5 Simple Ways To Pick A Stock
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5 Simple Ways To Pick A Stock

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5 Simple Ways to Pick a Stock.

This is one investor’s opinion on 5 simple ways to pick a stock.  Is that even possible?  Some people buy on a tip, sometimes it is just the name but do you want to pick a stock you found?  That diamond in the rough.  That is where real profits can be found.  There really is a lot of opportunity for our eyes to glaze over when it comes to stock valuations but this is really important work that is worth a second look.  Many of us are the “Just show me the MONEY!!!!!” This post won’t cover every valuation tool but I believe these 5 simple ways to pick a stock provide 5 handy tools to help you have wise and hopefully profitable choices in your stock picks. Hopefully, this will provide you with a long term list of stocks to hold.  When picking a stock please leave your excitement and passions at the door.

This is no place for emotion.

Picking a stock is really a glass half empty type of process.  Something we want to remember with stocks is that over time the stock market always performs well and brings the holder long term profits.  There is one other thing; people sell overvalued stocks (taking profits) and buy undervalued stocks.  It is the idea of buy low and sell high.  Stock valuation is where we find our 5 simple ways to pick a stock.

Before we get started…

We are not going to discuss stock indicators, but we will be talking about stock valuations.  Now I am not an investment advisor, I am not employed by any bank or investment firm but I have bought and sold stocks for decades.  Read this and then investigate the 5 factors for yourself and see what works for you.

‘The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.”
Peter LynchOne Up On Wall Street
One Up On Wall Street: How To Use What You Already Know To Make Money In The Market

 

Here Are 5 Simple Ways To Pick A Stock:

  • P/E Ratio Price to Earnings
  • Dividend Yield
  • Debt
  • Earnings per Share
  • The Piotroski Score

1. Price-To-Earnings Ratio (P/E)

This is probably the number one go to valuation ratio, as this compares the current price of the stock with the earnings made from each share.  This ration is easy for you to calculate.  
  • How it works: The low ratio indicates a cheaper stock.
  • What to look for: Look for a ratio under 9.
  • What it shows: Earnings support the stock price.
  • How to calculate it: Divide the stock price by the earnings per share.
If the P/E Ratio is higher than 9, for example this means investors believe earnings are going to rise.  If the earnings don’t increase to meet investor expectations then the price will fall as investors lose confidence for earnings growth.  This sell off will cause the P/E Ratio to “normalize” closer to nine. The cycle can then repeat as investors drive the price up or down based on the perceived value of a stock.
5 Simple Ways To Pick A Stock
Researching Stocks

2. Dividend Yield

One of my favourite indicators and one of the best reasons to have a stock.  I have always loved seeing dividends arrive in my trading account.  I divide the yearly dividend amount into the stock price to see what my percentage rate of return will be on the stock.
Things to consider with dividends:
  • The frequency
  • Tax savings
  • Your realized ROI
www.dividend.com. This is an excellent site to learn more about the benefits of regular dividends.

3. Debt

Your bank is interested in your debt load before they invest in you, so you should be interested in a company’s debt before you invest in them.  Yes there is a ratio to use, the debt to asset ratio can be found and it is good to have a ratio of 1.10 or less.  Let’s have a closer look at the debt to asset ratio.  I mean, it sounds pretty simple.  This just means they have more assets than they have debt.  Essentially this should indicate the company is strong and does not need an onerous amount of debt to function and pay off.  Also, just like with older brothers there is always the payback.  Well you know what they say about payback…  Bad debt is like that black eye for that prospective company.  For a much more in-depth look at this valuation tool have a look at investopedia.

4.  Earnings per Share

5 Simple Ways To Pick A Stock
Earnings per share.

I do like this one.  Fortunately for us non-accountant types this is a common evaluation and there are many sites that will do the appropriate calculations for us. For the accountants we know there is more than one type of EPS ratio.  Let us say one for the highly paid and important bean counters and then the simplified final metric you and I want to use to judge the stock’s worth by.  EPS is the Net income available to common shareholders divided by the number of outstanding shares – mediocre shares who am I to judge.   Earnings per share is a valuable metric used to point to different issues about the profitability of a company.

EPS Illustrates:

  • The quality of the earnings
  • The volatility of the earnings by showing past performance
  • Have they met or missed their projected EPS
  • Enables one to compare a company to a competitor – one of the best features of the EPS ratio.

5.  The Piotroski Score

The Piotroski score illustrates the financial strength of a company with a 9 point scoring system.  It gives a score between 0-9 that reflects the nine criteria used to find the strength of the company you are investigating. The Piotroski score was named after Chicago Accounting Professor Joseph Piotroski, who developed the scale.  The points are then added up to determine the best value stocks.  We can find out more about the Piotroski Score and the calculator at the Corporate Financial Institute.

Here are the Piotroski Score Factors:

Profitability

Return on Assets: Net Income divided by start of year total assets.

Operating Cash Flow: Operating cash flow divided by start of year total assets.

Change in ROA from the previous year.

Accrual: CFO compared to ROA

Leverage, Liquidity and Source of Funds

Change in Long Term Debt: Is there more or less than last year?

Change in Current Ratio: Is the current debt ratio larger than last year?

Total Common Equity: Has the common equity increased compared to the previous year?

Operating Efficiency

Change in Gross Margin Ratio: Is the current year’s ratio minus prior year’s ratio greater than 0?

Change in Asset Turnover Ratio: Are there more assets this year than last year?

5 Simple Ways To Pick A Stock Conclusion

The success of our goal to have profitable long-term stock picks is always built on a firm foundation of intentional and methodical research.  Striking it rich in the resource sector markets, or in a diamond mine, both result from careful research and that is the base on which to build larger profits.  There are so many well run companies out there it is our hope that you find the ones that provide long term growth and on going prosperity.  These 5 Simple Ways To Pick A Stock will indeed assist you in finding a profitable place to put your money to work for you.  Finding that great investment is a process, it does require study. It also requires avoiding the “shiny” stock picks someone is recommending because they are trying to pump it and dump it.  Remember, undervalued stocks get bought and overvalued stocks get sold.  Don’t let the later be sold to you.  Considering the fundamentals; build your stock portfolio with intent and with wisdom, and at least with these 5 factors in mind.  Happy investing for the long term – undervalued stocks are out there, and you can find them.  You can build a stable and profitable portfolio.

 

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