Here is a final copy of our game plan. Use this list to find stocks for the next meeting. A week before the next meeting, please send your stocks to me (firstname.lastname@example.org) and I will upload it on this site for everyone to see and form their opinion on them. Here it is:
- P/E ratio – Good P/E for a value approach would be between 8 to 15. Avoid negative P/E.
- If a company provides dividends, it must be increasing and consistent for atleast 10 years.
- Return on Equity (ROE). Look for companies with 15% ROE or higher. Break down the ROE and understand what is driving it. To breakdown the ROE, look at ROA (Return on Asset), Profit Margin, and leverage ratio (Asset/Equity).
- Debt to Equity (D/E). Look for companies with less than 1 D/E. If not less than 1, compare with industry standard.
- Price to Book (P/B). Look for companies with less than 1.5.
- Forward Price Earnings. Look for companies that have a number similar to trailing P/E (between 8 to 15 is good).
- Look for companies with large MOAT. What gives barriers to entry and a competitive advantage for company. See how well their connected with their suppliers and see if their brand has any value.
- Profit margin or income must be above 10% for past 10 years.
- Figure out if the company has cash to back their operations. Take a look at cashflow statement and the following ratios: cash flow to equity, current ratio, free cash flow to equity.
- Compare cash per share with their earnings per share. It is favourable to see cash per share greater than earnings per share. This shows company can pay dividends and is not relying on debt.
- For growth companies take a look at earnings/share growth rate or PEG.
- Take a look at insider buying to see how much management has an interest in the company.
What to Avoid:
- Jim Cramer, CNBC, Promotional Emails.
- Avoid hyped stocks/industries.
- Avoid CEO’s forecast of the business.