Investigating A Stock
1. Consider the MOAT (Competitive Advantage)
a. Are they a low-cost leader OR a high-quality/differentiated service?
b. Do they have a strong brand name?
2. Investigate its RATIO (is the price I’m paying good in relation to something?)
a. What is the Price/Earnings (P/E)? [Less than 25 is good]
b. What is the Price/Sales (P/S)? [Less than 2.0 is good]
The lower, the better in these cases; you should compare to competitors.
2 Ways Investors Make Money in Stocks
1. Growth (Capital Appreciation)
a. Buy low, sell high.
b. Beware: Stocks can go down and never recover (Bankruptcy)
2. Dividends
a. Regular passive income
b. Quarterly Payout
i. A “thank you” for holding stock/being an owner.
c. Beware: Companies don’t have to pay a dividend
i. It can be reduced or eliminated.
3. Combination
a. Growth Stock
b. Dividend Payer
What Is a Stock?
Common Stock (Public Company)
a. Owner
b. Claim on company assets and earnings.
c. Publicly sold on a market.
i. NYSE, NASDAQ
ii. DJIA (30 USA), NIKKEI (225 Japan)
d. Voting rights
e. Not involved with day-to-day operations
f. While risky, better performance vs. other investments in the long run
What is the essence of stock trading?
1. Some people want to buy stock in a company, others want to sell.
2. When we agree on the price, we trade.
3. It has an underlying principle of supply and demand:
a. More buyers than sellers = price goes up
b. More sellers than buyers = price goes down
Where Do Stocks Fit In A Diversified Portfolio?
1. How far away is your goal?
2. What is your risk tolerance?
3. Need (Income? Growth? Combo?)
How to read a stock quote
Ticker Symbol: (ex. General Mills, Ince. (GIS))
Price: trading or selling at # up (point value/percentage)
Market Value: The last price it sold at
Previous close – what price the stock closed with at the end of the day.
Open – First trade of the day
Bid: highest price a buyer is willing to pay and how many people are looking
Ask the lowest price the seller is willing to accept and how many people are looking.
Spread – Difference between Bid and Ask
Range: lowest price to highest price
Volume: how many transactions there have been
Avg. Volume: how the day is estimated to average in transactions
Beta – A measure of risk; how it compares to the wider market.
a. 1.0 = Same price movements as the wider market
b. >1.0 = Swings wider up/down than the market (More volatile)
c. <1.0 = Swing less up/down than the market (Less volatile)
Price to Earnings (PE) TTM – How does the price I pay compare to the company’s earnings?
Earnings Per Share (TTM) – How much money is earned per share.
Earnings date – When they will update the earnings (usually quarterly)
Forward Dividend & Yield – How much you earn as a dividend per share of the stock.
1-Year Target Est – What the stock price is anticipated to be in one year by analysts.
Diversifying Stock Investments
Stock Diversification Options
Size Category:
Small, Mid, or Large Cap
How Capitalization is calculated:
(Stock Price * Number of Shares)
General Cap Ranges:
Large: $10 Billion+
Mid: $2-10 Billion+
Small: Less than $2 Billion
Why care?
Portfolio Composition
Diversity inside the Asset Class
Reduce Risk
Narrow Research
Growth & Income (Value)
Growth Style Stocks
High-fliers that keep climbing.
Earnings grow faster than industry and market.
Revenue and/or Cash Flow
Higher Price to Earnings (P/E)
Higher Price to Sales
Typically, there are no dividends; companies focus on re-investing cash in a
growing company.
Example: Google
Income Stocks (Dividend Stocks)
Pay a Dividend (Income)
Still Want Growth
Price Increase
Dividend Increase
Example: Coca-Cola
Sometimes Labeled “Value Stocks”
Mutual Fund Style Box to differentiate from Growth Stocks
Value is more of an investment strategy
(Find undervalued stocks with a lower price relative to a
company’s true value)
It can help balance a portfolio
Value Stocks
Many times associated with Income
Lower price relative to fundamentals
“Bargain Hunting”
Great companies at discounted rates
Greater Risk than a true income stock or growth stock
May just be a dog and never recover
International
Sectors (Industry)
What part of the economy does this company belong to?
What is their primary business?
Important to compare to competitors (ratios)
Example: Health Care
Pharmaceutical (Merck)
Medical Devices (Medtronic)
Bio-Technology (Amgen)
Companies tend to move in concert with their sector
Compare
Vanguard Energy Index (VENAX)
S&P 500
Exxon (XOM)
