As I mentioned in my previous post entitled, “3rd Tip on Becoming a Financial Whiz: How to Value a Stock – Comparable Ratio Valuation”, once you have found an attractively priced stock, you must then analyze the company on a more detailed basis. This ensures that the stock you identified is indeed undervalued and that it does not have some major issue as to why it is trading at that price.

To start an investor on their journey, I have put together a worksheet that is meant to be used as a guide for due diligence of a particular company. Please visit http://www.iupsmip.com/component/option,com_remository/
Itemid,36/func,startdown/id,122/ to download an example of my analysis on Sherwin-Williams (SHW).

The fundamental analysis of a company is meant to identify any major underlying issues that the company might be facing, which should be understood before taking on an investment in that particular company. Such issues that might deter someone from making an investment in Sherwin-Williams might be the pending lead paint lawsuits that are in the courts now. My comfort in investing in this company is due to the fact that these cases are being thrown out of the courts and the company is not being found liable. I also see this company as a great long-term holding because it has consistently increased its dividend for over 21 years, considering their payout ratio is roughly 25%; the dividend is not at risk of being cut.

Here is a step-by-step process on how to fill out the fundamental analysis report, if you wish to do the analysis on a different company, please substitute the SHW ticker symbol with your chosen company’s ticker symbol.

Now that you have compiled all of the information into one place, you must then examine all of the underlying factors and determine whether the company would make a good investment. This is where you take into account the discount that you found the company to be trading at to its peers, then apply your fundamental analysis findings. You then will go into the report to the Investment Thesis section and state your decision and reasoning.

This does require some decision making on behalf of the investor, because in actuality, there are rarely any screaming buys available in the market. The best advice to be given is to diversify your holdings, smart money management is what a strategy that is not only smart but makes money. Feel free to check out the portfolio company holdings of the Indiana University of Pennsylvania Student Managed Investment Portfolio, which has used this fundamental analysis along with the Comparable Ratio Valuation to generate returns in excess of 4% over the market since inception (November 2006) with less risk.

Should you have any questions regarding basic fundamental analysis please feel free to contact me or leave a comment below.

When I initially first started looking into the stock market about 7 years ago, I didn’t know the first thing about what to look for when trying to find a company to research with due diligence. Most investment books at your local bookstore typically advise the reader to find a company that he is familiar with or one at which he actually shops and invest in that. Apparently this myth has been around long enough for people to believe it, but from my experience, it is the companies and the products that you don’t know about that will help make you wealthy.

One way to identify stocks is with an approach known as “Stock Screening,” which is a technique that finds stocks that match specific criterion. Initially, the investor starts with a pool of all stocks and begins to exclude portions of them by specifying different criteria, leaving only the stocks that match the set criteria for the investor to research further.

When it comes to a stock screener candidate for further research, I like to use Yahoo! Finance because it is free and is the main resource that I have used throughout my years of investing. To access the Yahoo! Finance stock screener please visit: http://screener.finance.yahoo.com/newscreener.html. Once there, click on Launch Yahoo! Finance Stock Screener, which will launch the JavaScript version. (If your computer does not open this screener, you can use the Launch HTML Screener and follow the similar instructions below.)

I will use the initial criteria of the Indiana University of Pennsylvania Student Managed Investment Portfolio team as a guide for this instruction.

The requirements of stocks in the portfolio have the following criteria:

• Market Capitalization of greater than $250 million
• Stock Price greater than $10 per share
• Price to Earnings Ratio between 5 and 20
• PEG Ratio between .25 and 1.5

Just using the above criteria, the stock screener has narrowed down the universe of stocks to 561 companies. Adding more criteria, such as “stocks that pay a dividend of 1% per year” and “stocks with a Price to Sale ratio of less than 2” brings the universe of stocks to a more manageable 146 companies.

Now that the screener program has helped to create a list of companies that, from the onset, appear to be trading at a reasonable valuation, it is time to pick a couple of different companies and perform further research. The next logical step in researching a company would be to complete the Comparable Ratio Valuation, which values a company based on the value of its competitors.

Using a stock screener such as the one available through Yahoo! Finance is quite beneficial to the novice investor because it identifies companies that may have never appeared on his radar. This process is the first step in how I found many of my winning stocks; also, the analysts on the IUP SMIP use this same approach to identify companies for further research.

If you have any questions, please feel free to email me at bryan@thefinancialwhiz.com or feel free to leave a comment.

Technorati Tags: stocks, stock market, screening, investments, analysis, trading, investing

What is the Stock Market? This is the first question that people usually ask when they find out that they can make money somewhere other than a bank. Instead of providing a textbook definition of the stock market, I felt it would be important to provide a graphical understanding of the general dynamics of the market and how it functions.

The above graphic displays how a stock goes first from being a part of a company to its final destination of the investor’s hands—or stock portfolio.

To better understand how a stock is formed, one must first understand how corporations raise capital. Corporations have two options from which they can obtain money to run their businesses; they can borrow (issue debt) or sell equity (issue stock). Each option has its own benefits and drawbacks for the corporation. For example, taking on debt means the company will have to pay the money back whereas issuing stock means giving away some ownership in the corporation; overall, it depends on what direction the owners want for the company. However, when a corporation chooses to issue stock in their company, buying in becomes the most appealing option for individual investors who are seeking returns in excess of those available through a bank. Stocks are not available on all companies because there are private company whose owners feel that they can access capital by other means without giving up ownership in their company—this is especially the case for family-owned corporations.

The process through which a corporation goes about issuing stock involves two markets. First, in the primary market, the corporation must pitch their company to underwriters who manage the sale of the stock in the Initial Public Offering (IPO). Following the IPO, the company is traded on a public stock exchange, such as the New York Stock Exchange (NYSE) or the NASDAQ. The trading that takes place in the public stock exchange is taking place in the secondary market. When an individual investor purchases a stock during the day, he or she is actually buying someone else’s share of the company because it is on the secondary market; the shares are no longer coming directly from the company.

Shareholders share certain unique benefits when they purchase a stock. Each share carries one vote in the election of the corporation’s Board of Directors, and though that may seem small, it still provides some say in the management of the company. Also, owning a stock entitles the investor to share in the company’s earnings. Though the investor cannot directly access this money, the company’s Board of Directors could elect to pay out a portion of the earnings through the issuance of a cash dividend or stock buyback. Finally, each share entitles the investor to a portion of the company’s assets should the company be liquidated. This, however, is not necessarily a benefit because usually after all the creditors are paid, very little is left over for the equity shareholders. In fact, this so-called benefit is actually one of the biggest risks in owning stocks. Still, if the public company is bought out by a private firm—one that does not offer public shares—shareholders receive some of this equity. For example, Penn National just sold for $6.1 Billion; its final price per share when the deal closes will be $67.00 per share. Though not exactly a result of liquidation, one could consider this the benefit that outweighs the risk of liquidation when choosing to invest in stocks. Overall, each share carries a proportion of the ownership, for instance, if the company had issued 10,000,000 shares, and an investor owned 1,000,000 shares they would effectively be entitled to 10% of the above benefits. More information can be found in Investopedia’s article “Knowing Your Rights As a Shareholder.”

To buy shares of stock, a common investor cannot go directly to the New York Stock Exchange, plop down $10,000 and buy 100 shares of General Electric on the exchange floor. Investors must go through authorized brokers who handle the buying and selling of stocks. Brokers do cost additional money, so the average investor cannot trade for only the amount of the stock’s cost. Whenever an investor makes a trade, the broker will charge a commission per trade (or per share) to cover the administrative costs and fees of their business. The internet offers an array of resources for investing; therefore, finding a broker suited to one’s own investing style is easier than ever before. Newer investors can choose full-service brokers who provide research but charge a higher fee. Seasoned investors or those who enjoy doing their own research can trade through discount brokers who provide a basic interface to enter stock orders and charge lower commission fees.

The basic concept of the stock market is that it provides a centralized-location for buyers and sellers to come together to exchange stocks. Because of the constant exchange between buyers and sellers during trading hours, stock prices move up and down throughout the day, and each trade usually generates a new price. The reason stock prices increase or decrease is simply due to the supply and demand of that stock. More buying pressure (meaning more people want to buy the stock than sellers want to sell their stock) creates an imbalance of supply and demand, and the stock price rises to bring the supply and demand back to equilibrium. The opposite occurs if there is more selling pressure existing in the market.

I hope that this explanation has helped give a brief overview of the stock market and the different aspects that go into it. If you should have any questions, please do not hesitate to contact me at bryan@thefinancialwhiz.com or post a comment below.

Technorati Tags: stocks, stock market, screening, investments, analysis, trading, investing

One of the approaches that the Indiana University of Pennsylvania Student Managed Investment Portfolio utilizes to value companies is known as the Comparable Ratio Valuation. This method uses a spreadsheet that I developed last year in allowing a potential investment to be compared against its closet competitors to find a company’s “intrinsic value.” While this approach may ignore fundamental flaws in a company’s business model, it gives an investor a good base to start analyzing potential stocks to invest in.

To download a copy of the valuation spreadsheet model, please visit: http://www.iupsmip.com/component/
option,com_remository/Itemid,36/func,startdown/id,100/

In the above spreadsheet example, an analysis of Amgen (AMGN) was done and the spreadsheet ultimately found the company to be trading at a discount of about 19% to its peers.

This spreadsheet is not the only determining factor in an investment decision; the sheet is preliminary a tool to analyze and identify stocks that will require more detailed research before a final decision can be made. The twenty minutes that it takes to input the numbers into the spreadsheet will save you roughly two hours or more compiling due diligence. In a future post, I will present the SMIP’s fundamental analysis worksheet that must be completed prior to the company being presented to the team.

At first, the spreadsheet is somewhat difficult to maneuver, but I will guide you through the process.

The areas highlighted in green are areas that will require you to input information to be used in compiling the intrinsic value of the company.

Company Inputs Section:

The data to be used here can be found at the links provided, but when analyzing a different company, please replace the ticker symbol with that of your company.

AMGN Competitors Section:

To get a good start on which companies to use as your comparable analysis, you should visit http://finance.yahoo.com/q/co?s=AMGN and http://finance.google.com/finance?q=AMGN and look under the Related Companies section. You want to find a sample of 5-6 related companies to input their valuation ratios to value your company. When selecting companies to use as comparables, you should look for companies that have a market cap above $250 million.

I will give an example of how to collect the information for the first competitor on the list BAX, Baxter International. You will need to collect the following information:

After this step, repeat the above processes for the other 4-5 competitors. If the ratio is not available for a company, just leave that section blank so it will not be used in the valuation calculation. If one company’s ratio is an outlier as compared to the other companies in the spreadsheet, consider leaving that section blank so it will not give an artificially high intrinsic value.

The Intrinsic Price Calculation:

The spreadsheet then takes the average of the 5-6 competitors’ ratios and then applies those ratios to the information provided about the main company under analysis. It then gives a price of the company for each of the valuation ratios: Price/Earnings, PEG, Price/Sales, EV/EBITDA, Price/Cashflow, and Price/Book. All of the prices that are given from those ratios are then averaged together to give the “Average Intrinsic Price”, which is then compared to the current stock price. Finally, a percentage drawn from these calculations shows if the company is overvalued or undervalued—and by how much it is. If the percentage is positive, then the company is undervalued as compared to its peers, and if the percentage is negative, then the company is overvalued.

I hope that this post has been helpful to those of you who are looking for a model of valuing stocks. This model should not be used by itself since it ignores other factors that go into the value of a stock, but it can help identify stocks for further research.

If you require any assistance in using the spreadsheet, or have any other questions or comments, please feel free to contact me at bryan@thefinancialwhiz.com.

The world of investments is very complex—as are many of the strategies that I have presented on this site over the past six months. The next couple weeks are going to be devoted to introducing investing to someone who has had no prior knowledge. Throughout the next couple editions, I will present the basic premise behind the stock market all the way through your first stock purchase. The following topics will be covered in the following posts:

• What is the Stock Market?
• How to Screen for Stocks?
• Analyzing Potential Positions
• Technical Analysis
• Buying a Stock
• Monitoring Your Investments
• The Future

I hope that the above topics will provide the readers with a jump start on becoming a Financial Whiz.