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How to Evaluate A Stock | Finding Stocks That Are Worth Buying
Stock evaluation doesn’t have to be overwhelming. Many people shovel money into a brokerage firm and let them figure it out. But what if you want to get a bit more involved?
With a bit of research, you can take control of your money and choose some companies to invest in on your own. All it takes is a few basic factors, and you will be on your way to being a sharper investor.
So, let’s delve into the basics of stock evaluation so you can see what it’s all about.
The Two Types of Stock Analysis
We’ll start by looking at the two primary analysis types before investing in individual stocks.
This method of analysis assumes that a stock’s price doesn’t necessarily reflect the company’s actual value. You use other valuation metrics and information to determine if the current price is a bargain.
This strategy is excellent for long-term investors who want to hold a stock for ten years or more.
Technical analysis assumes that a stock’s price represents all available information and that it will move with trends. Reading charts and their patterns is essential in technical analysis.
Many investors use this analysis to predict which direction a company might go in short term.
How to Research Stocks
So, how do you get started? Here are the first things to consider as you dive into stock research.
Find Your Focus
There are thousands of stocks out there and almost a dozen sectors. You can dive into finance, healthcare, consumer goods, energy, big tech, industrial products, etc.
You want to whittle things down to one or two sectors, which keeps you from being overwhelmed and helps you assess a company’s competition more quickly.
Use Qualitative Research Factors
Know the company. This mindset borrows from an old Warren Buffett adage, and it rings true if you want to become a shareholder in a business.
You should know what they do or produce and how they make money. It is also good to know who runs the company, their directors, leadership track record, and how they invest in the operation.
Use comparison charts to compare the company’s short- and long-term performance against the competition and the overall market. What causes dips and drives rallies?
Gather Data from Tools and Reports
There are quarterly reports, earnings figures, sector and market trends, and news from everywhere. You could spend your entire day trying to digest it all.
Luckily, this is the tech age, and all sorts of tools and apps can help you collect information on a company. A quick Google search for financials and news, paired with the dynamic stock charts in StockMarketEye, will get you started on the right foot.
How to Evaluate Stocks to Buy
There are a few critical indicators in picking a good stock. The following are some fundamental ratios to assess the value of a company and if it may be a good time to buy.
Price-To-Book (P/B) Ratio
The P/B ratio is essentially the assets of the company minus its liabilities. This one is the bare-bones indicator of a company’s worth and effectively represents its value if it gets sold today.
Anything of value goes into the price-to-book ratio, such as physical equipment, buildings, land, and other assets like stock holdings and bonds.
It is a helpful factor because companies in major industries may decrease in growth but are still valuable in terms of assets. A low price-to-book may mean the stock is undervalued and worth a second look.
Price-To-Earnings (P/E) Ratio
Investors and analysts give the P/E ratio a lot of attention as a good indicator of company value. The formula is simple; if a stock trades at $20 a share and has earnings of $2 a share, the P/E ratio is 10. That’s the share price divided by earnings per share.
There are trailing P/Es that experts use to compare past performance and forward P/Es to help project the future. Value investors like a low P/E ratio.
Price-to-Earnings Growth (PEG) Ratio
The PEG ratio considers the past growth rate of a company’s earnings. It is the P/E ratio from above divided by the year-over-year growth rate of earnings.
The PEG is an excellent way to compare competitors and a great way to assess low-priced or penny stocks. Analysts like a stock with a PEG ratio below 1.00 because of its growth potential. But it is very speculative since there are no guarantees.
Everyone likes a little money back on investments from time to time. Dividends are periodic payments companies make to stockholders to share their profits.
Some investors look for high dividends as a sign of a healthy company, but inconsistency could be a red flag. When looking at a prospective stock, check if the dividend payments have increased or decreased year over year.
Assigning Value to Stocks Helps You Choose What to Buy
If you consider all of these factors, you’ll have a good idea of the value of a stock. This research aims to help you feel confident about your next investment decision. You may even see a stock’s future, but nothing is certain.
Can You Find A Sure-Fire Winner?
While this is stock research 101, we hope the above factors will give you a jumping-off point and help you build your portfolio.
Of course, you can still pay that broker to manage some of your investments. Still, maybe you’ll feel more confident buying an individual company with a bit of your budget.
With StockMarketEye, you can import the portfolio from your broker and track all your individually researched stock picks against it. Can you beat their average return?