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Mom's Method of Stock Research: Part Two
Linda Goin
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 Archives |
We're not going to beat around the bush this week, as we have a lot to cover in your stock's company profile. Surf to the BUYandHOLD stock research page, plug in your stock, and we'll get started!
Go to the "company profile page" in the menu. Here you'll find a brief description of your company, as well as contact information. Some companies may not have this information available, but this doesn't mean the company isn't reliable. You'll get current information when you ask for their prospectus later. Don't touch the chart yet - we're going to cover the information in the "Key Ratios and Statistics" for now.
On the left-hand side you'll find information we covered last week - all but Beta. Some of you may have an "n/a" in this line and some of you will see a number. If you don't have a number, don't worry - it may be the company is too new to measure this statistic. The Beta is a five-year measurement of volatility of the stock relative to the overall market, and it's often measured against the S&P 500. If the number is above 1, it's said the stock is more volatile than other stocks within this scale. If the number is below 1, the stock is less volatile along the same measurement. Make note of this number if only to balance your decision to purchase the stock when you make choices for your portfolio.
Let's head south - take note of the capitalization of the company, shares outstanding and the float. If the shares outstanding number looks huge compared to the figure you jotted down last week, it's because this figure hasn't been rounded off. This is for those people who want to get their hands dirty on the calculations to follow.
Market Cap(italizaton) is the sum of the number of shares outstanding multiplied by the current price. Shares outstanding are those shares issued and held in public hands, less any stocks held in Treasury. You may or may not have a number for the "Float." These are shares outstanding and available for trade by the public. All these figures are used in calculating the ratios to follow. These figures are very important to investors who look for valuation of a company. Someone just like you.
We covered the P/E ratio last week. If you remember, a relatively low figure might mean the stock is undervalued. On to Price/Sales ratio (if you remember basic algebra, a ratio is a division of one figure by another): this figure is the company's capitalization divided by its sales over the past 12 months. Price/Sales is important within industry groups, and represents real earnings outside of depreciation and other non-cash items. If you check out competitors to your company, note the difference in this number between them for growth comparisons.
The Price/Book ratio constantly confuses me. I once sold used cars (don't laugh - you may be there one day...), and I think of the famous "Blue Book" with national used car prices when I see this term. This isn't all that different; the book value is a company's common stock equity (value of stock to the company) as it appears on their balance sheet, equal to total assets minus liabilities, preferred stock, intangible assets and/or depreciation. If you're not into all this figuring, you can find the book value of your company just below, in the "Per Share Data."
The Price/Book ratio is capitalization divided by the latest quarterly book value. If the figure is low in comparison with other companies within an industry sector, it could mean the stock is undervalued.
Now on to the Price/Cash ratio: This figure is determined by dividing the current price by the past twelve months' cashflow per share. Once again, if this figure is low in comparison to other companies within the industry sector, the stock might be undervalued.
Earnings Per Share (EPS) is figured by dividing the earnings by the number of shares outstanding. If this figure is high and all the above ratios are low, you're onto something here; however, this figure is often reflected in the share price. It's almost guaranteed there are a number of other people out there who figure they're on to a good thing also, and supply and demand will kick in to drive share prices up.
Many of you might see a "n/a" in the sales line. This figure is the total dollar amount collected for goods and services. This figure is not as important as the EPS in our books; however, you can often find this information at the company web site or through their prospectus.
Cash Flow is important. This tells us the past twelve-month cashflow divided by the average of the past twelve months of shares outstanding. This takes some work if you don't have a figure on this line. A steadily growing number indicates a growing company. Don't base a decision on the figure shown today - especially if it's in the minus column. Do a bit of research to find the number a few months ago to see if it's risen. The opposite holds true, also. If it's a high figure and the stock price is lower than expected, check back to see the cash flow figure from a few months ago - it might be falling.
Cash is cash available to the company. If you don't see a figure, you can find this elsewhere. If the figure is a minus and all the other ratios are high or the EPS is low, I would suggest you move on. Something is wrong somewhere in this company. Check their news section to see if there's a negative report. If you don't see immediate news, check back a few months - bad news tends to linger.
Phew - I reckon we've done enough for this week. Just a few suggestions: when you go comparison shopping, use the "Category Search" on the stock research page. You can search through industry sectors for company comparisons here. Also, if you want to find more glossary terms, check out InvestorWords.com. They have simple definitions, but no reasons why a term might be significant.
Next week we'll tackle ROI and ROE. No, these aren't the names of the Humpty-Dumpty twins, as Cora suggests...but they're just as big and just as important to the overall story.
Until Next Week,
Linda Goin
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