{"id":35923,"date":"2013-02-04T21:22:34","date_gmt":"2013-02-05T02:22:34","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=35923"},"modified":"2013-02-04T21:22:34","modified_gmt":"2013-02-05T02:22:34","slug":"how-to-pick-stocks-at-a-fair-price","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/02\/04\/how-to-pick-stocks-at-a-fair-price\/","title":{"rendered":"How to Pick Stocks at a Fair Price"},"content":{"rendered":"

By MoneyMorning.com.au<\/u><\/a> <\/p>\n

Over the past few days we\u2019ve seen a bunch of references to something called the \u2018Great Rotation\u2019.<\/p>\n

What does it mean?<\/p>\n

The cynic in your editor says it\u2019s just another catchphrase created by the financial drones. These are people who are incapable of +buying or selling unless there\u2019s a fancy phrase to go along with it.<\/p>\n

Want to sell stocks? Not until they\u2019ve got a \u2018fiscal cliff\u2019 or \u2018debt ceiling\u2019.<\/p>\n

Want to buy stocks? Not unless they\u2019re in the midst of the \u2018Great Rotation\u2019.<\/p>\n

So what\u2019s the next catchphrase the financial drones will make up as an excuse to buy or sell stocks<\/a>?<\/p>\n

Who knows? But to be honest, we don\u2019t care. We\u2019ve long stopped caring what the self-important drones think. We\u2019d rather stick to picking good stocks at a fair price<\/strong>.<\/p>\n

Trouble is where do you start?<\/p>\n

<\/span><\/p>\n

Well, it depends on the kind of stock you\u2019re looking for.<\/p>\n

If you\u2019re after a beaten-down blue chip stock<\/a> you can look at the usual financial metrics: balance sheets, income statement, price-to-earnings ratio, price-to-book value, return on equity, and so on.<\/p>\n

You can then compare different stocks to figure out which is the best value.<\/p>\n

In fact, even some of the basic online trading platforms include a simple screening tool that helps you filter stocks based on certain criteria.<\/p>\n

For instance, you may have a theory that all stocks are worth buying if they have a price-to-earnings (PE) ratio of 7 or lower.<\/p>\n

Plug that into the screening tool and hey presto! you\u2019ll have a list of stocks with a PE less than 7.<\/p>\n

Easy, right?<\/p>\n

Well, it\u2019s easy to get the info. But remember the old saying, \u2018Put rubbish in, get rubbish out.\u2019<\/p>\n

In other words, if your theory about buying all stocks with a PE below 7 is a bad theory, then the screening tool won\u2019t necessarily give you winning stock picks.<\/p>\n

It may give you some winners, but it will probably give you a bunch of losers as well. So how do you pick the good from the bad?<\/p>\n

There\u2019s More to Picking Stocks Than Balance Sheets and Ratios<\/h2>\n

That\u2019s what makes experience, practice and trial-and-error so important. It will help you figure out which ratios are relevant and which aren\u2019t.<\/p>\n

In fact, most analysts and stock pickers use several criteria to filter and pick stocks<\/a>. Even then, it\u2019s not cut and dry. Most analysts will also look at other aspects of a company \u2014 what the company does, who its customers are, who its suppliers are, and what\u2019s the outlook for the company\u2019s industry.<\/p>\n

That means it takes a lot of time to analyse stocks. But perhaps the cruellest thing of all: after you\u2019ve done all the analysis and separated the wheat from the chaff, you still<\/em> may not have a stock to invest in<\/a>\u2026so it\u2019s back to the drawing board.<\/p>\n

But at least when you\u2019re backing beaten-down blue-chip stocks you\u2019ve got a place to start. That isn\u2019t always how it is with small-cap growth stocks<\/a>\u2026<\/p>\n

This is why small-cap growth stocks are so much riskier<\/a> than blue-chip stocks. In many cases it\u2019s not worth looking at the income statement because the company doesn\u2019t make any money.<\/p>\n

And the only reason to look at the balance sheet is to see how much cash the company has left. Most small-cap growth stocks eat through cash pretty quickly as they attempt to uncover the game-changing resource discovery<\/a> or technology that could transform their business.<\/p>\n

As for PE ratios, price-to-book ratios or return on equity, forget about it. When a small company is exploring for a new resource, or developing a new technology, those ratios are meaningless.<\/p>\n

Of course, not all small-caps are resources explorers or small technology stocks. Some small companies are profitable but stay small because they operate in a niche market.<\/p>\n

With those companies it is<\/em> possible to analyse their financial statements (one of our small-cap value stock picks is up 86.2%<\/a> including dividends since last June, beating the S&P\/ASX 200 which is only up 20.4% over the same timeframe).<\/p>\n

Here\u2019s the Real Exciting Stock Story<\/h2>\n

But back to small-cap growth stocks<\/a>. We suggest there\u2019s still a lot of potential growth in this market\u2026despite the strong rally since mid-November.<\/p>\n

To put things in perspective, there are roughly 2,000 stocks listed on the Australian Securities Exchange (ASX). Yet, there are 1,323 stocks that have gained less than 15% over the past year.<\/p>\n

That\u2019s roughly two-thirds of the Australian share market<\/a>.<\/p>\n

So, when we hear some investors say they\u2019ve missed the boat and that everything is too expensive, we don\u2019t buy it.<\/p>\n

Sure, there are a lot of expensive stocks. But there are many more stocks that are still cheap. And it\u2019s not just because they\u2019re bad companies with bad ideas (although there are plenty of those), it\u2019s just that right now those stocks haven\u2019t convinced investors they\u2019re worth buying.<\/p>\n

So it\u2019s the job of the analyst and stock picker to filter through those 1,323 stocks to figure out which one could be the next big thing\u2026which stock is on the verge of convincing investors it\u2019s worth buying.<\/p>\n

As you can guess, the numbers are stacked against the small-cap investor. But it\u2019s also why if you can get on board a stock before it pops, the returns are much greater than if you buy lower risk blue-chip stocks.<\/p>\n

All this sums up why we\u2019re still picking stocks and backing potential little Aussie winners\u2026while the mainstream focuses on the irrelevant and meaningless issues like \u2018Fiscal Cliffs\u2019, \u2018Debt Ceilings\u2019 and \u2018Great Rotations\u2019.<\/p>\n

Given a choice we\u2019ll take the risk and excitement of innovative small-cap stocks<\/a> any day of the week compared to the fluff and nonsense that drives the share prices of lumbering blue-chips.<\/p>\n

Cheers,
\nKris<\/strong><\/p>\n

Join me on Google Plus<\/strong><\/a><\/p>\n

From the Port Phillip Publishing Library<\/em><\/strong><\/p>\n

Special Report: How to Hunt Down 2013\u2019s Biggest Stock Market Winners<\/a><\/p>\n

Daily Reckoning:<\/em> The Great Rotation Into Stocks<\/a><\/strong><\/p>\n

Money Morning:<\/em> <\/strong>This Share Market Rally Has Angered Some Investors<\/a><\/strong><\/p>\n

Pursuit of Happiness:<\/em> <\/strong>It\u2019s Time to Set Your Retirement Gameplan<\/a><\/p>\n

Australian Small-Cap Investigator<\/em>:\u00a0Why Invest In Small-Cap Stocks? And Why Now?<\/a><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Over the past few days we\u2019ve seen a bunch of references to something called the \u2018Great Rotation\u2019. What does it mean? The cynic in your editor says it\u2019s just another catchphrase created by the financial drones. These are people who are incapable of +buying or selling unless there\u2019s a fancy phrase to go … <\/p>\n

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