Things You'll Need:
- An extra open webpage to Morningstar.com.
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Step 1
Step One: Use the charts to avoid downhill trends.
One way to determine if you want to buy a certain stock is to examine a chart of its five-year progress. On Morningstar’s home page, you will see a box to get a quote of you favorite stock. Once you’ve typed in the call letters, then hit return, you will see a page featuring this stock and in immediate quote. Click on the “Quotes and News” tab to get a chart of the stock’s growth. (Beware, sometimes the chart on the right is hidden under an ad.) Click on the five year tab at the top of the chart to see if this stock is on a long-term upward trend. Compare several of your favorite stocks and you will begin to get a feel for which ones have the kind of long-term return you want.
A good example is Brazil’s ishares (EWZ). In 2003, the graph shows the stock was at ten. Since then, it has given shareholders a wonderful return. Compare that to any index fund following the Dow Jones, such as Schwab’s index fund (SWPIX), which shows a gorgeous run for three years, then a big burp! This is where the visual use of the chart can be so helpful.
Remember that all stocks go up and down a bit. In fact, any stock taking off in a ninety-degree angle will always correct, perhaps even viscously. If you do invest in an index fund that follows another nation’s market, keep an eye on that fund periodically. Watch the trends and exit if you aren’t comfortable with its performance. -
Step 2
Step Two: A great PE will bring a better return.
This piece of basic and critical information is located under the “Snapshot” tab. While Price per share (P/S) and Total Yield information are important, the first important indicator is the Price per Earnings (P/E). A stock with a P/E ratio between five and twenty is a good value. Buying a stock above a P/E of twenty is like buying a can of peas for sixty dollars. Significant corrections in the stock will hurt your portfolio and they are more likely to happen with a P/E over twenty.
Why do people buy stocks with P/Es over twenty? There are several reasons. One answer lies in market trends, such as the most recent rise in the value of gold. Look at Goldcorp (GG), for example. The P/E has been well over fifty for some time. People like healthy companies, and in the past, Goldcorp made it known that it was debt free. Savvy investors bet that the price of gold will continue to increase. The company’s inventory asset will rise in value, therefore the stock may rise, too.
Sometimes a high P/E reflects a company operating at a loss. Take, for example, the semiconductor 8x8 (EGHT). Morningstar.com rates their P/E as “Infinity” and one other stock screener set the P/E at 3624. Insiders are buying like crazy, but why would the rest of us do that? The answer: speculation. Ten or so years ago, an investor at a Schwab conference in Anchorage told me he had invested in the Chunnel, and “thrown the stock into his grandchild’s’ portfolio,” certain he’d never see the fruits of that labor. Today, that stock is probably a shiner.
Most investors should stick with stocks “on sale.” That low P/E is the best way to find the sweetest value for the richest gains. Investing a small part of a long term portfolio in a speculative stock is all right, but the bulk should be managed sensibly. -
Step 3
Step Three: Crosscheck the Financial Statements with your personal awareness.
Just for fun, let’s explore Toyota Motor Company (TM). If you type in the TM symbol in the Search box, then click on Financial statements, you will immediately see a ten year income graph that would satisfy anyone. Imagine if you owned a business and the graph of your sales looked like this!
Experienced business people know that the ledger on this page is critical to understanding the health of a business, but most investors’ eyes glaze over when coming across any kind of financial data. That’s why this graph can help the common person see the general progress of a company.
Now ask yourself if you know anything about the product you are researching. The legendary financial guru, Peter Lynch, always advised investors to watch what products others were buying. This stock is an example of this. Toyota has a jump on hybrid cars, has the fuel easy Tundra, and is soon to be the biggest carmaker in the world. This information is in advertisements and on the news. Toyota’s stock should eventually soar as they meet the needs of consumers.
Why is the stock currently depressed? Car companies are not hot right now due to an increase in gas prices. Eventually the economy will recover and automobile stocks will recover. -
Step 4
Step Four: Check to see if the company leadership is investing in the company.
There’s nothing to boost the confidence of an investor than knowing the top dogs are putting their money into their company. Clicking on “Insider Trading” is a legal and free way to see what the sentiment is of those who are most likely to make the difference in the growth of a stock.
At the beginning of this year, the leadership in Eagle Bulk Shipping (EGLE) was buying their stock like crazy. The chart on the stock indicates a beautiful upward run since then. This is a perfect example of how insider trading can help determine the near future of a stock.
Don’t make decisions about a company based solely upon insider trading because not all action is relevant to the trend of a stock.. For example, if a company leader exercises an option, s/he may just balancing his/her portfolio. If an executive gives a gift, that is usually a vote of confidence in the stock. The most important reason to check “Insider Trading” is that stock sales by multiple executives are a warning flag. Rethink investing in any stock where the top brass has lost confidence in the stock’s ability to appreciate.
One last note, be sure all insider buying is at the current price of the stock. Sometimes executives have the chance to buy into their stock at a lower price (an option). Perusing data quickly can always lead to problems, so spend time evaluating the data you see. After all, the bottom line is that you are responsible for your money, and the extra time spent in learning all you can is critical to your success. -
Step 5
Step Five: Use Data Interpreter to learn as much as possible about the stock.
Why not gets a free second opinion? Why not add to what you know about a business already? Why not find out about how a stock dividend compares to other companies of the same size and industry? All of this is free under the “Data Interpreter” button.
Take 3M (MMM), for example. Insider trading says that the leadership is buying the stock. But under the Data Interpreter is a graph showing how MMM’s stock compares to an index fund, and the stocks in the industry sector. MMM has been lackluster. Also there is a line among the paragraphs that says, “…the company will probably have to raise additional capital from outside sources at some point if it continues to grow at its current rate.” Good? Bad? Hard to say for the average investor. But it is enough perhaps to either buy into the stock with some kind of exit strategy in mind, or look for another.
