buy cheap stocks
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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
Subscribe to my videos
� And subscribe to my blog:
� www. investing-
performance.com
John Lux
� Trader, investment banker,
former OTC market maker
and attorney
� Lux.Investor@ gmail.com
� Copyright ©John Lux 2011
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