Basics on how to pick a stock

Partly based on the following article: Best Practices for New Investors:

 

Basic thigs to check in a stock:

  • P/E Ratio (Price/Earnings Ratio): Low is better than high. Benchmark is around 20 (Price to Earnings Ratio) P/E Ratio = MarketValuePerShare/EarningsPerShare & EPS = CompanyProfitPerYear/NumberOfShares. Therfore
    •                          StockPrice                    CompanyProfitPerYear
    • P/E Ratio = --------------------; EPS = --------------------------------------
    •                                EPS                              NumberOfShares
  • PEG Ratio (Price/Earnings-to-Growth Ratio): Determines a stock's value while also factoring in the company's expecte earnings growth providing a more complete picture than the P/E ratio.
    •                          P/E Ratio
    • PEG Ratio = -------------------
    •                          EPS Growth
    • E.g. PEG > 1 is overvalued; PEG < 1 is undervalued. e.g. PEG < 1 hast a lot of potention for growth
    • EarningsGrowthRate = (EPS this year/EPS last year -1)*100. e.g. -> ($2.09/$1.74 - 1)*100 = 20%
    • If P/E Ration = 22, then PEG Ratio = 22/20 = 1.1
  • If possible: Cash in its balance sheet; Income statement; Favorable net debt; Improving net margints
  • Tenbagger: Investment that appreciates to 10 times its initial purchase price.
  • Blue chip: Nationally recognized, well-established and financially sound company. Operate profitably in the face of adverse economic conditions.
  • Three types of goals:
    • Income-Oriented: Focus on low-growth firms in indusutries and sectors such as the utilities.
    • Capital perservation: Low-Risk tolerance, focus on stable blue-chip corporations.
    • Capital appreciation: Rise in the value of an asset based on a rise in market price.
  • Diversification
  • Keep your eyes open for emerging markets and new acquisitions etc.
  • Finding Companies:
  • Beta: A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks are supposed to be riskier but provide a potential for higher returns; low-beta stocks pose less risk but also lower returns.