Tuesday, May 5, 2009
How to run some DD on a Stock's fundamentals
Well, I do receive more emails at Junkyarddag@gmail.com. All kinds of mail. Some people have some very interesting stock picks to look at. Rather than get into them, I want to show you something to check out.
Tonight I am going to explain how to run some Due Diligence (DD) on a stock. Well, let's say that you have a situation/ stock and it sounds like an interesting proposition to invest some Money in. How do we figure out if it is a good investment beyond the story of the matter?
Well, I will now show a few things to immediately look for and in five minutes you can get a quick view of that particular stock.
If you like a particular Company for what they offer or are working on - I want you to run a good check on it before you invest too much. Then when and if you decide to buy some shares -- you know what you are up against and understand your risk to reward prospects.
Enter the magic of the internet !
I want you to go to the finance sections of aol, msn, yahoo, or Google finance and look at that stock's fundamentals. Click on the key statistics and then look at the revenues, earnings, and very important- how many outstanding shares there are. If a Company has a low earnings or negative and high number of outstanding shares, you have to know that these are headwinds to overcome.
Holding too much of a stock with over 100 million of shares outstanding, high debt, and little cash on hand with negative earnings is not a good formula for success.
Sometimes, the story is very compelling that the company will become profitable. In those cases, the market may price up the companies stock- but when that happens the Company may release more shares on the market devaluing your shares. These situations can deteriorate and cause you to lose money in your share value. Be careful. The idea is to buy stocks and have the price go higher, not lower.
Even if a stock looks great, I have a saying to always apply, "some not too much." There are NO guarantees in the market and just cause we buy something does not mean it's gonna go up ! In fact, for some reason, most of the time people buy an issue- they go down at first! enter something called patience. If there is a very good situation that I have run my DD on and if it dips, I may add some. They call that $ cost averaging. However, there is a fine line between adding and going too far. The idea is to limit your exposure to "too much" risk. I always practice having a good arsenal of cash to stocks, expecially after year 2008.
On the other hand, companies that are earning money, making profits - the number shows up in the Positive "eps" , earnings per share. THAT is something to always look for! Know what you are investing in. If there are no earnings you should know it is more of a speculation than an investment at that juncture. If a company is showing a minus eps, then they are currently operating at a loss.
Does the company pay a dividend? That can be a bonus for holding a "value" stock while you wait for their long term business plan to appreciate the stock value.
The PE is "price to earnings" ratio. In general, the lower the PE, the better the value. It means the price is low and the earnings are high. Sometimes a Company that goes from negative earnings to positive earnings will perform quite well in the market.
I recall a company with stock symbol "ENER". ENER flew into the 80's after their solar panel business became profitable from years of negative earnings. It was in the right place at the right time of market visibilty. I call that the "sweet spot". Times, they do change and ENER got a subsequent haircut when oil crashed and solar panels became somewhat subdued in a poor economy.
Different sectors tend to generally have various PE ranges that the natural market forces will allow. For example, a Utilty Company may have a PE of 5, whereas a Biotech may have a PE of 50 to 100 and Tech sector may see higher PE's as well. This is because there may be things that the market is looking forward to representing "potential" growth, whereas a utility fixed and known growth and typically pays a dividend. The price swings in a utilty are typically not as volatile as other sectors.
So here is something - If you like a stock's prospects and you are running some "Due Diligence" (DD) - click on those key data items of # of outstanding shares, revenues, debt, Cash on hand, and "EPS" which stands for "earnings per share". You will get a better idea about what the basic common share is worth.
The market wants to see earnings growth as the bottom line "eps" number to grow each quarter. Well , 2008 has not been great for that but then the analysts have revised earniings estimates downward to reflect a slowing economy.
Now I want you folks to run some DD on those picks you are sending me as well as whatever I post on my stockstowatch blog-- so you know better what ONE share of that company represents.
Hey, here are some general rules I try to follow as a 3 month look-ahead scout...
For more on stocks to watch and the market in general, stop by :
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Well, stay tuned. tomorrow I may post about something else.
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