www.investing-performance.com
Buy Cheap Stocks
Disclaimer
Stock speculation is very risky
Do not trade with more than you can afford to lose.
Seek professional investment advice.
This is not investment advice.
No warranties, you are on your own.
What Makes Stocks Cheap?
Stocks are cheap when the underlying value of the stock is much less than the current price –
Rubber band
Price is much less than value = cheap
NOT future value – actual, hard, present value
No pie in the sky
What is VALUE?
Value is almost always based on two things
1. Assets
2. Earnings
The other things claimed to be value – reputation, goodwill, good management, blah, blah, have to show up in earnings to be valuable
Earnings
Price earnings ratio – low P/E is good
You put $100,000 in a bank Certificate of Deposit (CD) for a year and get 2% interest
You paid 50 times earnings = the price of the CD divided by the earnings (interest)
How smart is this when you can easily find stocks selling at 10 times earnings or less?
But stocks' prices change and CDs are insured
Earnings Yield
If the stock sells at $10 and makes $1.00 per share in earnings, the price-earnings ratio is ten
And the “earnings yield is 10%
In other words, all things being equal, your stock should grow 10% per year
Valuing Assets
Cash – no haircut = 100%
Receivables – not all may be collected
Inventory – may be stale – how fast does it turn
Property, plant and equipment – what price was it bought at, how much deprecation
Intangibles – I usually value at zero, can be inflated
Shareholders Equity
Adjust for preferred stock, warrants, etc.
Treasury stock – At what price does the company buy its own stock?
Calculate book value per share
Cash and Working Capital
Calculate cash per share, working capital per share
Working Capital is current assets minus current liabilities
Calculate current ratio by dividing current assets by current liabilities – two or better is good
Summary – Buy Cheap Stocks
Cheap stocks are cheap comparing price with value
Value is book value and earnings power
Do NOT use future value – only present value
Calculate book value per share, cash per share, working capital per share, and price earnings ratio
Cheap Stocks Can Stay Cheap
Cheap stocks can stay cheap forever
But you want to reduce risk by buying cheap
Figure out which cheap stocks may go up – see my other videos or buy my books on Amazon.com –
How to Find a Home Run Stock
–
How to Pick Hot Reverse Merger Penny Stocks
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John Lux Trader, investment banker, former OTC market maker and attorney Lux.Investor@ gmail.com
Copyright ŠJohn Lux 2011