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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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To find companies that online investors categorize as income stocks, see Reuters Ideas & ScreeningBuy If the Stock Is at Its Lowest Price Buy low is easier said than done. Excellent investment candidates are stocks that are selling at their lowest price in three to five years (assuming that the companys financial position hasnt deteriorated). Wait for the price to stop declining and the company to show some strength, however, before you put your money down. You must condition yourself to work against the crowd. For free, delayed quotes and online company reports, see Reuters at www.reuters.com. At the home page, click Investing and then click the appropriate link in the left margin for the data you seek. Invest in Companies with Beautiful Balance Sheets Carefully analyze a firms financial statements before investing. The only way to determine a companys true financial situation and to evaluate the potential risk of investing in the firm is to do your homework and look behind the numbers: The statement of cash flows: Does the company generate more cash than necessary to sustain the business? Does it look like this situation will not change for several years? If so, you may have found a winner. A change of auditors: Some firms use aggressive accounting standards that may require them to restate their earnings. If a firm has to restate earnings, the value of the stock usually decreases. The financial statement: If you dont understand the financial reports, dont buy the stock. To find the latest financial news on publicly traded companies, see the following: The Wall Street Journal (www.wsj.com): An annual subscription costs $79 for the online edition, with two weeks free. CNN/Money (money.cnn.com): Gives free information. CBS MarketWatch (cbs.marketwatch.com): This site requires your free registration for more in-depth content. Investors Business Daily (www.investors.com): This site requires your free registration for most of its content. Check Out the Earnings Forecast People use earnings forecasts in fundamental analyses to determine the fair value of a stock. If this fair value is less than the stocks current price, the stock is overpriced. If the fair value is more than the current price, the stock might be underpriced and therefore a bargain. Financial software developers and most brokerages have analysts that develop earnings forecast for companies. Prices for these reports vary from free to several hundred dollars. The Internet provides many sources for earnings forecast reports: 123Jump (Investing Newsletters) (www.123jump.com/letters/ letters.htm) provides free earnings upgrade and downgrade information in addition to other related information. MSN Money (news.moneycentral.msn.com/category/topics.asp? iSub=1&Topic=TOPIC_EARNINGS_FORECASTS) provides earnings reports, earnings forecasts, and earnings surprises of publicly traded companies. Stock Wiz Links (www.i-soft.com) provides a links page for company information. Just enter the ticker symbol of the company youre researching, and you have your choice of hyperlinks to quotes, news, broker recommendations, research analysts earnings estimates (and actuals), company profiles and fundamentals, SEC filings, and intraday charts. Watch for Stocks That Are Trading under Book Value Book value is the companys net asset value that is, assets minus liabilities divided by the number of outstanding shares. This amount appears in the companys annual report. See the Reuters (investor.reuters.com) and use its high-powered stock screen to find companies that are trading below book value. Then go to the Securities and Exchange Commission (www.sec.gov) and read the annual reports of likely investment candidates. Companies that sell below book value (if they dont have serious problems) are often bargains. Look for Strong Dividend Pay-Out Records Income stocks tend to hold their value in volatile markets because investors are confident that theyre going to continue to receive sizable dividends. To find companies that investors categorize as income stocks, see Reuters Ideas & Screening at www.investor.reuters.com/ReadHTML.aspx? target=about&html=IncomeStocks. Reuters has developed a screen for income stocks. The screen seeks yield and companies that have realistic expectations of how much they can grow, how much capital they can productively reinvest into the company, and how much they can pay out to shareholders. Scroll down to the bottom and click the Daily Results of This Screen link to see the daily results. The 50 income stock candidates can be downloaded to your Excel application program for further research, or you can use the results for additional sorts using Reuters Power Screener. Seek Out Firms with Low Debt Ratios Usually, the lower the debt ratio, the safer the company. Compare the company youre researching to similar firms. Get an industry report from BigCharts (bigcharts.marketwatch.com/industry/bigcharts-com) and discover the average debt ratio for the industry. Compare this average to the debt ratio of the firm youre researching. To discover which firms have low debt ratios, use the online stock screens at MSN Money (moneycentral. msn.com/investor/research/welcome.asp). Use the Basic or Deluxe stock screeners to find companies with low debt equity ratios. Remember that companies that have paid down their debt over the last two or three years may be up-and-comers and well worth your serious consideration. Invest in Industry Leaders If you investigate a company in a specific industry, determine which companies are growing the fastest in that industry and which ones are the industry leaders. By focusing on just these two elements, youre likely to reduce the number of investment candidates for your consideration in this industry by 80 percent. You also discover that Many companies in the industry have no growth or display lackluster growth. Older companies have slower growth rates than do younger companies. Remember that investing in industry laggards seldom pays, even if theyre amazingly cheap. Look for the market leader and make certain that you have a good reason to invest in the industry in the first place. Additionally, be aware that all industries have cycles of growth; you want to invest in an industry thats in an upswing. For industry surveys and reports, see Value Line Investment Surveys (www.valueline.com). Buy Good Performers Try to buy for value and not for price. Select companies that regularly outperformed their competition in the last three to five years and that have consistent rather than flashy returns. Also consider the following guidelines: Check the companys stability and examine its five-year earnings record. Keep in mind that an annual percentage increase is desirable, but so is stability and consistency over the past five years earnings. You may want to consider not including a companys one-time extraordinary gains in your calculations. Determine whether the companys annual growth rate is between 25 percent and 50 percent for the last four or five years. If so, it may be a winner. Dont try to chase after last years high performer; it could be this years loser. Double-check what you want. For company reports, see CAROL (www.carolworld.com), which provides Company Annual Reports On-Line from companies in the United States, Asia, and Europe. Your free registration is required. Select Your P/E Ratio Strategy Any analysis of investment candidates includes P/E (price/earnings) ratios. The importance of these ratios varies from analyst to analyst. The following sections describe two strategies that are worthwhile to consider. Select the one that works best for you. (See Chapters 8 and 9 for additional information about P/E ratios.) Low P/E and high dividend approach Long-term investors often employ the 7 and 7 approach that is, they purchase stock in companies with a P/E ratio of 7 or less and a dividend yield greater than 7. Additionally, if the companys P/E ratio is lower than 10, and the earnings are rising, you may have found a winner. Make certain by investigating the security, however, that no major long-term problems exist that can drive the P/E to 4 or lower. (See Chapters 8 and 9 for details.) High P/E ratios are worth the price You often get what you pay for; consider the following example: From 1953 to 1985, the average P/E ratio for the best-performing emerging stocks was 20. The Dow Jones Industrials P/E at the same time averaged 15. If you werent willing to pay for the stocks that were trading over the average, you eliminated most of the best investments available. In other words, sometimes it doesnt pay to be frugal. Investors who bit the bullet and bought the bestperforming emerging stocks were overwhelmingly rewarded for it in the next several years for their timely purchases. For more information about how to use P/E ratios in your stock buying analyses, visit the Investorguide Web site (www.investorguide.com/igustockchoose.html). |
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