StockTrak Stock Market Game - How To Evaluate Stocks

Get all the buzz these days, but my own ideal company is in a mind-numbingly simple business that churns out more cash for its investors year after year. Such stocks are boring, but they are profitable-often very profitable. One attractive feature of these stocks is that you can understand them. Warren Buffett advises: "invest within your circle of competence." Boring stocks (and mundane mutual funds) should not make your entire portfolio, but they are a wonderful place to begin. Start simple. Diversify! If you hold a well-diversified investment mix, trading less is probably a smart move. But if you have more than a third of your stock portfolio in any industry sector or more than 10% in any one stock, you need to diversify. That's always the mantra to deal with stock market turmoil. Do remember that investors have gotten a harsh lesson about risk in the stock market over the past couple of years because they did not diversify.

RESOLVE not to blindly trust corporate earnings.

As we've seen -- a hundred-times over -- earnings can be, and are, manipulated every-which-way to show stellar performance.

Usually quite legally -- that's how arcane accounting laws are. But luckily, it only takes five minutes to do your own initial assessment of a company's health. The key? FREE CASH FLOW from operations and the growth in that number.

How can you beat the Experts? Hint: the answer is in the index

Celebrated Investor Warren Buffett wrote a few years ago that even a "know-nothing investor can actually outperform most investment professionals." This improbable feat, he explained, could be accomplished by investing in an index fund.

Note: Remember to take profits on a regular basis, to be patient and to swallow your pride and take losses when the market turns against your investments. You should have the discipline to limit what you are willing to lose. If you do not have a plan in place before the unthinkable occurs, you will be unable to act when it happens. Some tech-stock junkies took profits in a very disciplined fashion as the tech-stocks went up, never letting a stock double in price without selling half of their holdings. Their mistake: They often plowed the proceeds back into the tech sector. It turned out the biggest risk was sector risk.

How to evaluate Stocks

• Growth investing (relative price strength) vs value investing (price to sales, div. yld)
• Fundamental analysis vs technical analysis

Some fundamental stock measurements

Cashflow per share

Current Ratio

Dividend yield

EPS

Net Profit Margin

Price to Book ratio

P/E or multiple

Price to Sales ratio

Quick Ratio

Return on Equity

Some Technical Stock Measurements

Beta, relative price strength, volume

How to Read Stock Pages

3 Stock Classifications you should know:

1. Company size
2. Industry Classification
3. Growth or Value
   1. How you make money owning stocks?
      1. Through Capital Appreciation
         1. Through Dividends
         2. Total Return
   2. Why Stocks are good investments?
      1. Stocks have been the best investments over time
         1. Stocks allow you to own successful companies.
      2. Publications - magazines, newspapers, Newsletters, Value Line
         1. Companies themselves - Annual reports, Balance sheet, Income statement, 10-K, 10-Q
         2. Stock databases
         3. WWW - search tools - altavista, excite, lycos, webcrawler, yahoo
         4. Investment organizations
         5. American association of Individual investors
            1. Investors Alliance
            2. National Association of Investors Corpn.
      3. GATHER WORKSHEET CRITERIA
      4. Co. Basics- Co. name, Symbol, Exchange traded, phone, current stock price, 52 wk high/low, market capitalization, daily $ volume
         1. Co. health - Net Profit margin, Cash, Total Debt,
         2. Stock Health - sales per share, cashflow per share, eps, dividend yield, roe, insider buys/ownership, stock buy-back
         3. Past performance - eps rank, relative price strength rank, 5-year sales and earnings gain, 5-year price appreciation
         4. Projected performance - sales, and earnings, projected stock high/low
         5. Rankings - Value line timeliness/safety, S&P stars / fair value
         6. Stock ratios - current p/e, average price to earnings (over 5-yr), price to sales, price to book, current ratio, quick ratio
         7. Compare competitors
         8. Growth or value
         9. Company strengths
         10. Company challenges
         11. Why to buy?
         12. Why to sell?
   3. S&P Stars System. Stars stand for stock appreciation, stars classify stocks from 1 to 5, with 5 being the best.
      1. S&P's fair value: ranks from 1 to 5, 5 being the best (most undervalued). Look for S&P rankings 4 or 5.
      2. Total # of shares outstanding (value line, S&P stock guide) * current stock price = Market capitalization
      3. Daily $ volume = stock's average daily trading volume * share price
      4. Sales (value line): careful about sales figure. Some are quarterly sales and some are annual figures. Use annual figures.
      5. Net profit margin - income stt.
      6. Cash and debt - balance sheet. debt rating downgrades.
      7. sales per share - value line
      8. 5-year sales and earnings gain - Look for those that have grown an average of 10% per year over past 5 years. For small companies require 15%.
      9. Projected Sales and earnings: Large co.s should be expected to grow at least 10% per year, medium co.s 15%, small atleast 20%
      10. eps value line, cashflow per share and dividend yield (value line). For growth companies look for only those that have increased eps, sales per share, cf per share in each of the past 5 years and are projected to increase them again this year and next year.
      11. Projected Stock high/low: bigger is better for both high and low.
      12. Dividend yield: Want to buy large co.s with high dividend yields. Ignore dividend yield for small co.s. Relative Dividend yield (RDY) is used. Dividend yield of Co./(div. yld of S&P 500). Screen stocks for relative div. yld and then do fundamental research. Div. yld of S&P 500 in Feb. 98 is 1.6%.
      13. ROE - compustat. 20% is good. Bigger, better.
      14. insiderbuys/ownership - value line lists insider decisions to buy and sell for each month over the past year. Add the buy decisions and write down the no. Value line prints % of company that officers and directors own. More insider ownership, the better.
      15. stock buyback - find out by browsing co.'s website or contact co.'s investor relations. Answer in terms of yes or no.
      16. eps rank - investors business daily. rank from 1 to 99. eps rank 95 has earnings figures in the top 5% of all co.s in tables.
      17. relative price strength - investors business daily ranks 1-99, 99 being the best.
      18. 5-year sales and earnings gain - Value line prints both sales and earnings growth per share for the past 5 and 10years in a small box titled "annual rates" on left side of each profile page.
      19. 5-yr price appreciation - how much stock price has changed over past 5 years. Take high price from 5 yrs ago and compare with current price. Use value Line.
      20. Projected performance - 5 yr projected rates of change for sales and earnings - value line
      21. 3-year projected high and low price - from value line
      22. Current P/E should be below or at the 5-year average p/e. P/E of any co. that is fairly priced will equal its growth rate of earnings. If p/e of Coca Cola is 15, you'd expect the co. to be growing at 15% per year. P/E < growth rate stock is a bargain.
      23. Price to Sales. smaller is better
      24. Price to book. smaller is better
      25. current ratio at least 2. bigger is better
      26. quick ratio at least .5. bigger is better.
      27. max/min is stock's projected max gain and min gain, both expressed as percentages. Bigger is better for both max and min projections.
      28. Management: how mgt is compensated, how board is constructed and insider ownership. Mgt pay should be tied to shareholder return
      29. Don't buy a stock just because you like the "tone" of its annual report (it is like buying a product based on its advertisement)
      30. Annual report reflects mgt's philosophies, policies or goals.
      31. Does the Co. have products or services with sufficient market potential to make possbile a sizeable increase in sales for at least several years?
      32. Learn from Pros:
      33. MUTUAL FUND MANAGERS CITED BELOW ARE THE ROYALTY OF PORTFOLIO MANAGEMENT TODAY.
      • VALUE INVESTORS: Mario Gabelli, Mark Mobius, John Neff, Michael Price, Robert Sanburn, Kent Simons and Larry Marx, Rolan Whitridge
      • GROWTH INVESTORS: Lawrence Auriana and Hans Utsch, Robert Bacarella, Elizabeth Bramwell, James Craig, Shelby Davis, Foster Friess, Rod Linafelter, Gary Pligrim, Garrett Van Wagoner, Ralph Wanger, Donald yacktman.
      • STOCK PICKING.
   4. Don't be market timers, trying to guess when mkts are about to peak, or bottom out. Don't cash out of hot markets, or pour money into depressed mkts. Focus on stocks rather than mkts.
      1. Look at some Growth and Value Mutual Funds at Morningstar.com. Look at mutual fund's 25 largest holdings of portfolio-these stocks are the manager's biggest bets. You may want to consider some of these stocks.
      2. Superiority of equities over other classes of assets
      3. Way to make money is to take some risk and there are ways of minimizing the risk.
      4. Your goal as stock investor, should be "an average annual return on investment of 7% to 10%" compared with 5%-6% on bonds and 4% on passbook savings.
      5. If you are determined to become a smart stock picker, study the masters well. Find a method that makes sense to you, fits your temperament and suits your investment objectives. And then stick to it. IN INVESTING CONSISTENCY IS A VIRTUE.

1. RESEARCH