Selecting Stocks Personal Finance

How hard is it to pick a stock? “ Everyone has the brain power to follow the stock market. If you made it through fifth-grade math, you can do it.” -Peter Lynch Fidelity Investments

How can stocks earn money? Stocks are ownership stakes in corporations that can earn money in two ways: Dividends – periodic payout of corporate profits Dividend yield = dividend per share/current stock price Capital Gains – the profit realized when a share of stock is sold for more than the purchase price

The goal of stock ownership Buy low and sell high Is that really all there is to it?

What moves the market? In the short run: Enthusiasm, fear, rumors and news In the long term: Earnings, general economic trends and the business cycle Remember – individual stocks are not the market, they will behave differently

Things not worth considering Past performance Just because a stock has been appreciating doesn’t mean it will continue to do so Price alone A $100 stock may be a better bargain than a $25 dollar stock

How to evaluate a stock No system is perfect, otherwise there would be no risk Investors compare stock prices to other factors to assess value The goal is to purchase an undervalued stock based on your assessment criteria

Things to consider - Size Size refers to market capitalization (number of shares * current share price) What the company is worth today Large cap companies are considered stable, but with lower growth potential Small cap companies are considered riskier Mid cap stocks are somewhere in between

Things to consider - Style Growth companies are expanding at an above – average rate Cannot be sustained Value stocks are currently underperforming, but might be poised for improvement Cyclical companies make something that isn’t in constant demand throught the business cycle

Things to consider - Sector Sectors represent industry groupings Finance, health care, technology, energy, etc. Exposure to industry risk

Things to consider – P/E ratio Price/earnings ratio is the most frequently used valuation tool P/E = current market capitalization/earnings There is debate about what earnings to consider (previous, current or future?) What is a good P/E ratio? Compare with competitors But how do you compare different companies in different sectors

Things to consider – PEG ratio PEG ratio is P/E ratio divided by the long term growth rate A company with a PEG ratio close to 1.0 is trading in line with its growth rate A smaller PEG can indicate an undervalued stock

Things to consider – Other ratios The price/sales ratio: current stock price/total sales per share for the past 12 months How much am I paying for revenue? Price/book value ratio: current stock price/(total assets – total liabilities) “bird in the hand”, conservative valuation

Advice from “an expert” – Michael Sivy The core of your portfolio should consist of financially strong companies with above average earnings growth High growth stocks tend to be overvalued To calculate earnings growth add dividend yield to projected growth This should exceed 10%

Where to find the information Company earnings reports (10Qs and 10Ks) Analyst reports Many can be accessed for free online Ask a full service broker

Diversify and invest for the long term Buying stocks in several companies and across several industries will lower risk and smooth returns If you CHURN your portfolio, you will BURN cash in trading fees and someone else will EARN your invested money

In the end …….. Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful". Warren Buffett