE stocks (over 90%) have stock tickers that are 3 characters long.

Facebook’s IPO is probably the most awaited IPO of all time. I’m sure that first day’s volume will be worth at the very least $2 billion. I have no idea what the price of the share will be, though a $100 is a very likely figure.

Now the question on everybody’s mind, is what will Facebook’s stock ticker symbol will be? Until this very moment, there is no official word from Facebook on the its stock ticker and the stock market it’ll be trading in (NYSE or NASDAQ), so everything I will say from this moment on is pure guessing…

Early last month, LinkedIn became public, and what was its stock ticker? LNKD, and it was listed on the NYSE. Now we all know that LinkedIn is very comparable to Facebook: they are in the same industry, they have a very similar business (but both the audience’s quality and quantity are different), and they both don’t need the money in the first place!

Anyway, I’m sure you already noticed when examining LinkedIn’s ticker, is that they removed all the vowels from the company’s name to get the ticker symbol, so if we do the same to Facebook, what we will get will be “FCBK“, which is OK, but how about FACE, isn’t FACE more attractive? Well, FACE is taken on the NASDAQ, which means that it cannot be chosen even if Facebook decides to be listed in the NYSE, as you can’t have two different stocks with the same ticker symbol in the two markets (NYSE and NASDAQ). I don’t know if it’s a rule, and if somebody can find such stocks, please let me know.

Since FACE is taken, how about BOOK (the second part of the word). I think that BOOK will be a bit odd for Facebook, especially because it loses the brand completely (people will associate the stock with a book, which is wrong). BOOK is available on both the NYSE and the NASDAQ. Now how about FBOOK? I also believe it won’t work, because now it’s a 5 letter ticker, which most people will think it’s lame, especially for a company such as Facebook (but hey, the most expensive stock in the world has a 5 character ticker symbol).

How about FB? FB is nice, and it fully represents Facebook, as most people refer to Facebook as FB, and fortunately, it’s not taken in either market! Not only that, it’s a two letter ticker symbol. I personally vouch for this one to become the official Facebook’s stock ticker symbol. The second best alternative is FCBK.

Now where would Facebook be listed? It seems to me that since LinkedIn was listed on the NYSE, then so will probably Facebook. However, it makes more sense for a technology company to be listed on the NASDAQ.

Facebook’s IPO should be upon us (very) soon and time will tell!

I was jogging with a friend of mine yesterday, and we started talking about X (United States Steel Corporation), a stock that I personally believe to be underpriced, and then I thought, how many other stocks have a ticker that consists of only one letter, and which ones are they? So I decided to create this list! Without any further delay, here are the stocks with one letter symbols:

Symbol Company Average Volume Current Price
A Agilent Technologies Inc. 3796000 48.18
B Barnes Group, Inc 546557 23.11
C Citigroup, Inc. 40442100 40.01
D Dominion Resource 2435880 47.27
E ENI S.p.A. 882817 47.02
F Ford Motor Company 65761900 14.18
G Genpact Limited 838405 15.56
K Kellogg Company C 1827110 55.49
L Loews Corporation 1296510 41.52
N NETSUITE INC 391185 37.73
O Realty Income Corporation 842555 34.12
R Ryder System, Inc. 675586 53.26
S Sprint Nextel Corporation 62783400 5.93
T AT&T Inc. 29249200 30.97
V VISA Inc. 4870470 80.70
X United States Steel Corporation 9476790 44.14
Y Alleghany Corporation 9285 328.99

Some notes on the table above:

- There are 16 one letter stocks.
- All the one letter stocks are listed on the NYSE. There is not a single one letter stock listed on the NASDAQ.
- Almost all one letter stocks have high volume, with the exception of Y. 4 one letter stocks have very high volume (over 10,000,000 stocks/day), and they are: C, F, S, T. X is also very close to having very high volume.

I wonder if it costs more for a one letter stock ticker. All of the companies above are rich enough to afford it anyway (including Alleghany Corporation). There is not a single company on the above list with a market capitalization less than $2 billion.

Buying at IPO is an almost guaranteed way to make money, especially if the company issuing the stock has a sterling reputation (many times you can make money even if the company issuing the stock is losing money!). But holding the stock for a while is a totally different story. Let’s look at some examples of recent IPOs:

GM (General Motors Company): The stock was listed back in November of 2010 (I remember I have recommended against it), it was trading at around the $34 level. It went up to almost $40 in January, only to go to just below $30 in April. The stock is now trading at $31.30. Let’s say you bought it on the first day of trading and held it until now, you would have lost 8% of your investment.

DANG (E Commerce China Dangdang Inc): As dangerous stock, DANG was listed back in December of 2010, and it started trading for around $30. In the next few days after the Initial Public Offering, the stock went up and touched $32.79. The stock experienced a January Effect, and then it was stuck in a bearish trend, where it will probably remain forever. How much is the stock trading today? Around $20. You would have lost 33% of your investment had you bought and held the stock. Not a very smart investment.

Now let’s move to the latest IPO on the market, LNKD (Linkedin Corporation): LNKD started trading (officially) at $45, but it was impossible for anyone to buy at this price. The lucky ones bought at around $80. The stock moved up substantially to over $122 in the same day, but again, the stock went down ever since, and today, just over 10 days of its IPO, the stock is trading at $77.73. If you bought at $80, you’re OK, but if you bought at $122 (thinking that the stock would go up), then you now lost 35% of your investment. Expect this stock to go down to $20 or even less, it is trading at around 2,170 P/E and, in all fairness, linkedin is not an essential website for every human being, and can easily be replaced.

See the problem with IPOs is that there is too much excitement in the first couple of days, but after that, investors become more aware about what the company really is, and those in for quick money start jumping ship. There is a rumor that IPOs are undervalued, but looking at the above, with the exception of LinkedIn (just give it some time, it will go down below $45 in the next couple of months), I think it’s fair to say that IPOs are overvalued.

Now the question is, when you should sell when you buy at IPO? I think at the first chance you have. Buying at IPO is literally a gamble, you don’t know anything about the technicals of the stock, you know little about the company, and you’re following the herd.

If you buy in the first hour of the IPO (which is impossible if you do it through your bank, as your order will probably be delayed till the middle of the day, and cannot be canceled), then you’ll make a lot of money. If you buy the next day, then it’s already too late to make a lot of money, if you buy in a week, then expect to lose a lot money.

So, what’s the next exciting IPO, well Facebook of course, now worth $85 billion!

May 26, 2011 | In: General

What Is a Short Squeeze?

I have listed yesterday the top 100 stocks with the highest short interest ratio, and in the post, I’ve briefly discussed the concept of a short squeeze, I would like to discuss it more. I will start with the definition of a short squeeze, and then I will discuss in details how it happens, I will then provide some examples, and finally I will point out which stocks are generally more vulnerable to short squeezes.

Definition

A short squeeze is a substantial spike in the price of a stock (usually 10% or more) when investors shorting the stock start covering their positions (in other words, buying back the shares they borrowed and sold immediately).

How it happens

Shorting stocks is a very risky and dangerous game. Investors shorting stocks know that they are betting against the very long term trend of the market when they short stocks (it is a proven fact that markets can only go up on the very long run). Usually, investors short a stock when they see that:

- The company consistently delivers bad news.
- The company has no future.
- The stock technicals are moving from bad to worse.
- A lot of other investors are shorting the stock (follow the herd).
- There is a general sentiment that the stock is overvalued (this applies a lot to commodity ETFs and commodity related stocks, especially those related to gold and oil).

When all of the criteria above apply to the same stock, then the stock will be heavily shorted, and the stock price will decline, attracting more investors to follow the trend and short the stock in order to make money themselves (by the way, shorting a stock will lower its price because it’s considered a sell transaction). Investors already shorting the stock will short even more shares of the same stock. Eventually, the stock will reach a point where a substantial percentage of the daily volume is short selling, and this is where the game becomes dangerous. The thing is, for everything and everyone in life, there are ups and downs, the same thing for stocks, a stock cannot continue going down forever (unless, of course, the company goes bankrupt), and it cannot go up forever. The trend of a stock can be reversed in an instant by many factors, including:

- The company suddenly reports higher than expected earnings.
- A larger company expresses interest in buying the company (maybe it’s a rumor or maybe it’s true, but who cares?).
- Insiders start buying shares from the company (a sign that they know or feel something good is going to happen to the company).
- Institutional investors, such as large investment banks, start buying shares in the company.

When any of the above happens, the stock will rise, despite the shorters’ attempts to maintain the downtrend by shorting even more stocks. At one point, automatic orders to cover losses will be triggered. Here’s how:

Let’s assume that Investor A shorted 100,000 shares of NFLX when it was at a $100 back in July of 2010, the investor assumed that NFLX cannot sustain its growth, and the stock price of a $100 is overvaluing the company. Investor A, to protect himself, created a stop loss automatic order to buy back the stock if it goes up more than $110. Investor B also shorted 100,000 of NFLX during the same period, thinking that the stock can go nowhere but down. Investor B was able to tolerate a bigger loss, so he created a stop loss automatic order to buy back the stock if it crosses the $120 mark. NFLX, probably the most dangerous stock to short, instead of going down, went up $10, and triggered the stop loss order of Investor A, who had to buy the 100,000 stock he earlier borrowed. Now, when Investor A and other similar investors had their stop loss orders triggered, they inadvertently raised the stock price again, pushing it over $120, which triggered Investor B’s stop loss order, who had to buy back the stock, thus pushing the stock price even higher. This can easily become a vicious circle for shorters, where an investor short covering will trigger the stop loss order of another investor, until the short interest ratio will be reduced to almost nothing. What makes things even worse is that regular investors start seeing some value in the stock and they start buying it, in masses! The stock can jump over 50% in one day if this situation happens.

Examples

There are many examples of short squeezes, the NFLX one above is somewhat real, but here are a couple of recent examples:

- BIOS (BioScrip Inc.): Take a look at the below chart

BIOS Short Squeeze – courtesy of Google Finance

The stock was heavily shorted before it jumped on good news, I remember that the stock jumped 60% in one day, that’s not very normal!

- GG (Goldcorp Inc.): Again, take a look at the below chart

GG Short Squeeze – courtesy of Google Finance

GG is the stock of a gold producer, so it’s directly affected by the price of gold. You can easily notice that there were short squeezes when investors thought that gold was way overpriced and so it has to fall down, and yet, because of different factors (including instabilities in the Middle East and the weak US dollar), gold jumped, thus pushing many investors to cover their positions.

Which stocks are typical candidates of short squeezes?

Small cap stocks are at a much higher risk of short squeezes than blue chip stocks, this is because…

- The volume on small cap stocks is so low that it’s easy for a small number of powerful investors to short a significant percentage of the daily average volume.
- The volatility of blue chip stocks is much lower than that of small cap stocks. When was the last time you saw BAC going up 60% or going down 70%?
- Small caps stocks are cheaper and thus easier to short.

In my opinion, a short squeeze is the market’s punishment for those trying to benefit from the misfortune of others. Everyone should understand that stock trading is not a zero sum game (people don’t have to lose money so that others make more money), and there’s enough money for everyone.

I have promised in yesterday’s post to create a list of stock with the highest short interest ratio. So here it is:

Rank Stock Symbol Short Ratio Last Trade
1 NATR 103.90 10.65
2 ISRL 95.60 61.69
3 PMBC 86.70 3.71
4 PNBC 73.20 5.10
5 RCI 70.80 38.24
6 BSTC 70.00 23.64
7 SIEB 67.80 1.8906
8 BTFG 67.20 2.43
9 UBFO 67.00 3.33
10 TOWN 62.80 12.76
11 TAYC 60.50 9.65
12 PULB 58.00 7.20
13 LWAY 57.90 9.78
14 PNBK 56.00 2.00
15 NASB 56.00 11.38
16 RBPAA 53.90 1.725
17 DGICB 53.90 18.09
18 LNET 51.80 3.13
19 BRID 51.20 8.79
20 CMLS 48.40 4.03
21 UBSI 48.40 23.38
22 BBGI 47.80 4.68
23 FFIN 46.80 51.70
24 TXI 46.30 38.00
25 NKSH 44.50 24.91
26 CALM 43.60 28.18
27 BRLI 43.50 23.47
28 CCBG 43.50 10.06
29 STBA 43.50 18.45
30 ATLO 43.30 17.18
31 PRAA 43.10 83.01
32 FNLC 43.00 13.92
33 ABCW 42.80 0.75
34 CHUX 42.10 7.07
35 TCBK 41.70 14.26
36 SCHS 41.00 13.63
37 AAON 40.70 31.67
38 PERF 40.50 13.80
39 AMWD 39.40 19.50
40 CHCO 39.20 31.51
41 LBAI 38.80 9.91
42 JOE 38.70 21.94
43 HEI 38.70 49.77
44 MEG 38.60 4.49
45 CFNB 38.20 14.61
46 WBCO 37.80 13.14
47 KNSY 37.40 24.41
48 CIA 37.40 6.53
49 AMNB 37.20 19.84
50 CRWN 36.70 1.91
51 FBP 36.20 4.56
52 CVGW 36.00 19.43
53 TR 36.00 28.49
54 ALNC 35.50 28.23
55 CNBKA 35.10 23.93
56 OZRK 35.00 47.03
57 RMTI 34.80 13.975
58 INDB 34.40 29.01
59 OSBC 34.30 1.0199
60 MBTF 33.80 1.5885
61 COBZ 33.80 6.5195
62 AM 33.50 22.71
63 WPO 33.30 411.77
64 BSRR 33.10 10.82
65 CDZI 33.00 10.51
66 NWK 32.90 2.72
67 MCBC 32.30 2.54
68 RBA 32.20 26.77
69 ECHO 32.20 14.30
70 CCNE 31.80 12.93
71 BCRX 31.80 3.21
72 PETS 31.60 12.77
73 AACC 31.20 4.00
74 OUTD 31.20 5.66
75 TRST 31.10 5.51
76 VIVO 31.00 22.65
77 LTRE 30.70 9.25
78 CM 30.40 85.82
79 SCL 30.40 64.11
80 BELFA 29.90 21.14
81 BKH 29.80 30.17
82 WMK 29.20 39.97
83 LANC 29.00 60.10
84 IBOC 29.00 16.05
85 QDEL 28.90 14.95
86 MOG-B 28.80 40.01
87 CTHR 28.80 2.74
88 BMO 28.50 63.04
89 PMFG 28.40 18.00
90 RSYS 28.30 8.20
91 ZOLT 28.30 10.25
92 PWOD 28.20 34.29
93 BWINB 28.10 21.58
94 FMD 27.80 1.77
95 DYII 27.50 1.95
96 HHGP 27.50 4.58
97 VALU 27.30 13.71
98 HUSA 27.20 17.05
99 LION 27.10 7.14
100 TYL 27.00 24.09

Now that I’ve listed the stocks, what exactly does “short interest ratio” mean? In short, short interest ratio means the percentage of shares sold short with respect to the daily average volume. So technically, all the above stocks should be avoided like the plague, because a lot of investors are betting against them.

Now, the question, should one short a stock with a very short ratio (such as NATR), a logical answer would be yes, because everyone else thinks and acts as if it’ll go down forever. But shorting a stock with a very high short interest ratio can be a very dangerous game. Let me tell you how…

Let’s say you shorted a 1,000 shares of NATR yesterday just before the market close. You would have made so far today $300, because the stock went down 30 cents. Now let’s say, around 11:30 AM, one of the following happens:

- An institutional investor looked at the stock and liked it, so he bought one 100,000 shares, or about 4 times the daily average volume.
- The owner of Nature’s Sunshine Products decides to take the company private, and so he buys back all the stock.
- A rumor spreads that Nature’s Sunshine Products will be bought by a very large company

When any of the above happens, then the stock will jump, at least 20%. Now what will happen to all the investors shorting the stock? Usually, when someone shorts a stock, he adds a stop loss automatic order for contingency, so when the stock goes up more than a certain amount, he exits his short position automatically by buying back the stock (see an introduction to shorting stocks). A this point, an avalanche will start forming: an investor will buy back the stock (which he borrowed and sold immediately), and then the stock will go up beyond the stop loss limit of another investor, who will again buy back the stock, pushing the stock price even higher, and so forth… This avalanche is called a short squeeze. Of course, day traders will notice the trend, and will start buying the stock to make money, and the stock will go even higher. When the market closes the stock will probably be trading nearly a 100% higher (which means that you will lose $10,000 for covering your position for these 1,000 stocks that you shorted). Shorting is a very dangerous game!

I think a correct use of the list above is to see which one of the stocks is worth buying long, and not which one is worth shorting… Never short a overly shorted stock!

Before writing this post, I would like to stress the point that a good company does not necessarily mean that its stock is good, but a good stock is definitely the sign of a good company (PS: I don’t think NFLX is a good stock).

Now what are the characteristics of good stocks that make these stocks attractive to traders? There are many, namely:

Low P/E Ratio: A low P/E ratio not only mean that the company is actually making money, but it also means that the stock is relatively undervalued. Now the question is, what is the ideal P/E ratio at which a stock should trade? The answer depends on the industry. In the Banking industry, a P/E of 15 is the norm, in the Technology industry, a P/E of 20 is good, in the Oil drilling industry, a P/E of around 15 is standard, in the Pharmaceuticals industry, a P/E of 30 is still considered to be attractive. (Quick definition: P/E is the Price/Earnings ratio, a P/E of 10 means that at the current profits, it will take a company 10 years to buy back all its stocks and become private).

Low Short Ratio: A low short ratio means that investors are not betting against the stock, which means that they believe that there is little chance for the stock to go down. I will create a list (hopefully tomorrow) including the stocks with the lowest and the highest short ratios.

High Volume: Of course, high volume can be a good thing and a bad thing, but if the stock is generally bullish (bullish technical indicators) and you have a high volume, then this means that the stock is definitely worth a look. High volume usually means that institutional investors are trading this stock.

High company liquidity: Look at Apple, they’re sitting on (literally) hundreds of tons of cash. Before discussing this point further, I would like to explain how they are literally sitting on hundreds of tons of cash. Since any US$ bill weighs about 1 gram, then a million dollars, in $100 bills, will weigh 10 kilograms. Which means that a billion dollars will weigh 10 tons, and since Apple is sitting on around $41 billion on cash and short investments, then they are literally sitting on 410 tons of cash (or around 820 tons of gold, at today’s price). Now let’s go back to discussing the point, a high company liquidity means that the company is saving money for rainy days, and it’s here to stay. It also means that the company is conservative in its spending (why would you leave uninvested cash when you can nearly double the amount if smartly invested). High company liquidity is a very healthy factor.

Relatively low goodwill value: Goodwill is what a company thinks its brand is worth in the market. Apple’s goodwill value is $741 million, that’s 0.2% of its total market capitalization, and we know that Apple is one of the most respected brands in the world. BioScrip’s goodwill value is $324 million, that’s 85% of its total market capitalization. Hmmm…

Great technical data: There are many technical data that makes a stock “good” especially the MACD, the RSI, and the Fibonacci. Always pay attention to the technicals.

Good sector: A stock’s good characteristics fade when the stock is considered to be in a bad sector (for example, take a look at bank stocks in the second half of 2010, actually take a look at them now). It is important to correctly to assess the stock’s sector before buying it. Good sectors right now include Commodities and Technology.

Good news, most of the time: The stock’s company should be issuing good news, if not all the time, then at least most of the time. If the bad news surpass the good news, then stay way of the stock, even if it meets all the other characteristics. Markets are moody, and the sentence “Buy the rumor, sell the truth” always prevails.

When a stock meets all the above criteria, then it is considered a good stock, and buying it is highly recommended. I will try to create a list of the top 100 good stocks in the next few days (it’ll be complicated, but definitely worth it).