Doing Your Homework: Finding the up to date Information for every Stock on Your List

Doing Your Homework: Finding the up to date Information for every Stock on Your List

 

Knowing the list of key information critical to stock selection isn’t enough for success. You have to actually find that information for every stock on your list. And, because the information is constantly changing, you also have to keep your analysis up to date - preferably quarterly.

 

How much time your research effort will take depends on how you do it.

 

Library:  Visiting the library and writing or calling for annual reports will certainly work, but you’ll spend a lot of time gathering data. If you’re able to automatically download the information you want directly into a spreadsheet or database, that part of your research can happen in minutes every day - while you’re sleeping.

 

Internet:  It’s hard to imagine anything that has done more to ease the burden of securities research for the individual investor than the development of the Internet. The amount and quality of information you can easily access from the comfort of your own home truly boggles the mind.

• Need an annual report? Click.
• Access to government fillings? Click.
• Prices, charts, analysis, commentary? Just click again.

Information that once took vast amounts of time and dedication to assemble now rushes to your fingertips down the information superhighway.

 

Technology can certainly help you cast a wider net in your search for winning stocks, but your ultimate success as an investor will most likely be determined by how you use the information you find, rather than how you find it.

 

There are three fundamental ways in which the information you’re looking for will vary:

 

1. Cost

• A surprising amount of information is available for free, either directly from companies themselves, from government agencies like the Securities and Exchange Commission (SEC), or certain Web sites.
• Brokerage firms often make some form of research available to their customers.
• Subscription services vary dramatically in price, from the cost of a daily newspaper to thousands of dollars per month for comprehensive data and analysis services.

 

 

2. Format
Information is available in print or electronic format.

• Newspapers, magazines, and annual reports are familiar in print.
• Electronic versions of all these items are commonly available, as are a host of software applications and Web sites.

 

3. Content

• Financial statements, balance sheets, and company reports provide a rich source of data items, but you will probably still have to compute the ratios yourself.
• Many third party information services provide exactly this kind of processed information already calculated for you.
• Key financial ratios, earnings trends, and per share data are commonly listed, along with analysis and commentary, including rating services and lists of specific security recommendations.
• The amount of information is usually commensurate with its cost.

 

The cost, format and content of all kinds of information sources are rapidly evolving, and any attempt at a comprehensive listing would be almost instantly obsolete. By pointing out a few alternatives across the spectrum of choices, we hope to show you a sample of the kind of information that’s available. How you choose to proceed will depend on your level of interest, resources, preferences, and expertise with computers.

 

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Printed Materials:

• Newspapers (business sections)
• A company’s annual report
• Stock rating publications: Value Line Investment Survey, Standard & Poor’s Stock Reports, Morningstar Stock Analyst Reports

 

Internet Sources

• Most recent annual and quarterly reports
• Recent news releases and access to a news release archive
• A calendar of events, including planned shareholder meetings.
• Notes and commentary from recent analysts meetings, speeches, or other presentations.

 

Software and Data Services

• These are software programs and data providers that deliver an almost unimaginable amount of detailed financial data on virtually every publicly traded stock.
• They include powerful analysis tools and forecasting models, charting capabilities, and interfaces with spreadsheets and other software programs.
• They are also expensive.

 

Once you find the right source of information for you, it’s time to use your data to define the universe of stocks you will be tracking.

Doing Your Homework: Rule of thumb

Basic Financial Metrics

Sales per share
Rule of thumb: The higher the better.


Dividends per share
Rule of thumb: The higher the better.


Cash Flow per share
Rule of thumb: The higher the better.


Yield
Rule of thumb:  The higher the better.

Quick Ratio:
Rule of thumb:  Greater than 1 and the higher the quick ratio the better.  If the ratio is less than 1, you would want to assure yourself that the company is generating enough cash flow from operations to cover both its normal expenses and any short-term debt obligations that come due.

Valuation Ratios

Price-to-Sales ratio: 
Rule of thumb:  ratios less than 2 indicate good value

Price to Earnings ratio (P/E):
Rule of thumb:  Historically, stocks are a good value when the ratio or multiple is around 14.  We will consider stocks that have a P/E of less than 20 a decent value based on this ratio - the lower the ratio the better.

Dividend Ratios

Dividend Coverage ratio: 
Rule of thumb:  Minimum of 120%

Dividend Payout ratio:
Rule of thumb:  The higher the better, so long as the ratio does not exceed 100%.   By maintaining a conservative payout ratio of 30%, this allows management to consider increasing dividends as earnings increase.

Growth Ratios

One-year revenue growth rate:
Rule of thumb:  greater than 10% increase in revenue

One-year earnings growth rate:
Rule of thumb:  greater than 10% increase in earnings


Trend Analysis

All preceding ratios
Rule of thumb:  Look for positive trend with an increasing growth in sales, earnings, cash flow, and dividends per share.  The quick, leverage, value and dividend ratios are all positive or well within acceptable ranges.



Caution:  A parting word about a standard rule of thumb
Although convenient, rules of thumb should not be adhered to in isolation. 

For example, electric utilities normally have current liabilities that exceed their current assets, yielding a quick ratio of less than 1.  However, investors are not concerned because utilities have strong cash flow from operations and their accounts receivables are from electricity users who must pay their bills if they want to continue to receive electricity.  If your rule of thumb were rigid, a low quick ratio would be a signal for you to avoid the company and discard promising stocks individually or even across an entire industry.

Ultimately, by integrating these ratios into a single analysis for any given company, you should be able to confidently select dividend-paying stocks that will help you to accomplish your investment goals and to build your wealth slowly over time through compounding dividends and price appreciation.

Doing Your Homework: Trend Analysis

The information in the financial statements (BS, IS or RE statement), the basic (per-share) financial metrics and the various ratios are snapshots of the company's financial condition at a point in time, but there are trends in motion that need to be identified so you can understand if the company's position is improving or deteriorating.

For example: 

http://spreadsheets.google.com/pub?key=tdTJEsOwTqdvL-tOgwfeb9A&output=html

• Company ABC's year-over-year trend analysis indicates a generally positive trend with an increasing growth in sales, earnings, cash flow, and dividends per share. 
• The leverage, value, and dividend ratios are all positive or well within acceptable ranges, with the exception of the quick ratio. 
• Based on analysis, the dividend looks to be secure and Company ABC would be a good buy.

Doing Your Homework: Basic Financial Metrics and Ratios Analysis

Ratios Analysis

Ratios are widely used not only to evaluate a company, but to compare a company's financial position with other companies'.  The data used to calculate ratios are readily available in each company's annual and quarterly reports.  You can concentrate your analysis in the following two areas.


Building Block One:  Basic Financial Metrics

These are formulas that allow you to view any company's results on a per share basis.  Once financial data are reduced to the shareholder level you can easily compare companies that might be very different in size or in different industries.

For example, trying to compare the annual sales of General Motors with the annual sales of a much smaller car company like Porshe might not tell you much, but by comparing sales per share (divide each company's sales by the number of shares outstanding), you have a more meaningful measurement.  Generally, the company generating higher sales per share is going to be the better value. 

Some useful basic financial metrics you can use for your analysis are:

Sales per share
= Sales/Shares outstanding  (Source: IS; BS)

Earnings per share
=Earnings/Shares outstanding (Source: IS; BS)

Dividends per share
=Dividends/Shares outstanding (Source: RE; BS)

Cash flow per share
= (Net Income + Depreciation)/Shares (Source: IS, BS)

Yield
= Dividend per share/Price per share (Source: DPS; newspaper)



Building Block Two:  Ratio Analysis

Ratio analysis allow you to analyse a company's financial performance

• against other companies in the same industry,
• against all stocks in the market, or
• against industry standards, which are sometimes known as "rules of thumb." 

Although there are a great number of ratios that you can use to analyse a company, below is a short list of ratios that will give you the information you need to pick good dividend-paying stocks.

Liquidity Ratio
Quick Ratio
= (Current Assets - Inventory) / Current Liabilities (Source:  BS)

Debt Coverage Ratio
Short-term Debt Coverage Ratio
= Operating Income/Short-term debt (Current Liabilities)  (Source: IS; BS)

Valuation Ratios
Price-to-Sales ratio
 = Stock price/Sales per share (Source: Newspaper; Sales per share)
Price-to-Earnings ratio
= Stock price/Earnings per share (Source:  Newspaper; Earnings per share)

Dividend Ratios
Payout ratio =
Dividend per share/Earnings per share (Source:  Basic metric formulas)
Dividend coverage ratio =
Cash flow per share/Dividend per share (Source:  Basic metric formulas)

Growth Ratios:
Revenue growth rate ratio
= Year over Year percent change in revenues (Source: IS)
Earnings growth rate ratio
= Year over Year percent change in earnings (Source: IS)

Doing Your Homework: Analysing Financial Statements to pick Great Stocks

How do you pick great stocks?

If you don't have a crystal ball or inside information, then the best way you can tell a winning stock from a loser is by analysing a company's financial statements.

Before you dismiss this simple answer because you find financial statements confusing or boring, you should know that you don't have to become an accountant or financial analyst.  Just a nodding acquaintance with the fundamentals will allow you to make better decisions about

• which stocks you should investigate and
• which stocks you should own as part of your (e.g. dividend-focused or growth-focused) portfolio.

Financial statements are an important source of information regarding a company's profits or losses, assets and liabilities, and sources of funds used to operate its business.  You should concentrate on the basics: 

• the balance sheet,
• income statement, and
• statement of retained earnings.

The balance sheet
This gives you an overall picture of a company's assets, liabilities, and equity at the end of an accounting period (i.e. quarterly or year-end).

The Income statement and the statement of retained earnings
These tell you how much revenue, expense, and profit the firm generated over a specific period of time (e.g. its fiscal year).

Together, these statements provide you with all the financial data you need to perform a ratio analysis to determine if you would want to buy a stock.

Since financial transactions occur continuously, this information becomes rapidly dated.  Be sure you are looking at the most recent statements and continue to review the updated statements of those stocks you decide to hold.

Ten Habits of Highly Successful Value Investors

Ten Habits of Highly Successful Value Investors


Warren Buffett once said, "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."


Keeping this in mind, here are ten things to remember as you evolve your value investing style.

1. Do the due diligence
2. Think independently and trust yourself
3. Ignore the market
4. Always think long term
5. Remember that your're buying a business
6. Always buy "on sale"
7. Keep emotion out of it
8. Invest to meet goals, not to earn bragging rights
9. Swing only at good pitches
10. Keep your antennae up