tbul@trsvax.UUCP (08/31/84)
#N:trsvax:52900015:000:15546 trsvax!tbul Aug 31 12:30:00 1984 STOCKS - COMMON --------------- Book value is the assets of a company minus liabilities, divided by the number of outstanding shares. Long term debt plus net worth equals the capitalization of a company. Funds are assets set aside for special purposes. O The greater the price fluctuation, the lower the investment caliber of the stock. O Do not put more than 10% of the money allocated to common stocks into stocks of the same industry. O Do not put more than 5% of your money into one company. O Should the dividend be cut, take another close look at the stock. O Are accounts receivable rising rapidly (have they taken a big jump recently)? In other words, if the company cannot collect from others what it is owed, then sell the stock. O Likewise, are inventories rising? If so, then perhaps the company cannot sell the goods that it makes. Should the economy turn sour, how are they going to sell that warehouse full of goods? If prices for that product go down, then the company will suffer a big loss in its inventory prices. O Should inventories increase (inventories of raw materials not finished goods), the company may be predicting that the cost of the raw materials will be higher in the future. Ratios to check on: O PSR ratio: (price/sales). It is the ratio of the current market capitalization (# of shares of stock currently outstanding) divided by the revenue (sales) of the company. For example, a company's stock currently sells for $10 and there are 10 million outstanding shares. The company has sales of $200 million for the last year. Therefore, the market capitalizationis $100,000,000 ($10 x 10 million) and the PSR is .5 ($100 million/$200 million). A PSR of less than one is very good (0.2 is excellent). The ratio is indicative of how poorly the stock is currently regarded (but may come into good grace eventually and that is the time to sell). O Check the sales/inventory ratio and compare it with others in its industry class. O What is the sales to accounts receivables ratio? Compare it with others in the same industry. O The current ratio (current assets/current liabilities) should be at least 1.5:1. The higher, the safer. O Compare liquidity with others in the industry by dividing cash by current liabilities (cash/current liabilities). O Check the net income/equity ratio with others in the industry. If higher than most others, buy! O Compare cash income/equity: if higher than others, buy. O A high net income to sales ratio is a good sign. O Since inventory is included in current assets, subtract the inventory from current assets and figure the current ratio again. O If you can find them, buy stocks in companies with no more than 2/3 book or net-asset value. O Is the company financed conservatively? In other words, is long term debt 1/3 or less of total capital? O Is the return on equity (net profit as a % of net worth) consistent from year to year? O Check the shareowners' return on equity. If this return is over say, 15%, then buy! O Total debt should be no more than 40% of the total value of the company's bonds, preferred and common stocks. O Debt and preferred shares together should be no more than 45% of the total capital structure (bonds, preferred and common stocks). O How heavily leveraged is a company? Total all the invested capital. This includes long term debt (bank loans, notes, bonds and debentures). Total the preferred and common stock at current market rates (total value of stock outstanding). Next, find out what percentage is the total invested capital (all of the above) is represented by the securities which have fixed charges (ie, add the long term debt to the preferred and divide this into the total invested capital. The higher the figure the more leveraged the company, the more risk you take. Should this figure get over 25%, then you should think of selling as the risk factor is unacceptably high. O Cash flow per share is the total of net income after taxes plus depreciation. Check others in the industry; here again, the higher the better. O Is the cash flow per share for the past 4 years good (even though earnings may be down)? O Price to Sales ratio: if greater than 1, avoid! If less than or equal to .75, then buy! P/E ratio notes: O Buy stocks that have low P/Es. O Invest in a company only if it is currently selling at 30 to 40% below its average P/E for the past 10 years. O Has the company you are considering buying have a relatively high P/E and has it bought a company with a low P/E? This sort of maneuver will boost the earnings per share of the high P/E company. Since earnings appear to be rising, the stock price should follow. This type of takeover could continue indefinately and earnings will keep rising although the earnings will not be composed of quality. When others find out, take heed... O If you invest in low P/E stocks of solid growth companies currently out of favor, it does not matter if you invest at the market top or bottom. O Quick selection: divide the stock's total return by its P/E ratio. If this figure is over 3, then buy. O The buy and hold strategy is the safest way to apply the low P/E strategy. O Buy stocks with P/Es lower that the Dow Jones Industrials's P/E. O When a stock's P/E rises to that of the overall market, then it is time to sell. Please note, that if the P/E has risen because of an earnings decline, then the stock should not be sold. Earnings: O Are earnings up several years in a row? If so, and you think it will continue, then buy! O Does the company reinvest their earnings into the company at a healthy rate? Expect small dividends, if any, at the beginning. O How does the past record and future for earnings look? O Are earnings accelerating? If so, buy! O Does the company have a higher rate of earnings growth than the S+P 500 both in the recent past and projected into the future? O Watch for a market to develop so that the company can sell its product. O Purchase stocks that have less than 10% institutional investors. They will buy in later. O When you buy a stock, immediately set a price at which to sell it. O If a stock is stagnant for two years then sell it O Watch insiders in the stock you are considering buying. If they are buying the stock shouldn't you? Likewise, if they are selling the stock, shouldn't you? (not necessarily...they have been known to be wrong too!). O If you cannot find a good stock to buy, then buy a T-bill. You do not always have to be invested in the market. O Is the company able to market its product? O Buy stocks in hot, growth oriented, fields. O Have the dividends been consistently paid (at least 10 years in a row)? O If you buy a stock, then sell one from your portfolio. Keep your portfolio to a manageable size. O If the stock's price falls 15-20%, then sell it. O Skip industries that are heavily regulated. O Watch the long term characteristics of stocks instead of the short term characteristics. A stocks' rate of return that deviates sharply from the past norm will most probably return to the long term rate. O Give the strategy that you employ a chance to work. O A portfolio should contain 15-20 stocks in 10-12 industries. O Use dollar cost averaging. How are earnings and other items predicted? O 1) start with a sales forecast from the company O 2) project the profitability of these sales O 3) calculate the pre-tax margin and estimated tax rate, the earnings, and the earnings per share. O 4) estimate the percentage of earnings paid out to dividends. O How many footnotes to the financial statements are there? The fewer the better, the more readable they are, the better. O Are the footnotes' print smaller than normal? Perhaps the company is trying to hide something... O Cut your losses and let your profits ride. O Is depreciation too low? Low depreciation indicates that the company has been remiss in maintaining plant investment or perhaps has been overstating earnings by overestimating depreciation expenses. O If a company uses accelerated depreciation in its accounting methods, this will cause correspondingly lower earnings and is a good example of conservative accounting. The straight line method, however, results in higher earnings (and is viewed as not being conservative). Look for conservative accounting. Oil stocks: O In the oil business, large companies fare better than small ones since expenses can be enormous. O Profits are least stable in the refining end of the oil business while companies that operate from crude production to marketing of the oil products have more stable earnings. O Usually, consumption of oil products increases slightly each year. Therefore, a large emphasis is placed on the ability of a company to find new oil fields. O The demand for gasoline is less in the winter than in the summer. This seasonal pattern is just the reverse for fuel oil, therefore, a company that deals in both products will find its earnings more stable than one that does not. O If the gross national product is rising, it is a sign of better economic climate. O Employment (not unemployment) figures, if rising, are a good sign for business and the economy. O Disposable personal income is also important to the business climate. Look for rising figures. O Watch for bank deposits to increase. A rising figure indicates more business in the future (and resultingly, more jobs). Should deposits drop substantially, it would be a sign of caution since the public cannot deplete their savings forever. O The figures on consumer debt are also important. As with savings accounts, consumers cannot borrow forever. O Watch a companies figures on new orders and unfilled orders These indicate how business is faring and how well it will do in the near future. O Watch for business failures. A marked increase in business failures is a sign for caution (they cannot receive credit). O The cost of living index is important should you own stock in a company that has a large labor movement. Often, labor agreements are tied to this index. Profit margins: O Watch the trend of profit margins in the past and predict what they will be in the future. O What are the pre-tax margins (income before taxes as a percentage of sales)? The higher and more consistent their record, the better. O Are the profit margins higher than others in the same industry? O Think about buying a company that has a low profit margin in the hopes that they will soon increase their efficiency and hence raise the the value of the stock. O Is any of the profit 'unusual'? Check for non-recurring profits. Subtract non-recurring income from the normal income to arrive at the true earnings. If the company does not bring these non- recurring profits to your attention, then they should be severely faulted. O Is the industry attractive? O Is the industry growing? O How important are labor costs? Try to keep labor involvement to a minimum. O Is the industry subject to price wars? If it is then you may want to avoid it. O Is the industry cyclical? If it is, then has anything in the company changed to eliminate this fluctuation? O What is the out-look for the industry? Where is it headed in the years to come? O Is it easy for competition to come on the scene? If so then avoid the industry. O How good is management? O Does the company spend a lot on R+D? (a good sign if it does). O How does its R+D cost as a percentage of sales compare with others in the same industry? O Has the company developed any new products lately? O What percentage of sales are attributed to these new products? Should the product flounder will earnings be hurt severely? O Is the company diversified? -hope so. O Does the company have patents or other type of protection for its products? O How well does the company control costs? O Is the company dependent on others for its raw materials? O What is the yield? If you want growth of capital, then forget the yield. O High yielding stocks typically lack any growth potential. It usually indicates weakness. O Buy companies when they get new management that is more responsive to its needs, is more aggressive and more efficient. O A growth company with good management will have a better than average increase in sales from year to year and will introduce new products which diversify and increase the profit of the company. O Buy companies that are leaders in their respective fields. O Buy companies that are making improvements in their glamor status. O Is the company improving its growth rate? O Do not make snap judgements about buying stocks. Take your time in picking them. O If you think the company has good potential growth, do not sell the stock just because it is now selling at a premium. After all, it could go much higher... O Treat the stock with objectivity - do not fall in love with it. O Do not concentrate on the market but consider the outlook for each individual stock that you are considering buying/selling. O Disregard stock market tips. O Stocks always look worst at their lows and best at the top of a bull market. Try to time your buying to the bottom of a bear market and sell when near the top of a bull market. O Remember, the public is generally wrong where stocks are concerned. O Concentrate on where a stock is headed in the future not where it has been. O Reevaluate your portfolio periodically. O Emphasize quality stocks. O In the annual report, if the accounting method has changed then there must be a very good reason for doing so. Was the change necessary or are they covering up something? O Does the auditor's report run more than two paragraphs? If so, then read carefully. O Does the company have potential for future expansion? O What is the country going to need next and will the company you are considering fill this need? O Can the company finance growth without going disastrously into debt? O Can the company withstand an economic downturn? O If the company buys its own shares when the shares are depressed, it could be to boost earnings (the earnings per share will rise because of fewer shares outstanding). If a company does this year in and year out, then you might consider selling the stock. O Watch for fully diluted earnings. This means that earnings are reported as if everyone converted their convertible bonds, warrants, convertible preferred etc into common stock. Watch for earnings that are reported as undiluted and ask yourself why they were not reported as fully diluted (fully diluted earnings is best). O A company that borrows money at a set rate then uses this money to buy a company that is returning a lower rate is not totally crazy. There is a tax loophole for companies that do this sort of thing and earnings per share are increased slightly. An investor should be wary of this practice since the return from the company taken over will eventually lower the earnings of the parent. O Sell your worst stocks and not your best performers. Stocks should not be sold just because their price has risen, but because their future growth potential is in question. O Look for stocks with few shares outstanding. These stocks will perform better from a rise in earnings than will a stock with many shares outstanding.