Methods Used to Evaluate Stocks
We are applying the following methods to assist in stock evaluations:
- Key statistics, such as Market/Book, 52 wk low and high, Beta, EPS, Price/Earnings, PEG, Interest Coverage, and ROE.
These methods support in determining how a stock’s performance compares to its competitors in its industry, the market, and the company’s historical performance.
For example, the P/E ratio shows how much investors are willing to pay per dollar/earnings. The PEG ratio is used to indicate the stock value. PEG is more favorable nowadays because it includes the growth of the company. We use a PEG ratio >2. Beta (β) is an indicator of a stock’s volatility, relative to the overall market. The higher the β, the higher risk we procure, yet we will receive a higher return. We apply a β of less than two.
- Company Profile: This section provides the Company’s product mix and their recent headlines or activities. We examine this information to better understand the company’s business ventures and evaluate the amount of product needed to contend with the competitors. This also helps us to better assess their risk versus return to determine if they will continue to produce growth and remain relevant in their industry.
- Industry Overview: The tools utilized consist of the monetary policy indicator using the sector rotation, current rank, safety rank, industry opinion, key issues affecting the industry, porter’s five forces.
The industry overview allows us to further our knowledge and select the most favorable industry, which will provide the optimal return. Also, for any company we choose to invest in, we observe the monetary policy in their home country. We use the sector rotation to identify how a company in a specific industry will respond on monetary policy that is settled in one country. Sector Rotation is divided into ten industry sectors and categorized as a cyclical or non cyclical industry. The current rank for the industry provides outlook for current underperforming companies, and allows us to conclude which companies will perform better in the future and vice versa. The safety rank indicates whether the company in the industry is secured for an investment. To further our evaluation, we implement Porter’s Five Forces to understand a company’s strengths and vulnerability in that particular industry.
- Financial Overview: Economic outlook from 10K/10Q, financial statement in current year, financial ratios which include valuation ratios, dividends, growth rates, financial strength, probability ratio, management effectiveness, and efficiency.
The financial overview section discloses the company’s performance. We obtain the data from the 10K or 10Q for every company in the current year.
- Discounted Cash Flow Model (present value/future value analysis system):
Most of the data examined in this section, is acquired from <www.valueline.com>. We use some indicators to see the undervalued or overvalued stock. If the market price is higher compare to the price in our calculation, it means the stock is overvalued, and vice versa.
- P/E Sensitivity, Earnings Sensitivity.
By employing the P/E Sensitivity and Earnings Sensitivity, we can better perceive how much a price fluctuation will affect the P/E and earnings. Thus, it tells us how much we want to tolerate the difference of the return that we will get in the future.
- Momentum
The momentum chart depicts the movements of the stock. We use tools from <www.stockcharts.com>. In addition, we view Bollinger bands. These bands are plotted two standard deviations away from a simple moving average. The standard deviation measures the volatility. The closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market. The best time to buy a stock occurs when the price moves closer to the lower band.
- Portfolio Management
Portfolio diversification attempts to gain more than an average rate of return on our fund. When selecting stocks, we focus our attention on mid-sized and small-sized companies and corporations, due to their increasing potential growth.