Value Investing Basics Part II

12/05/08 Categories: Investing Tips/ Commentary

After reading Value Investing Part I, you now know the basics of what you need to know to invest in stocks that are value picks. The next part of this process gets into more of the details of value investing.

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!

Value Investing Basics for Beginners Part I

11/04/08 Categories: Investing Tips/ Commentary

First off, what is the definition of value investing? Value investing is an investment strategy or approach where the investor buys a stock that is selling below the company's true value, or underpriced. Value investors buy discounted stocks with the belief that the price will reflect the company's true value in the future. Value investing goes against the herd that chases the hottest, fastest rising stocks of the moment for a longer-term ride of returns.

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.

Why Buy Stocks Cheap Like Warren Buffett in this Bear Market?

10/05/08 Categories: Investing Tips/ Commentary

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.

warren buffett, buffett buys Goldman Sachs, Buffet buys GE
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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