Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Use This Indicator to Uncover Bargain Stocks

By

Play it smart with these equations.

PrintPRINT
For investors who fear that the markets have soared too far too fast, the thought that some stocks may still be cheap is hard to imagine -- especially when it comes to China.

Here's one way to separate the cash from the trash.

I call it the "good-deal number" or the "good-deal indicator." And for a very good reason: By running this simple equation, I can determine whether a stock I'm interested in is worth buying.

Intuitively, investors know that it's best to buy at the bottom and sell at the top. And history bears this out.

For instance, investors who bought at or near such market peaks as 1928, 1969, 1999, or 2007 tended to overpay. And they doomed themselves to sub-par returns as a result.

On the other hand, investors who had the courage to wade in when the days were darkest -- think 1932, 1942, 1982, and 2003 -- were typically rewarded with above-average results. Over time, such moves can translate into life-changing wealth.

Unfortunately, reality is never that simple. Markets usually aren't operating at peak or trough levels. And even when they are, how can an investor tell for sure?

Nor is that the only challenge investors have to face, Pat Dorsey, director of equity research for Morningstar, wrote in a recent Money magazine column. Although investors endure a daily barrage of stock prices, Dorsey said there's no "ticker tape" that tells us whether those prices represent actual values.

In other words, just because a stock is cheap doesn't mean it's a bargain.

That's why I like my "good-deal indicator" so much. Although it can be used when the markets have reached extremes, it's just as useful when the markets are in between extremes -- as they are right now.

But best of all, it's simple to calculate and easy to use. I can run the number in my head or on the back of a napkin -- without resorting to fancy spreadsheets or computer modeling. You can develop a good feel for how a company will perform over a longer stretch so you won't get fooled by one or two periods of dramatic movement.

Let's walk through a real-world example drawn from a meeting I held in China regarding a fast-growing energy-and-biofuels company that I'm studying right now.

To start, you need two key numbers: the company's earnings per share (EPS) and its price/earnings (P/E) ratio.

Since 2007, this company's annual per-share earnings have ranged between $0.22 and $0.72, according to MSNMoney.com. For purposes of making a reasonable, middle-ground estimate, let's say the company's EPS number is $0.47.

During the period in question, the company's P/E ratio has ranged from a low of 5.0 to a high of 43. So using the same middle-ground approach, let's call it a P/E of 24.

Now we multiply the EPS of $0.47 by the P/E of 24 (0.47 x 24) and we get a rough "value per share" of $11.28. That's roughly 1.69 times higher than the stock's recent market price of $6.65, suggesting that this particular stock is a "good deal."

Here's the calculation:

EPS of 47 x P/E of 24 = Estimated Value of $11.28/Market Price of $6.65 = "Good-Deal Number" of 1.69. Conclusion: Stock appears to be undervalued -- and a "good deal" -- at this price.
< Previous
No positions in stocks mentioned.
Fifteen trades. All profitable. Since launching his Geiger Index trading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 15 for 15, meaning he's closed every single one of his trades at a profit. And he did this during one of the most volatile periods for the U.S. stock market since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, the Geiger Index.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE