Selecting Stocks

1
Selecting Stocks

• Use your own personal stock analystThe Value
  Line Investment Surveyfor free.

2
The VL Timeliness Ranking

• Gives VLs view as to how well the stock will
  perform over the next 6 to 12 months.
• 100 stocks are rated 1the top rating
• 300 stocks are rated 2above average
• 900 stocks are rated 3average
• 300 stocks are rated 4below average
• 100 stocks are rated 5worst expected performers

3
The VL Safety Rating

• VLs view of the financial health of the firm,
  the competency of its management, and volatility
  of its stock
• 1 most safe
• 2 above average safety
• 3 average safety
• 4 below average safety
• 5 least safe, very risky stock

4
Beta

• Measures the volatility of a stock compared to
  the stock market in general
• Beta Computation
• Change in the Price of a Given Stock
• Change in the Stock Market
• Example
• A stock rises 50 while the stock market rises
  25
• 50 / 25 2 The stock has tended to be twice
  as volatile as the market.

5

• Keep in mind the stock with a beta of 2 would
  tend to fall 50 if the market was down 25, for
  example.
• Stocks with betas of 1 have tended to move with
  the market.
• Stocks with betas above one are more volatile
  than the market. (often called aggressive
  stocks)
• Stocks with betas below one are less volatile
  than the market. (often called defensive stocks)

6

• Invest in high beta stocks if you have a high
  tolerance for risk.
• Invest in low beta stocks if you have a low
  tolerance for risk.
• Remember, betas change over time!

7
Insider Ownership

• Insiders are officers, directors, or major
  stockholders of a firm.
• Some feel that if insiders have high ownership in
  a company (say, 10 or more of the outstanding
  stock), they have even more incentive to help the
  company do well.

8
Insider Buying and Selling

• If insider buying insider selling, the outlook
  is bullish for the stock.
• If insider selling insider buying, the outlook
  is bearish for the stock.
• Insider buying is considered a better indicator
  of future stock price than insider selling.
• Insiders sell for non-investment reasons.

9
Capital Structure

• The capital structure shows how a firm financed
  its assets.
• Example
• Assets Liabilities Stockholders Equity
• 1,000,000 800,000 200,000 or
• 100 80 20
• This firm is using lots of debt financing. It
  has big principal and interest payments.

10

• This firm has much less financial risk.
• Assets Liabilities Stockholders Equity
• 1,000,000 200,000 800,000
• This firm would be much more likely to survive
  during a recession.

11
Financial Strength Rating

• A, A, A, B, B, B, C, C, and C are the
  ratings.
• A is the best.
• C is the worst, and indicates serious financial
  problems.
• A rating as low as C is satisfactory.

12
The Price/Earnings (P/E) Ratio

• P/E Current selling price of a stock
• Earnings per share
• 1,000,000 Year 2000 Profit
• 500,000 shares outstanding 2 EPS
• Current selling price of stock 40
• P/E 40/2 20 The stock is selling for 20
  times it EPS. Investors are willing to pay a
  multiple of earnings because they are looking at
  the future earning potential of the company.

13

• It would take 20 years for the company to earn an
  amount equivalent to your investment per share
  (40) if EPS stayed at 2.
• Hopefully EPS will rise over time. If it does,
  the price of the stock will rise.
• The trend in EPS affects stock prices more than
  anything else.

14
The Low P/E Approach

• Compare the P/E of the stock to the rate at which
  earnings are projected to grow over the next
  several years
• If P/E earnings growth rate (EGR), the stock is
  considered overvalued.
• If P/E undervalued.
• If P/E EGR, the stock is properly valued.

15

• Logic The P/E over time tends to move toward
  the EGR.
• Example
• P/E 10 Projected EGR 15 Stock looks
  undervalued (P/E
• If EPS is 2, stock will sell for ?
• If P/E rises to 15 (where it matches the EGR),
  the stock will sell for ?

16
VL High and Low Price Projections

• VL projects the high and low price at which a
  stock will sell during the next several years.
• Gives us some idea if we will be able to double
  our money in five years.
• If we can, we will earn about 15 a year.
• Rule of 72 72/15 approximately 5 years