Couple questions on how to evaluate a stock

[SuperDave]

I have been doing some research on how to read stock tables such as P/E ratio and and what that means but I was wondering what I should be looking for exactly when reading figures on a stock. Is P/E ratio the best way to evaluate a stock? Should the revenue of a company be considered? What are the best ways to evaluate stocks?

[Stocktrading101]

Originally Posted by SuperDave

I have been doing some research on how to read stock tables such as P/E ratio and and what that means but I was wondering what I should be looking for exactly when reading figures on a stock. Is P/E ratio the best way to evaluate a stock? Should the revenue of a company be considered? What are the best ways to evaluate stocks?

If I understand you correctly here Dave, you are asking about the best way to evaluate a stock fundamentally (sales, earnings, debt, etc.) versus technically (chart analysis with moving averages, MACD trends, etc.); That is a great question! P/E ratio is probably the most popular figure to utilize to judge a company's value. And really, it all boils down to strategy and proven theory, investors like Warren Buffet weighed heavily on debt (amongst other factors), whereas some investor groups may not even take debt into consideration. I know this isn't a direct answer to your question, but I do recommend heading over to investopedia.com, here is a link to a great tutorial on fundamentals, perhaps this can lead you in a better direction!

Fundamental Analysis: Introduction

[gijoe9]

Well Dave I agree with Blain on the tutorials at investopedia being a good place to start. I would mention that all types of analysis are about indicators and that if there was just one that worked then everyone would be using it to get rich. The P/E is an indicator of the relative value of a company compared to others. High P/E indicating less value and low indicating more value. But there are other factors to consider like the industry minning tends to have a low P/E <10 and Tech will have a high P/E >20 so how do you compare Microsoft (MSFT) to Southern Copper (PCU)? You can't really using P/E alone although you could use the industy averages to compare.
What I am really trying to illustrate here is that you need to learn how to compare apples and oranges when you are trolling for companies. I use a screener to find candidates for further investigation. In order to get the most from a screener I need to know and understand the different fundamental indicators and how they relate or mesh with each other. I also need to know what I am looking for Growth, Blue Chip, or other.
That is all I got to say for now. Good luck Dave and ask more questions when you need to.

[SuperDave]

Originally Posted by Stocktrading101

If I understand you correctly here Dave, you are asking about the best way to evaluate a stock fundamentally (sales, earnings, debt, etc.) versus technically (chart analysis with moving averages, MACD trends, etc.); That is a great question! P/E ratio is probably the most popular figure to utilize to judge a company's value. And really, it all boils down to strategy and proven theory, investors like Warren Buffet weighed heavily on debt (amongst other factors), whereas some investor groups may not even take debt into consideration. I know this isn't a direct answer to your question, but I do recommend heading over to investopedia.com, here is a link to a great tutorial on fundamentals, perhaps this can lead you in a better direction!

Fundamental Analysis: Introduction

Thank you so much for posting back! Yes I am just really getting deeper into investing and I was wanting to know how to evaluate, like you said, fundamentally versus technically. I will definitely check out the tutorial at investopedia as soon as I'm done typing! I've been there many times before to look up certain investing lingo but I guess I didn't catch the tutorial on there.

This may be stupid to ask too, but when you say debt you mean like what the business pays for capital compared to what they earn right? I certainly know of Warren Buffet, but how exactly does he take that into consideration as a strategy for building such large company with Berkshire? Thanks!

Thanks again for all your help and info. I'm like a sponge on this board, I just soak it all up!

Dave

[SuperDave]

Originally Posted by gijoe9

Well Dave I agree with Blain on the tutorials at investopedia being a good place to start. I would mention that all types of analysis are about indicators and that if there was just one that worked then everyone would be using it to get rich. The P/E is an indicator of the relative value of a company compared to others. High P/E indicating less value and low indicating more value. But there are other factors to consider like the industry minning tends to have a low P/E <10 and Tech will have a high P/E >20 so how do you compare Microsoft (MSFT) to Southern Copper (PCU)? You can't really using P/E alone although you could use the industy averages to compare.
What I am really trying to illustrate here is that you need to learn how to compare apples and oranges when you are trolling for companies. I use a screener to find candidates for further investigation. In order to get the most from a screener I need to know and understand the different fundamental indicators and how they relate or mesh with each other. I also need to know what I am looking for Growth, Blue Chip, or other.
That is all I got to say for now. Good luck Dave and ask more questions when you need to.

Great info! I'm sorry if I have so many questions but this kind of stuff gets my blood flowing...

Ok so the P/E ratio would be a good place to start but certainly not finish right? And you said that one P/E is good for one sector but not for another...is there a way to know exactly what the P/E level should be for any or all sectors? I mean not like a hard rule such as, "all tech should be above 20..." but like an example of where I should be measuring.

Ok this will sound dumb, but, when you say "screener" do you mean something you personally look for or something like a piece of computer software that helps you? I'm really confused on that.

Oh and one more thing. While on Yahoo finance looking up stocks I noticed that it says the industry leaders (for that one industry of course) for PEG were actually pretty high, like above 2 sometimes. I thought that a good PEG was supposed to be below 1? Was I misguided about PEG?

Thanks again for responding and taking the time to post. I look forward to learning even more from everyone.

Dave

[aquaswim47]

Cash flow from operating activities
Cash flow from investing activities (specifically capital expenditures)
Dividend payouts
Borrowing (paying back of debt)
Issuing (stock buybacks)

Cash on the Balance Sheet / AP
Cash / CL
Cash/TL
CA/TL
CA/CL
PE

I find revenue to be a chase indicator; it really doesn't say much about the future. I like PE between 10-16 but never above twice the growth rate. That means, for a biotech stock, it might be okay to have a PE of a stock of 28, if its growth rate (capital expenditures and sales) is greater than or equal to 16%. Good luck investing.

[gijoe9]

Dave Yahoo has a free stock screener on there somewhere I use MSN money deluxe it is free. I think rueters has one and there are probably others. For a fundamental researcher screeners are valuable tools. What a screener does is basicaly compare all stocks in its data base to see if they comply with your criteria and then display the top matches. Back to P/E when I search with the screener I set this indicator as follows (current P/E <= industry average P/E) so it will return a list of companies that have a P/E less than the industry average. I use other criteria to sort out other companies like Market cap, cash flow, and debt/equity among many others. I think investopedia has a few articles on stock screeners you should read them and let me know how you make out.

PEG is an indicator of value and growth relative to other companies. A company that has lower growth may have a low P/E but a higher PEG than one in the same sector that has a higher P/E but has higher growth so a lower PEG. The industry average PEG will also be a factor when comparing companies of different sectors or when the sector has a high average. A company that has a PEG 25% below the industry average vs a company that has a lower PEG but is 25% above it's industry average.
All I got for now Dave.

[llamagatekeeper]

I was just curious as to if anyone equates dividend yield into the evaluation process. While looking at a company and it is a steady performer say something like GE, and the yield is around 4% or so. Does that entice anybody?