9 points to check before picking a multibagger

7/30/2019 9 Points to Check Before Picking a Multibagger

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9 points to check before picking amultibagger

For most of us investing in stock market is a fascinating investment option. We always look to invest in those stocks which can fetch handsome returns. Mutlibaggers are stocks which have the potential to earn multifold returns in a stipulated period of time.

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For most of us, investing in stock market is a fascinatinginvestment option. We always look to invest in those stockswhich can fetch handsome returns. Mutlibaggers are stockswhich have the potential to earn multifold returns in a

stipulated period of time. A stock that gives returns up to five-fold is called a five bagger,

while the one which gives 10-fold returns is called a ten bagger. However, identifying themcan be like finding needle in a hay stack. Moneycontrol.com takes help from SP Tulsian andPN Vijay to know the nitty-gritties of investing in multibagger stocks.

According to experts, following characteristic should be kept in mind while scouting for a multibagger:

> Look for companies having lower equity base because lower the equity base higher wouldbe the valuations and earnings per share (EPS).

> Stocks where promoters holding is higher, the free float is lower, so there are chances of prices jumping on the back of strong earnings.

> Dig deep through information to recognise a substantially undervalued stock.
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> Stocks which are not much noticed by market can be potential multibaggers.

> Investors should opt for companies with strong positive cash flows and robust business

model.

> The share price of the stock should not reflect its earnings growth. One should also take anote of availability of inherent liquidity in the stock.

> While selecting companies, investors must always be cautious about the fact that selectedcompany follows the required corporate governance norms.

> The quality of the management and goodwill of the promoters should be considered.

> One should try and avoid looking for multibaggers in troubled sectors, which are not insync with the economy.

Multibaggers and misconceptions

When investing in multibaggers one should have a view of five years or more, howeverinvestors keep a view of just six-12 months and start expecting blasting returns, highlightsTulsian.

"Investors expect multibaggers to start giving enormous returns overnight, one has to keep aview of at least three years," Vijay adds.

All small stocks, which are not much talked about are considered as being multibaggersdespite them not having basic multibagger characteristics, this according to Vijay is anothervery common myth amongst investors.

Following are examples of classic mutilbaggers


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Hindustan Zinc , Hero Moto (earned over 25 times returns in the last 10 years)

Jindal Steel and Power (earned 5 times returns in the last 5 years)

Titan Industries (earned 5-6 times returns in the last 5 years)

Vijay feels, identifying multibaggers is one thing, but making big money out of them isanother. "Wine needs time to mature. So, to bag "multi" fold returns, investors should bepatient. Secondly, one should not be tempted to book profits after a 25 to 30% rise," herecommends.

[email protected]

Finding the Best Stocks to Buy As investors, it's important to know how to go about finding the best stocks to buy . Beforeit's possible to successfully choose the best stocks, you first have to understand some of thefundamentals of evaluating these securities. For example, what are the desired characteristicsfor a stock?

What Stocks to Buy?

The answer to that question is fairly straightforward: You are trying to figure out whichstock to buy, before the rest of society wants to buy that same stock. It's called the stock market for good reason. It's a very efficient market, one that follows the law of supply anddemand. As an investor, you want to buy a stock just before demand for that stock increases.

This means you need to buy an "undervalued" stock.

Additional Resources

Five Good Stocks to Buy in2011

Finding the Best Stocks to Buy Identifying Takeover Targets Poison Pill Defense Dividend Paying Stocks Understanding Dividends Understanding Market
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Now that we know what kind of stock we want to buy(undervalued ones), we have to be able to identify thespecific companies in which we'd like to invest ourhard-earned money. There are roughly 3,000 companies listed on the New York Stock Exchange alone, so unless you have a lot of time, we need to quickly narrow the list. Thefollowing guide will help you through that process, but there is no substitute for conductingyour own research.

Researching Good Stocks to Buy

In fact, the entire approach outlined below is based on a series of articles dealing with thetopic of stock research . We've already addressed one topic in our article entitled - the TenBest Stocks to Buy . In this publication, we're going to discuss the mindset you should havewhen you're trying to decide if buying a particular stock makes sense for a serious investor.

Pick a Market Sector that You UnderstandMany people like to play the market on gut, but we're not comfortable buying shares of acompany that is in a business we don't even understand. We'd rather spend our time focusingon sectors that we know and understand, rather than learning about topics such as nuclearphysics.

That means focusing on business sectors that we interact with daily: car manufacturing,toothpaste, or lawnmowers.

Pick a Stock with Real Value

The best stocks to buy will be those that demonstrate good fundamentals. Now some of youmight be thinking - this magazine is old school; they aren't even going to mention technicalanalysis. Well, you're correct in that thinking.

Technical analysis is the study of trading patterns and historical prices of a stock. If you'veever been a day trader in a bull market, then you might be forever sold on technical analysis.The techniques described in this publication rely more on in-depth stock research.

Fundamental analysis means you are looking at, and comparing, Price / Earnings ratios , book

value , cash flow, and return on assets . If you're not familiar with these terms, then take alook at our article on Understanding Financial Ratios .

Basically, you are looking for stocks with real intrinsic value . Something we discuss atlength in our third publication on stock research.

Avoid Stocks with Potential Liabilities

There are many stocks to choose from, so it is a good idea to stay away from stocks that arein the news because of large and looming lawsuits. Legal problems can drag on for years andlower a company's stock price, so your best bet is to steer clear of companies that have legal

problems.

Capitalization
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Look for Companies with Bright Futures

Although past performance might be a good indication of future returns, the reverse can alsobe true. If you find a stock with good fundamentals, then make sure you look at thepredictions of the analysts that track the stock. At the very least, make sure they arepredicting stable or growth in earnings per share .

If there is one lesson everyone has learned from the dot-com bust of the 1990s, it's thatcompanies need to be profitable to remain in business. Don't be confused when people starttalking about revenues . A company can have a huge revenue stream, but earnings are themeasure of a company's profitability. If you're serious about investing in the stock market,then you need to understand fundamental research topics such as earnings per shareestimates .

Finding a Stock that is Not Popular

This is probably one of the most difficult things to do. You want to pick a stock that is notpopular today, yet could be popular tomorrow. Remember, it is supply and demand forces atwork in the market. If a stock is popular, then this means that demand has already pushed theprice higher. You want to find a "sleeper" stock. This is a stock that is currently beingignored by the market, but has the future potential to rise in price.

If you follow these guidelines, then you should stay one step ahead of the crowd. By findinga fundamentally strong stock in a sector that you understand, you should rest comfortablyknowing that you picked a stock with the potential to provide for rewarding returns.

About the Author - Finding the Best Stocks to Buy

Bill Sharlow is the Editor of Money-Zine.com. Copyright 2004 - 2011 Money-Zine.com

Thursday, September 22, 2011

The Magic of Multibagger Stocks

Investing money in stocks is cool but investing money in potential multibaggers isabsolutely fascinating and mesmerizing since multibaagers are the only friends who canactually help you become a millionaire or a billionaire.

Indeed, becoming a millionaire used to be the ultimate dream, the difference betweenthe rich and the poor. Times have changed thanks to inflation and its compounding effect.These days, having a million is not enough for most of us to retire. While winning $1million in the lottery used to be the ultimate dream of millions, these days, any jackpot

under $10 million will not generate much excitement. As Sean Parker said in theFacebook movie, You know whats cool? A Billion Dollars.
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And I say to you forget 1 billion dollars and just aim for 1 billion rupees and thats cooltoo unless you are extremely greedy in which case Lady Luck herself will have to whisperthe name of the next multibagger! Wishful thinking. Not easy to make 1 billion rupees

even if you have one crore surplus funds since your stocks should then have to become a100 bagger! No, not at all easy. Its tough, really really tough to identify and invest in apotential 100 bagger.

Now lets get back to the real cool stuf f called multibagger stocks. What precisely aremultibagger stocks and how can an investor go about identifying such dream stocks thatcan change your life forever. Whats so magical about multibaggers.

What are multibagger stocks?

Multibagger stocks have true magic in that it can transform your stock investment of sayRs.1 lakh into Rs.10 or even 20 or 30 lakhs in just over 5 years. No bank, mutual fund or

Government on Planet Earth could present you with such fascinating returns. Thats th emagic and mystique of multibagger stocks. Enter the world of Multibaggers

Multi-bagger stocks are stocks that go up 2-fold, 3--fold etc. A stock that say goes up 5-fold is called a Five Bagger and a stock that goes 10-fold is called a ten bagger. Likelegendary investor Peter Lynch said, to be a millionaire, all you need is $10,000 and to

invest it in two ten -bagger stocks.

Multi-bagger stocks do not come from investing in established companies, but they exist inthe realm of small companies. When you buy an established company, with a wide

economic moat, you can make consistent profits of say 15%-25% like Warren Buffett.However, to make multiple returns on your money, you have to know how to pick the


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right Small Capitalization Stocks b efore they become medium, big and eventually, megacapitalization companies.

HBJ Capital specializes in finding the stocks of small cap companies before they becomefamous brands, before they develop an economic moat and before stock analysts andinvestors even know they exist.

A simple example of a multibagger stock is Titan Industries Titan was in dire state wayback in 2003. It was also undergoing a restructuring exercise with a target of increasingearning at a fast pace. The companys strong b rand equity in the domestic watches marketand the prospects of strong growth in the jewellery business accompanied by improvingmargins made the stock a potential multibagger at that point in time. The stock eventuallymultiplied 16 times, from Rs.67 to Rs.1070; all in a span of 5 years a great 16 bagger!

While most folks know that Rakesh Jhunjhunwalla [ RJ ] made great profits in Titan, whatmany dont know is that RJs forst multibagger pick was Tata Tea. He bought 5000 [email protected]/share and sold the entire quantity @Rs.143/share thereby making a cool profit ofRs.5 lakhs [ 715000 minus 215000 ] and that too in 3 months. Thats what I call a HighSpeed Multibagger 3.3 bagger in 3 months!

I would like to mention that we at HBJ Capital hunt for multibaggers which have a robustbusiness model, good P&L and balance Sheet strength. We never recommend stocks likeKaleidoscope Films Limited and we are least concerned if such scrips becomemultibaggers.


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Kaleidoscope Films Limited - having declining topline, losses and eroded reserves and yetit had a dream run .......from July 2009 at 98 paisa to rupees 42 in April 2011. Means inalmost over one a half year the stock has become a 42 bagger!

And yes, if somebody tells you Cals Refinery is destined to be the next multibagger of theIndian bourses then please take him or her to a Financial Doctor who will grill and drill himthoroughly to understand why this person thinks that Cal will be a winner and thenprescribe the poor person with some nice prescriptions.

How investor can identify multibagger stocks?

An investor must look at the following factors whilst searching for multibaggers.

Low Equity base lower the Equity base, higher the EPS and higher the valuation

Promoters Holding higher the promotors holding lower the floating stock andhence stock price can shoot up if y-o-y and q-o-q results are good.

Sector Choice - choosing the right sector is as important as selecting the rightpotential multibagger

Earning Visibility investors must search for companies having a robust businessmodel with promising earning visibility going forward.

Price Earnings Ratio if a company has good business model, strong fundamentalsand balance sheet strength backed by +ve cash flows and if such company is

quoting in the range of around 10 PE then we may look at such stock to see themultibagger potential.


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Book Value if the price of a stock is much below the book value then theinvestor must dig deeper to find out the potential of the stock in becoming amultibagger

Zero Institutional holding this one is crucial for the obvious reason that a

discovered and well resea rched stock would in all probability be havinginstitutional support. So,investors need to look out for scrips having virtually noinstitutional holding.

Positive Cash Flow needless to mention investors need to take a hard look atcompanies having consistent positive cash flow for the past several years backed bythe above factors.

And dont you ever forget that to identify a multibagger is like identifying KarishmaKapoor in her teens. And sometimes you have to rely on your hunch or sixth sense think

Infosys and you will know what I am talking about. You have to catch them young and notwhen Tom, Dick, Harry, Amar, Akbar and Anthony know about these stocks then it hardlymatters whether you own Naryans Infosys or Steves Apple!

And yes if you buy stocks containing above ingredients when blood is running in thestreets then the chances of such stocks becoming multibaggers gets accelerated youbecome richer faster!

Kishor S. Khot, [[email protected]], Equity Strategist, HBJ Capital Services PvtLtd http://www.hbjcapital.com/2011/09/magic-of-multibagger-stocks.html .

How to Choose Stocks 27 authors | 87 revisions | Last updated: July 26, 2012

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When you want to see more growth from your funds, it is time to take them out of the bank,and invest in stocks. When you know nothing about investing, it is a bit scary because youfear losing all your money. Learn first, how to understand how stocks work, and how tochoose the correct ones for you.

Edit Steps

1. 1

Read as much as you can about publicly traded companies, the stock market, accounting,

finance, financial statements, etc . There are tons of free websites devoted to these topics.

2.

2

Read the Wall Street Journal, and the Business section of your local paper . The more youread, the more you'll learn about the market and what to look for in a company.

3. 3

Start with industries with which you are familiar . No matter if you are a student, a teacher,whatever, you are familiar with at least some publicly traded companies.

4. 4

Think of products you like or companies that provide services you think are good orpopular .

5. 5

Look up the company or parent company that makes the product or service you like by

going to finance .yahoo.com or http://moneycentral.msn.com/home.asp , for example.

6. 6
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Look at the company's official website, especially everything in the Investor Relationssection .

7. 7

Look at the company's financial statements . It takes lots of time to learn how to analyzethese properly, but you should definitely have looked at them before investing in acompany.

8. 8

Become familiar with the free Morningstar .com website. Especially look at the "5-YrRestated" financial page--this page can identify the consistency of revenue growth, earningsgrowth, dividend record, stable number of shares, free cash flow, and the balance sheet.

9. 9

Decide how much money you are willing to risk . Imagine you were to lose all the moneyyou invested, how much would you put in?

10. 10

Enter an order for a certain number of shares after you have followed the stock for acouple weeks to see where it is .

11. 11

Learn how to identify stocks with criteria that may indicate potential for future priceappreciation .

12. 12

Determine a method of knowing when to be buying a stock and when to avoid adding new

money to your investments .

13. 13

Learn technical analysis tools like candlestick charting, EMA, MACD, etc . to better timeyour entries and exits.

14. 14

Read Benjamin Graham and learn about value investing .

o Learn what the "margin of safety" means. Warren Buffet learned this concept fromBenjamin Graham and Warren said that this is the most important three words ever

written about Real Estate. The Margin of Safety is buying a stock when the price of the company (value of all the shares) falls below the price of its assets (cash, land,


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buildings, equipment, stocks, bonds). A key-ratio called "Price-to-book" is thestock/assets and when it is below 1, there is a margin-of-safety.

15. 15

When you have read Graham, read all you can about Warren Buffett's strategies . Buffett

studied under Graham and got very rich by improving on Graham's approach. The book"Buffetology" by Mary Buffett is a good start.

16. 16

Think logically about the stocks that you buy . Consider the fundamental profit-producingfactors of the company; a stock that is cheap could be undervalued, or it could be nearlyworthless and overvalued by some betting on a miracle and some hoping to sell to thosepeople before the company collapses meaning that it has more going down than going up todo. Think also about trends and decide which is the best. For instance, if you know that a

mass group of immigrants are about to come to the United States it is logical for you to thinkthat they would talk to their relatives, it would make sense to get stock in the company thatprovides international telephone service.

Edit Tips

Be careful about buying the "hottest stock". It may indeed be a good buy but do your ownhomework to determine whether it meets your own criteria.

Read "One Up on Wall Street" by Peter Lynch. You will not regret it. Do not buy a stock without seriously thinking about it first. Imagine if it fell 10% the next

day, would you think you had made a bad investment or would you still believe in it? If youstill believe in it, that is just an opportunity to buy more at better prices.

Expect price fluctuations. If you plan to buy 100 shares in a company, for example, do notbuy it all at once. Instead, buy it in increments of two or three. For instance, you may buy 30shares now, and enter order to buy another 30 shares when the price drops 10%, and theremaining 40 shares when the price drops 20%. If the price never drops to the level of yoursubsequent order, fret not, as there will always be other opportunities available.

1. Benjamin Graham did a study of 100 years and the stock market crashed 19 times in100 years so every 5.3 years the stock market crashes 40% or more and every 2years there is a minor crash where the stock market crashes at least 20%. WarrenBuffet knows the companies that he likes and during these crashes he invests most

of his money. When the stock market is not crashing, Warren Buffet is hoardingcash. Warren Buffet and friends would get together every couple of years and ask the following

question, "If you were to go to a deserted island and you had to invest all your money in onestock for 10 years, what stock would it be?" Warren Buffet said that this helps them to focuson long-term buying of a stock rather than the short gain that requires a quick exit.

Be greedy when others are fearful and be fearful when others are greedy.

Edit Warnings

Do not impulse buy stocks. Make sure you know what you're getting into.

Don't place orders overnight. The stock might rise and open higher and you'll spend moremoney than you intended to.
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Don't sell when a stock falls unless you're sure it's only going to drop further. Panic selling isa top reason people don't come out ahead.

Edit Related wikiHows

How to Buy Stocks How to Get Started in the Stock Market How to Get a Venture Capital Investment How to Invest in Stocks How to Invest Small Amounts of Money Wisely How to Find High Yield Stocks How to Invest in Quality Dividend Stocks How to Decide Whether or Not to Read a Book

Edit Sources and Citations

http://www.morningstar.com http://www.stockcharts.com http://www.yahoo.com http://www.growthstockanalytics.com http://www.stockta.com http://www.howthemarketworks.com/questions/what-stocks-to-buy.php

Article Info

5 Must-Have Metrics For Value InvestorsMay 21 2011| Filed Under Fundamental Analysis , Stock Analysis , Stocks , Warren Buffett If you're a value investor , there's no "right way" to analyze a stock. Even so, any successfulinvestor will tell you that focusing on certain fundamental metrics is the path to cashing ingains. That's why you need to keep your eye on the metrics that matter.

As a value investor, you already know that when it comes to a company's health, thefundamentals are king. Fundamentals, which include a company's financial and operationaldata, are preferred by some of the most successful investors in history, including the likes of George Soros and Warren Buffett . That's no surprise, as knowing the ins and outs of acompany's financial numbers - like earnings per share and sales growth - can help an in-the-know investor weed out the stocks that are trading for less than they're worth.

But that doesn't mean that all metrics are created equal some deserve more of your attentionthan others. Here's a look at the five must-have fundamentals for your value portfolio.

Tutorial: The World's Greatest Investors

1. Price-to-Earnings Ratio
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While the price-to-earnings ratio (also known as the P/E ratio or earnings multiple) is likelyone of the best-known fundamental ratios, it's also one of the most valuable. The P/E ratiodivides a stock's share price by its earnings per share to come up with a value that representshow much investors are willing to shell out for each dollar of a company's earnings.

The P/E ratio is important because it provides a measuring stick to compare valuations acrosscompanies. A stock with a lower P/E ratio costs less per share for the same level of financialperformance than one with a higher P/E. What that essentially means is that low P/E is theway to go.

But one place where the P/E ratio isn't as valuable is when you're comparing companiesacross different industries. While it's completely reasonable to see a telecom stock with a P/Ein the low teens, a P/E closer to 40 isn't out of the line for a high-tech stock. As long as you'recomparing apples to apples, though, the P/E ratio can give you an excellent glimpse at astock's valuation. (Learn more about the P/E ratio in our Investment Valuation RatiosTutorial .)

2. Price-to-Book RatioIf the P/E ratio is a good indicator of what investors are paying for each dollar of a company'searnings, the price-to-book ratio (or P/B ratio) is an equally good indication of what investorsare willing to shell out for each dollar of a company's assets. The P/B ratio divides a stock'sshare price by its net assets, less any intangibles such as goodwill .

Taking out intangibles is an important element of the price-to-book ratio. It means that theP/B ratio indicates what investors are paying for real-world tangible assets, not the harder-to-value intangibles. As such, the P/B is a relatively conservative metric.

That's not to say that the P/B ratio isn't without its limitations; for companies that havesignificant intangibles, the price-to-book ratio can be misleadingly high. For most stocks,however, shooting for a P/B of 1.5 or less is a good path to solid value. (See Digging Into

Book Value to learn how book value per share is normally calculated.)

3. Debt-Equity

Watch: The Debt To EquityRatioKnowing how a company finances its assets is essential for any investor especially if you'reon the prowl for the next big value stock. That's where the debt/equity ratio comes in. As withthe P/E ratio, this ratio, which indicates what proportion of financing a company has receivedfrom debt (like loans or bonds) and equity (like the issuance of shares of stock), can varyfrom industry to industry.

5 Must-Have Metrics For Value Investors
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May 21 2011| Filed Under Fundamental Analysis , Stock Analysis , Stocks , WarrenBuffett

If you're a value investor , there's no "right way" to analyze a stock. Even so, any

successful investor will tell you that focusing on certain fundamental metrics is the path

to cashing in gains. That's why you need to keep your eye on the metrics that matter.

As a value investor, you already know that when it comes to a company's health, the

fundamentals are king. Fundamentals, which include a company's financial and

operational data, are preferred by some of the most successful investors in history,

including the likes of George Soros and Warren Buffett . That's no surprise, as knowing

the ins and outs of a company's financial numbers - like earnings per share and sales

growth - can help an in-the-know investor weed out the stocks that are trading for less

than they're worth.

But that doesn't mean that all metrics are created equal some deserve more of your

attention than others. Here's a look at the five must-have fundamentals for your value

portfolio.

Tutorial: The World's Greatest Investors

1. Price-to-Earnings RatioWhile the price-to-earnings ratio (also known as the P/E ratio or earnings multiple) is

likely one of the best-known fundamental ratios, it's also one of the most valuable. The

P/E ratio divides a stock's share price by its earnings per share to come up with a value

that represents how much investors are willing to shell out for each dollar of a

company's earnings.

The P/E ratio is important because it provides a measuring stick to compare valuations

across companies. A stock with a lower P/E ratio costs less per share for the same level

of financial performance than one with a higher P/E. What that essentially means is that

low P/E is the way to go.

But one place where the P/E ratio isn't as valuable is when you're comparing companies

across different industries. While it's completely reasonable to see a telecom stock with a

P/E in the low teens, a P/E closer to 40 isn't out of the line for a high-tech stock. As long

as you're comparing apples to apples, though, the P/E ratio can give you an excellent

glimpse at a stock's valuation. (Learn more about the P/E ratio in our Investment

Valuation Ratios Tutorial . )
http://www.investopedia.com/tags/Fundamental_Analysishttp://www.investopedia.com/tags/Fundamental_Analysishttp://www.investopedia.com/tags/Fundamental_Analysishttp://www.investopedia.com/tags/Stock_Analysishttp://www.investopedia.com/tags/Stock_Analysishttp://www.investopedia.com/tags/Stock_Analysishttp://www.investopedia.com/tags/Stockshttp://www.investopedia.com/tags/Stockshttp://www.investopedia.com/tags/Stockshttp://www.investopedia.com/tags/Warren_Buffetthttp://www.investopedia.com/tags/Warren_Buffetthttp://www.investopedia.com/tags/Warren_Buffetthttp://www.investopedia.com/tags/Warren_Buffetthttp://www.investopedia.com/terms/v/valueinvesting.asphttp://www.investopedia.com/terms/v/valueinvesting.asphttp://www.investopedia.com/terms/v/valueinvesting.asphttp://www.investopedia.com/terms/f/fundamentals.asphttp://www.investopedia.com/terms/f/fundamentals.asphttp://www.investopedia.com/terms/g/soros.asphttp://www.investopedia.com/terms/g/soros.asphttp://www.investopedia.com/terms/g/soros.asphttp://www.investopedia.com/terms/w/warrenbuffet.asphttp://www.investopedia.com/terms/w/warrenbuffet.asphttp://www.investopedia.com/terms/w/warrenbuffet.asphttp://www.investopedia.com/university/greatest/http://www.investopedia.com/university/greatest/http://www.investopedia.com/university/greatest/http://www.investopedia.com/terms/p/price-earningsratio.asphttp://www.investopedia.com/terms/p/price-earningsratio.asphttp://www.investopedia.com/terms/p/price-earningsratio.asphttp://www.investopedia.com/terms/e/eps.asphttp://www.investopedia.com/terms/e/eps.asphttp://www.investopedia.com/terms/e/eps.asphttp://investopedia.com/university/ratios/investment-valuation/ratio4.asphttp://investopedia.com/university/ratios/investment-valuation/ratio4.asphttp://investopedia.com/university/ratios/investment-valuation/ratio4.asphttp://investopedia.com/university/ratios/investment-valuation/ratio4.asphttp://investopedia.com/university/ratios/investment-valuation/ratio4.asphttp://investopedia.com/university/ratios/investment-valuation/ratio4.asphttp://www.investopedia.com/terms/e/eps.asphttp://www.investopedia.com/terms/p/price-earningsratio.asphttp://www.investopedia.com/university/greatest/http://www.investopedia.com/terms/w/warrenbuffet.asphttp://www.investopedia.com/terms/g/soros.asphttp://www.investopedia.com/terms/f/fundamentals.asphttp://www.investopedia.com/terms/v/valueinvesting.asphttp://www.investopedia.com/tags/Warren_Buffetthttp://www.investopedia.com/tags/Warren_Buffetthttp://www.investopedia.com/tags/Stockshttp://www.investopedia.com/tags/Stock_Analysishttp://www.investopedia.com/tags/Fundamental_Analysis


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2. Price-to-Book Ratio

If the P/E ratio is a good indicator of what investors are paying for each dollar of a

company's earnings, the price-to-book ratio (or P/B ratio) is an equally good indication

of what investors are willing to shell out for each dollar of a company's assets. The P/B

ratio divides a stock's share price by its net assets, less any intangibles such as goodwill .

Taking out intangibles is an important element of the price-to-book ratio. It means that

the P/B ratio indicates what investors are paying for real-world tangible assets, not the

harder-to-value intangibles. As such, the P/B is a relatively conservative metric.

That's not to say that the P/B ratio isn't without its limitations; for companies that have

significant intangibles, the price-to-book ratio can be misleadingly high. For most stocks,

however, shooting for a P/B of 1.5 or less is a good path to solid value. (See Digging

Into Book Value to learn how book value per share is normally calculated.)

3. Debt-Equity

Watch: The Debt To EquityRatio

Knowing how a company finances its assets is essential for any investor especially if

you're on the prowl for the next big value stock. That's where the debt/equity ratio

comes in. As with the P/E ratio, this ratio, which indicates what proportion of financing a

company has received from debt (like loans or bonds) and equity (like the issuance of

shares of stock), can vary from industry to industry.

The Death of the PC

Beware of above-industry debt/equity numbers, especially when an industry is facing

tough times it could be one of your first signs that a company is getting over its head

in debt.

4. Free Cash Flow

While many investors don't actually know it, a company's earnings almost never equal

the amount of cash it brings in. That's because companies report their financials using

GAAP or IFRS accounting principles, not the balance of the corporate checking account.
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So while a company could be reporting a huge profit for its latest quarter, the corporate

coffers could be bare.

Free cash flow solves this problem. It tells an investor how much actual cash a company

is left with after any capital investments. Generally speaking, it's a good idea to shoot for

positive free cash flow. As with the debt-equity ratio, this metric is all the more

significant when times are tough. (Watch out for accounting trickery when looking at free

cash flow, see Free Cash Flow: Free, But Not Always Easy to learn more)

5. PEG Ratio

The price/earnings to growth ratio (or PEG Ratio), is a modified version of the P/E ratio

that also takes earnings growth into account. Looking for stocks based on their PEG

ratios can be a good way to find companies that are undervalued but growing, and could

gain attention in upcoming quarters. Like the P/E ratio, this metric varies from industry

to industry. (For further reading, check out Move Over P/E, Make Way For The PEG . )

Going Beyond the Numbers

When it comes to investing, the numbers aren't everything. There are times when low

valuations are justified, and there are qualitative metrics like management quality

that also factor into a company's valuation. Just because a stock seems cheap doesn't

mean that it deserves to increase in value.

Ultimately, the only way to improve your fundamental analysis skills is to put them into

practice. With these five must-have fundamentals under your belt, you're well on your

way to finding the most undervalued stocks on the market.

For additional reading on value investing techniques, check out The Value Investor's

Handbook.

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9 points to check before picking a multibagger

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