Transcript Selecting Stocks - Mentor High School

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