Joel
D. Kinard CISSP, CIAM, EIT
205 Airport Road
Monroe
,
NC
28110
Email address: jdkinard@gmail.com
Five Benchmarks for Picking Stocks
If you're looking to invest in stocks, it will help if you have a few
ratios or numbers to check to determine if a particular stock is worth investigating
further. Here are five easy-to-find ratios or numbers that will give
you some comfort that a stock may be worth buying. Don't think you can find a
suitable investment by just looking at these five numbers. This is only a first
step, before getting into the balance sheet and income statement and really digging in. But by
looking at these numbers, you'll know whether you want to proceed further.
1. P/E Ratio:
Right now the average Price to Earnings (P/E) ratio for stocks reporting earnings is about 20. If you find a stock that has a higher P/E ratio than 20, then the market is expecting the company to grow faster than the average
company reporting earnings. So the first check is to look at the P/E: if it's higher than 20, the earnings better be there to support the stock; if it's lower than 20, then maybe the stock isn't growing as much as the average company is, or maybe it is and the market hasn't rewarded the stock yet. With the market in turmoil, you definitely want to be sure any stock you consider has a growth rate higher than its P/E ratio, also known as the PEG.
2. Price to Sales Ratio (PSR):
This is the number you want
below 3, and preferably below 1. This measures a company's stock price against the sales
per share. Studies have shown that a PSR above 3 almost guarantees a loss while those
below 1 give you a much better chance for success.
3. Return on Equity:
Supposedly Warren Buffet's favorite number, this measures how much your investment is actually earning. When you see a number around 20% or better, this is a good thing. Of course, one hit wonders don't count. You're
looking for 20% or better over at least five years, a very difficult task.
4. Debt to Equity Ratio: This measures how much debt a company has compared to its equity. That means it looks at how much the company owes and divides it by the amount of equity the firm has. You're looking for a very low number here, not necessarily zero, but less than .5. If you see it at 1, then the company is still fine. But if you saw 2 or greater, then you'd have a company that has a lot of interest to pay on debt and if the company ever loses money, that interest would have to be paid from stockholders' equity (that's your money). For better sleeping, look at stocks below 1.
5. Beta: This number wouldn't always be included in a top 5 numbers to check, but given the volatility of the market, this one might give you more comfort than some others. The Beta measures how volatile a stock is when compared to an index. The higher the beta, the more up and down the stock moves. (A negative beta means
that the stock moves inversely to the market so that when the index goes up, the stock goes down and vice versa. Maybe this is a good time to look at some of those negative beta stocks.) If you want to the least volatile stocks, look for ones with betas well below one. If you feel very bullish, then look for stocks with betas above 1.25.
So there are five numbers that can help you decide if you want to spend more time on a
stock. They're easily found and can be of great use in finding good stocks.
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