Value Investing Basics Part II
Historical research shows that stocks with low P/Es have performed better over time than high P/E stocks. The P/E ratio is the multiple of earnings per share (EPS) that the stock price currently is (Ex: Stock A has EPS of $3, and P/E of 10x; the stock price= $30). However, to find really solid stocks there are lot more aspects to look at than simple P/Es, because the P/E ratio doesn't paint the whole picture of the company.
After you have read Part I - Value Investing Basics for Beginners, you should know what type of companies to look for. You now need to follow these guidelines for making sound value investments. You can input these requirements into stock screeners to find undervalued stocks. Most of these ratios are readily available in Yahoo! Finance information for companies.
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Value Investing Guidelines
Screen:
1.
PEG Ratio less than 1.
2. Net profit margin more than 15%.
3. Return on Equity more than 15%.
4. Return on Assets more than 10%.
5. Earnings growth of 10% or more over the past 5 years.
6. Growing Cash Flow from Operating Activities.
7. Low Debt relative to Gross Profit- Total Debt should not exceed
3 or 4 times Gross Profit.
Although these are not hard, fast rules, these are guidelines that
will sift out great companies from the not-so-great companies. If
the stock has a low PE with all of these requirements, it is an
attractive stock.
These requirements make the PEG Ratio important. The PEG ratio
equals the PE ratio divided by the expected EPS growth rate for the
next 5 years (Ex: a stock has PE of 9 and a five year EPS growth
rate of 15%; so 9/15= .6 PEG ratio). Many value investors buy
stocks from just the PEG ratio. Although it adds an important
element of profitable growth to the PE number, you still have to
look at factors other than the PEG.
Now you understand the fundamentals of how to Value Invest. This
list and Part I allow you to find sound value investments. There
are more details that some investors use, which I will post later
about. Happy Investing!
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Value Investing Basics for Beginners Part I
The most famous value investor in the world is Warren Buffett, who has generated over 20% average annual returns since the 1970's. He has prided himself on finding "good deals" on good businesses. This stock investing strategy was mostly created by one of Buffett's teachers, Benjamin Graham. He wrote a book on value investing called The Intelligent Investor. This 600+ page book, much like a textbook, gets into the nitty gritty details of his investing strategy and how he came up with it.
Basics of Value Investing
1. Find a Great Company- Whether it's a company you buy products from, buys products from you, employs you, or if you just love the company, check it out. Also, if it's in an industry that you know very well than you should look into it. You want to love the company you are going to own. It has to be GREAT, not just good or okay.
2. Proven Business- How long has this company been around? It's hard to value a company when it has only been in business for a year. Usually a company that has been successfully in business for 10 or 15+ years makes a good candidate. The companies must be proven, successful businesses to be considered for investment.
3. Survivability- Ask yourself, "Will this company be around in 10, 20, 30 years?" If you cannot see the company being around in ten years, you have no business investing in their stocks; after all, you are buying a piece of that company. Say you and three of your friends want to buy a new $1200 HD-TV. Would you want to pay $400 for your stake if you thought the TV was going to die in two years? I hope not.
4. Uniqueness- What is unique about this company? Do they have some kind of competitive advantage? Are they better at some aspect of the business versus the industry? Are they the first in a market? Do they have any special patents, copyrights, or trademarks? These are the kinds of questions to answer when finding out about a company.
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Reading:
This article should give you something to work on for a little
bit. Stock investing can be confusing and difficult. Just slow down
and think of some really great companies that you'd be willing to
OWN not just hold the stocks of. Remember, value investing is all
about finding good, solid companies that are priced below their
true value.
Stay tuned for Part II because
I will be posting more on Value Investing Basics. Congratulations!
You now know the groundwork that value investing in stocks is all
about. Making you a better, more informed investor is my
goal.
Why Buy Stocks Cheap Like Warren Buffett in this Bear Market?
While you may be worried about what to do with your investments in this recessionary stock market, you have to open your eyes to the opportunities out there.
Courtesy of About.com
Warren
Buffett has noted that this is a time for great opportunities, and
he made a statement to the world about it when he bought $5 billion
worth of Goldman Sachs
(GS) common stock and $3 billion worth of
General Electric
(GE) preferred stock. He also made a $4.7 billion
investment in Constellation Energy Group
(CEG) a few weeks prior to the GE and Goldman deals.
It's no question that this man, along with his Berkshire Hathaway
company, has enviable investing
talent. He has produced a 22% compounded return over the past 40
years! Not even the savviest investors on Wall Street can keep up
with that kind of return.
Stocks on the whole have taken a beating; some deserved it because
they were over-leveraged and run into the ground, but most stocks
that have suffered precipitous losses have been oversold. Investing
in stocks can be very tricky, but if you understand that stocks can
be undervalued because of fear and panic, then you can take
advantage of those prices.
Strong companies that you can see doing well for years to come have
been underpriced in this market; it is your job to find the best
undervalued stocks and let them take you on a profitable ride for
the years to come. One thing stock investors have a hard time doing
is being patient. With value investing in stocks, you have to be
patient because other investors in the stock market may not realize
the real value of a stock until next month, next year, or five
years from now. Do like Buffett does; wait and let it
appreciate.
The Dow Jones Industrial
Average is down over 26% for the past year
(trailing 12 months) and the S&P 500 is down around 29%!
With stocks down this low and this
widely spread. You could actually make big investing gains over the
next several years by simply investing in an index fund or ETF of
the S&P 500 or Dow. Right now you can't go wrong; the market
will get better over time and things will look up again. Why not
get a piece of the market while it's still down?
Stock investing advice is all over the place and when it comes down to
it, you are the one that ultimately has to make the decision. It is
good to get different viewpoints, but make your own strategy. Trade
stocks your own way; that is how you will make money investing in
stocks.
If you are interested in learning more about value investing, I
will be posting about value investing methods soon. Also, stay
tuned for value stock picks. I will find you some great bargains
out there to make you money...
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