I have been daytrading Bank of America (BAC) with great success lately. I believe in purchasing ONLY stocks that are fundamentally sound, and this is my screen that I developed some time ago:

I analyze the company’s books and fundamentals, from a potential buyer’s perspective. I won’t get into everything I examine, but I did develop what I called “The ______ Screen” (based on an old screen name of mine) back in the late 90s, for fundamental stock analysis.

A few of the things I look at are:

P/E – price to earnings ratio – I like for this to be under 20, even better if under 10, but really the number is not so much the issue as how the P/E for this stock compares to other stocks in its same sector or league.

For example, the P/E of TGT is currently 9.84. Sounds good, no? But wait – the P/E of JC Penney (JCP), another company in the same class of stocks, is 4.54 As Leonardo DiCaprio would say in “Catch Me If You Can” – “Even better!”

EPS – earnings per share. As a general rule, I won’t touch companies with a negative EPS. Unless I am going in there to buy the whole company for a song and turn it around, or unless I expect the stock to turn around quickly for some reason, this means the company is losing money. Over time, a stock that maintains a negative EPS will go down. Period. Even the high flying internet stock days of the late 90s proved this – you cannot reinvent the wheel. Get profitable, or go down.

So – back to TGT. EPS is 3.35 NICE! Any EPS over 2 is decent. But wait, JCP is 4.16 Even better!

Next I look at the BETA. This is the volatility of the stock. TGT is 0.84, JCP 1.19 In general some prefer a beta of under 1 for a stock that is a long term hold, but a fabulous stock can have a very high beta if it is on the move UP (for example AAPL, which has a current beta of 2.62, but a nice (for its class) P/E of 17.98 and outstanding EPS of 5.36, is a good stock in my opinion).

Next I look right into the balance sheet of the company. I look at three areas in particular: CASH, INVENTORY, RECEIVABLES. I also take a peek into LIABILITIES.

For Target
TGT: Balance Sheet for TARGET CP – Yahoo! Finance
I want to see CASH going up over time (Oops! TGT did a flip flop, 2006: 1.7M, 2007: $813K, 2008: $2.45M). That is a minor red flag.

What about inventory to receivables ratio?
Well in 2006: inventory/receivables was 1.03, 2007: 1.01, 2008: .74 This are is a little complicated. In general, you don’t want ratios too much under 1, because this means that the company is getting owed more money related to its inventory than it is getting paid. Could turn into a situation where there it gets stiffed. On the other hand you don’t want a situation where the ratio is too much over 1 either, because that means lots of inventory and not so much receivables.

I also look at current liabilities. Obviously in order for the company to be profitable, current assets must exceed current liabilities, but also I don’t want to see too many debts accumulated versus current income, either in the current liabilities or long term debt columns.

Finally look at the bottom line: are the net tangible assets (or stockholder’s equity) increasing over time? They should be!

For JC Penney:
Balance sheet is not as strong in some respects. Cash is down to about nothing for 2008. Danger! Will Robinson, Danger! Inventory is seven to eight times net receivables (goods are piling up!). On the other hand, JCP’s current liabilities are fully half of its current assets (that is good), versus about 3/4 in TGT.

I analyze some other areas too. But what is the bottom line? Well based on P/E and EPS JCP is the clear winner versus TGT. But there are some red flags in JCP’s balance sheet, which might make TGT a better choice.

The last area of analysis I use is charting. I look at the recent and long term charts of the stock to determine whether this might be a good entry point. Yes, I know many experts (Warren Buffet) included believe that market timing is worthless, but these days especially, it is not a bad idea to try and buy (or accumulate) shares on some sort of dip, or to ride out a downward trend without buying more.

SO – I look at the 1 month, 3 month, 6 month, 1 year and 5 year charts.

For TGT, 1 month is pretty much straight down, not much help there. 3 month, also at a historical low, not so helpful. Same with 6 month. One year, way down! Five year, at a new low…ten year, well the stock always rounded off of 26, so I suppose there is major support in that area. But the stock is at 32.94 right now, so is this a strong support level? Not really clear – we are testing new waters with this one.

JCP – the lowest we have EVER seen this guy is around 8 years ago, but there seems to be quite a bit of support for the stock between 10 – 20.

And if you’re thinking, Wow! we have to look back ten years to figure out whether this stock might go lower, then yes! we really are in a serious financial crisis situation and there is no telling where stocks might go in the short term.

But, in the long term, come hell or high water blue chips have risen about 11% per year, which is outstanding. Short of putting the cash into some kind of business or development project, and lately even those are far from sure things, the stock market provides the average investor the best return out there for his cash.