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Mom's Method of Stock Research: Part Four
Linda Goin

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We left you hanging last week with ROI (Return on Investment). This is a method to calculate how much you've made on your initial purchase of stock over a period of time.

For example: Say you bought 100 shares of SHE (Superior High-Class Environment) at $17.25 in on January 1, 1990. Your initial investment was $1,725.00. Since your purchase, SHE split a few times and the number of shares you own increased (stock dividend) from 100 shares to 3,200 shares. Yes, this can happen.

But, these shares are now only worth $13.32 per share. You might be discouraged over the price, but the number of shares gathered in dividends bumps the current value of your total investment to $42,624.00. Your ROI is 2,370.95% over twelve years. Not a shabby return for watching your money work for you. You've garnered an average annual income of $3,408.25 before taxes.

The ROI ratio is determined by subtracting your initial investment from current value. You then divide that result by your initial investment. This calculation doesn't take into account the time factor, which can be a bear or a blessing. For the past few weeks, we've talked about how to decipher the "Company Profile" page of your choice. All these figures constantly change, based on the company's performance and on the current economy.

Up until two years ago, hypothetically speaking, SHE experienced superior sales, created one-of-a-kind product development, and was whizzing along at top speed. Let's say you bought the same shares of SHE, but within a different time frame. While SHE was hopping, you popped 100 shares of that stock into your portfolio on January 1, 2000 at $77.44 per share (not a bad price at the time, you thought).

Suddenly, the economy took a downturn. Analysts barked out orders that all stocks were overvalued, and sellers hit the streets running. Your initial investment of $7,744 and your ROI suddenly slipped - big time. Since you have buy-and-hold mentality, you held onto SHE shares. But, it's been two long years, and what do you have? Let's say SHE split one time in the past two years. You now have 200 shares, but they're only worth $13.32. Your current value is $2,664.00, and your ROI is a minus 65.60%. What happened?

First rule: You never sell a good company during economic downturns - unless you need the loss on your tax return. Remember buy low and sell high? If the figures on SHE looked good at time of purchase and still look good now, then you need to sit and wait. Economic downturns have always reversed, and most sound companies have found ways to survive an economic crisis generated outside company walls. Heck, use this down time to buy more SHE shares. This will help to lower your cost basis and your breakeven point.

But why did everyone else sell? That hurt!

This brings us to the "Analyst Ratings" section of your company's stock pages at BUYandHOLD. If you know which firm the analyst hails from and you trust the firm and the analyst, then you might feel comfortable in your reliance on their suggestions. If you're not familiar with the analyst source, I would be very careful about developing a dependence on these figures and suggestions. Although each firm is under SEC regulation to base all recommendations on fact rather than opinion, please be reminded that "fact" might be based on mathematical probability. This means the analyst might base their decision on current and past statistics, and put forth recommendations based on projections of these figures.

Sometimes, the recommendations are solid. For instance, SHE decides the economic downturn is too much to bear, so they declare bankruptcy to meet expenses. You will probably see recommendations to sell. It's your choice at this point.

On the other hand, some companies even fool the professionals by hiding figures in their accounting. Although the SEC firmly regulates this procedure, a company will occasionally slip through the cracks with misleading statements. In this case, you'll see the attorneys line up to take on stockholder's grievances. The analyst is not to blame in this case - nor in any other case. You are responsible for your own decisions, no matter what the analyst says.

Many people do base their buys and sells on analyst ratings, and that's often what makes the world turn. When a few firms recommend a "buy" on a particular stock, you'll normally see the shares shoot up in price. Watch it again when the same firms recommend a "sell" and you'll see the share price fall. This is a great indicator if you're seeking to sell or buy on the opposite side of the recommendation.

I always look at stock recommendations for abnormalities. If I see a number of analysts on board with recommendations of "sell immediately!" or "buy and buy now!" I want to investigate further, and only for one reason - to watch the fluctuation in share prices (and volume!). These indicators might show liquidity you won't find any other time. If the analyst recommends a "buy," then I see it as a time to sell if I'm ready to sell (remember buy low and sell high?). If the stock takes a dive on poor recommendations, and the company is sound, I might see this as an opportunity to buy - or buy more. We'll look more into this prospect when we talk about quarterly earnings.

The last item we need to cover is the stock chart. With the knowledge you've gained to date, this will be a breeze for you to comprehend. In the menu on the lower left, you'll find a list of past stock splits, cash dividends, etc. This is a good page to begin historical analysis of your company. You'll also find most of the information we covered on the "Quotes" page located here for your convenience.

You may want to delve more into Bolinger Bands, Parabolic SAR, teacups and candlesticks. I'm not talking about Harry Potter, either. If you want to gain more skills in mathematical parameters and probabilities of charting, I suggest you visit your local library and borrow some books on this subject. There's a lot of techno-jargon out there, but some books are more beginner-friendly than others. These books will offer insight into how these tools might affect a stock performance. Just the knowledge of what a stock parameter means might give inklings of what other stockholders might do with their own shares.

You've all been real sports for keeping up with me -next week we'll lighten up a little. In fact, we might get a bit volatile. How's that sound?

Until Next Week,
Linda Goin

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