As noted in Part 1 of this two-part article, successful online stock investing is about picking the best stocks to buy. Some professional investors and traders use the fundamental analysis of stocks, other rely on technical analysis of the financial markets.

The fundamental analysis of stocks is based on criteria like Relative price strength, Cash Flow, Financial leverage ratio, Consencus-earnings-forecast.

Whether you are looking for best penny stocks to buy or any other hot stocks to trade, you will find very useful the following 5 out 10 most important fundamental factors shared by the top performing stocks before they made huge stock market profits in short term.

1. Relative Price Strength - RPS

Definition:
Relative price strength( RPS) is the ratio of the price performance of a stock by the price performance of an appropriate index for the same time period.
What it measures:
How stocks have performed compared to the overall market over a particular period.
Recommended value:
Relative price strength(RPS) with a value of at least 70.
Interpretation:
Stocks with relative strength above 70 tend to continue to outperform other stocks.
Observation:
Avoid stocks with 12 month relative strength below 50 or stocks which three-month relative price strength drops 20% from its 12-month relative strength.

2. Cash Flow

Definition:
Amount of money that move into or out of, a company’s bank accounts during the reporting period.
What it measures:
How viable is the company in short-term? What is its ability to pay bills.
Recommended value:
Any positive number is OK, but it’s best if the operating cash flow (i.e.: cash flow attributable to the company’s main business) exceeds the net income for the same period.
Interpretation:
Stock of companies with more cash flow has greater chance to rise more.
Observation:
Stock's price of companies with little cash to support their operations is likely to stagnate or fall.

3. Financial Leverage Ratio - F/L Ratio

Definition:
Financial leverage ratio = total assets divided by shareholders equity.
What it measures:
Level of Company’s debt. Is the company submerged in debt?
Recommended value:
F/L of one means no debt. F/L less than five( 5).
Interpretation:
The higher the F/L ratio, the more the debt.
Observation:
Avoid companies with leverage ratios above 5 which the average of S&P500 index. P.S: Banks and other financial organizations always carry high debt compared to firms in other industry.

4. Consensus Earnings Forecast - CEF

Definition:
Consensus earnings forecast is the average of analysts’ forecasts.
What it measures:
Consensus about the earnings estimated by analysts.
Recommended value:
Avoid stocks where the latest fiscal-year estimates are more than two cents below the 90-days-ago figures.
Interpretation:
The higher the F/L ratio, the more the debt.
Observation:
CEF changes move stock prices. So negative forecast trend warns of future forecast reduction, which will likely pressure the share price.

5. Institutional Ownership

Definition:
Institutional ownership is the percentage of share held by mutual funds, pension plans, banks, and other big holders. Institutional ownership for in-favor of the best stocks to buy is usually between 30% to 60% of shares outstanding, and rarely below 30%.
What it measures:
How many shares are owned by institutions.
Recommended value:
Choose stocks with more than 30% institutional ownership.
Interpretation:
A stock with small % held by institutions is out of favor with investment professionals. That means they don't see the potential of profit. Do not try to outguess the investment experts.
Observation:
Avoid stocks with less than 30% institutional ownership.

These fundamentals indicators should be used in addition to the five other metrics mentioned in the article How to pick the best stocks to invest in.

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