How to Pick a Stock?
Quantitative
I have heard many experts said this, especially in this economic down term (not recession yet):
B.S.W.E. –buy stock with earnings
B.P.N.P.—buy profit not promise
Here are some basic index or factors that will affect stock price
1. P/E
Trailing P/E – price / reported earnings
Forward P/E – price / Analyst estimated earnings
It is hard to tell from P/E ratio itself, different industry has different P/E ratio
Only in auto industry, buy high P/E, sell low P/E
2. PEG = P/E / Growth Rate (ideally, the longer the term you use, the more accurate)
If PEG = 1, stock price is fairly priced
If PEG > 1, stock price is under priced, a good sign to buy
If PEG < 1, stock price is over priced
3. β – stock price movement compare to S&P index (as of 1)
E.g. If β = 0.75, it means price moving 75% compare to 1, less volatile
Some people like to see their stocks move up and down, they feel excited about it; some don’t. It’s your preference to buy a more or less volatile stock.
4. Div’d Yld – dividend paid / stock price
The higher dividend, the riskier the stock
5. PSR = Price / Sales Ratio
If PSR <1, a good indicator that the stock has chance to do well
If PSR >1 Not a good sign
Grocery industry tend to be low
6. EPS – this is a company’s bottom line, looking for a solid growth trend
Using Value Line Coca-Cola (NYSE-KO) as example
1. PE ratio = 20.7
2. PEG = 1.76
3. β = 0.75, less volatile than average market
4. Dividend Yield = 2.5%
5. PSR = 53.66/13.45= 3.98
6. EPS = 2.95
7. ROE is 12%, normally, large cap average ROE is 8%
Historical High $88.9 in 1998 and Low $36.1 in 1996 in the past 20 years. Analyst expected price in 2010-2012 high is $85 and low is $70.
Lastly, my study combined with analyst recommendation shows RRC, ENOC, GFA, WIN are good catch.
