Free Market Stock Analysis

This article discusses free market stock analysis. Any investor, even a small one, can do the kind of analysis of his own stocks that two of Wall Street's most sophisticated security analysts do for the nation's major institutional investors. Robert Olstein and Thornton O'glove sell their Quality of Earnings Report for fees running into five figures a year in security transaction commissions. They don't forecast the market or recommend buys, sells, or holds. They critique the financial statements of hundreds of major corporations, looking for problems. And they find them. See stock analysis for more information.

In an interview, Olstein and O'glove disclosed ways that individual investors can examine their own holdings in the same ways-if they'll just take the time.
When they have a question about a company, the first thing they do is call the company for an answer. Individual investors have an advantage over professionals here: Corporate executives are less wary of them, more likely to answer straight rather than evade or smooth-talk. Steps to take:

Look for financial statement peculiarities:
Deviations from trends, inconsistencies, especially between stockholder reports (annual and quarterly) and filings with the Securities and Exchange Commission (SEC)-lOKs, lOQs, proxy statements, prospectuses, etc.-that companies must provide.
Focus on big deviations between the financial report and the tax returns. No outsider, not even a shareholder, can see a tax return. But corporations must reconcile deviations between the two sets of books in their SEC lOK filings. They must explain the significant differences between tax costs in financial statements and what's actually paid to the IRS. Key items: Deferred taxes, differences between effective tax rates and statutory rates because of depletion allowances, investment tax credits, offshore tax credits, FSC benefits, etc. Example: Corporation's reported earnings went from 93et: to $1, but Set: represented deferred taxes. Real earnings growth may have been only 2et:-not 7et:. Inventory figures are crucial: Not only the turnover ratio changes, but also the mix of raw materials, work in progress, finished goods, ete. Look at these figures to see if there are buildups of finished goods, maybe signifying plans to cut production, or an increase in raw materials without increases in work in progress, meaning a production problem.

Accounts receivable: What's happening to allowance for doubtful accounts? Worry if the ratio to receivables is up or down. Could mean they are expecting trouble if it's up or manufacturing false earnings if it's down. Another key number worth figuring can be number of days of sales in the receivables total, indicating level of activity compared with previous years.

Accounts payable: Are they stretching out payments? Why? Credit problems?
Sources and uses of funds statement: How is company's liquidity situation? Is it going to need new financing?

Income statement: Look at ratio of marketing costs, R&D costs, cost of goods sold, etc., compared with trends. Is it controlling its expenses at past rates or losing control? Did changes in trends penalize earnings? Increase them? Deviations in either direction are worth following up with calls to management (play the bumpkin; you may get better information).

To Free Market Stock Analysis - Top

Standard advice for investors: Buy into companies when they're unpopular and relatively cheap. Problem: How do you really know when that's the case?
As a guideline, investors have traditionally used the price/earnings (P/E) ratio (the market price per share divided by the net income per share). They compare that ratio with the average PIE ratio of the Dow Jones industrial average or another stock index.

Example: A stock looks especially attractive when its PIE ratio is 10 and the PIE ratio of the Dow is 18. Trap: The PIE ratio is dramatically affected by a company's earnings, which are subject to arbitrary and often outmoded accounting methods.
Better guideline: The price/sales (P/S) ratio, which is more stable, more current and less susceptible to accounting manipulation. To get the PIS ratio, divide a stock's price by its sales per share.

Example: A company with $100 million in annual sales that sells for $15 a share and has 5 million shares outstanding has a price/sales ratio of .75 ($15 divided by $20 sales per share). Comparison: If the same company has earnings of $5 million a year, its price/earnings ratio is 15 ($15 divided by $1 per share earnings).
When dealing with PIS ratios, think smaller numbers. Very unpopular companies have a PIS below .25. An average company has a PIS of .5, and a very popular company has a PIS ratio of 1 or above.

Guidelines: To get the highest growth on an intermediate to long-term basis, stick with stocks having PIS ratios of less than .25. Sell the stock if its PIS ratio approaches 1. We've found that low PIS stocks outperform low PIE stocks-and by a wide margin.
There's also growing evidence, on the basis of a random sampling, that low PIS stocks outperform the market.

This isn't t9 say that PIE ratios don't have a place in stock analysis. Buying low PIE stocks is certainly a viable way to get above-average reward at below-average risk. No matter which ratios you watch, it's also necessary to use fundamental analysis to identify the quality companies among the low PIS or low PIE candidates.
Limits of use: PIS ratios don't apply to the stocks of companies such as banks, real estate investment trusts and others in which ongoing sales aren't the driving force. They're often not helpful in analyzing very small (under $5 million in sales), rapidly growing companies. However, they're especially valid for industrial companies, retailers and insurance companies.
 

Source: Consumer Information Center

Disclaimer: While every effort is made to ensure that the content of this website is accurate, the website is provided “as is” and Bizmove.com makes no representations or warranties in relation to the accuracy or completeness of the information found on it. While the content of this site is provided in good faith, we do not warrant that the information will be kept up to date, be true and not misleading, or that this site will always (or ever) be available for use. Nothing on this website should be taken to constitute professional advice or a formal recommendation and we exclude all representations and warranties relating to the content and use of this site.

 Copyright © 2010 by BizMove.com. All rights reserved