Friday, August 10, 2007

How I Select Securities

I am for the most part a value investor and as such invest primarily based on fundamentals. Some of the main metrics that I use are:

-Forward P/E
-Dividend growth rate
-Average EPS growth
-debt levels
-revenue growth

I am not going to provide specific numbers for each of the above metrics as it varies from industry to industry. However, one number that I generally view as being important is the forward P/E and I will rarely invest in a company with 1yr forward P/E of over 18 and a 2 year forward P/E of over 15. Due to that fact I generally do not invest in the technology sector (regardless of how great a company’s technology is I’m not going to pay over 18X next years earnings for it). From my experience, growth companies and those with a high P/E will often get caught with “multiple compression” when either the economy stalls or they fail to meet expectations.

I also look at qualitative factors such as:
-barriers to entry
-competitive advantage
-long term prospects of the industry (ie- I wouldn’t invest in a Cassette tape manufacturer that was trading dirt cheap---unless of course they had some valuable underlying assets such as real estate that weren’t factored into the price)
-management (do not focus on it though)
-cyclicality of the industry
-the fit of the stock in my portfolio

I usually don’t set target prices but in almost all cases I use limit orders when both buying and selling.


G said...

One of two ways to make money in market is to buy undervalued stocks. It seems you have a better understanding of valuation. So far mine have been pure guesses. I find it extremely hard to analyze intrinsic value of anything. I think there is a factor of entrepreneurship involved here.

Other method is to index the portfolio - the one I might end up using.

moneygardener said...

Good post.

I use a simlar method. One thing I really like is long-term consistency of EPS growth. I think that is the one factor that makes me feel the best about a company. said...

I'm surprised you don't use any cash flow indicators... cash flow can sometimes be the most reliable as it isn't subject to as many 'creative' accounting trickery.

Middle Class Millionaire said...


I do sometime use cash flow but usually when looking at resource companies.

kojak said...

I love dividend stocks but I noticed the yield was absent? with banks especially, wouldn't this be an indicator of a stock being on sale?