To start, I am not a financial advisor. I am still learning the nuts and bolts of the stock market, and by sharing it here, I hope it will make your journey easier. Without wasting any more time, let’s dive into my fundamentals on how to value a stock.
Product
Research and learn as much as you can about the company/business. Learn the past, present, and future if you plan to hold the stock long term. It is a continuous effort that is vital to understand if the company is changing its revenue stream, overhead expenses, and strategy moving forward. Use the SWOT (Strength, Weakness, Opportunities, Threats) analysis to measure the outlook and scalability of the business. Leverage the annual report for hard evidence and supplement with information available online (articles, news, journals), and corroborate them with studies/technical analysis done by other experts. I find this to be the most exciting part of unfolding new information and learning new things.
People
Study the leader (CEO) and management team (CFO, COO, other C-Suites). Analyze their track records, success stories, leadership styles, and their vision for the company. The future of a company is only as good as the leader managing the company. Leadership cultivates the foundation of culture to empower employees to achieve the company mission and realize how vital each of their contributions is to furthering those goals.
Financials
1) Stability. Analyze the stock price movement over a more extended period (5-10 years). Depending on the portfolio strategy, holding or buying stocks that survived times of economic difficulty may help minimize overall portfolio risks.
2) P/E ratio or price to earnings ratio is one of the most widely used metrics to determine stock valuation. P/E ratio shows what the market is willing to pay today for a stock based on its past or future earnings. The average P/E for the S&P 500 has historically ranged from 13 to 15, and we can use this range as a benchmark. Any P/E ratio above the average suggests that investors expect higher growth from the company, and vice versa.
3) Debt to Equity ratio. Be wary of buying stocks of companies with high amounts of debt in comparison to their equity, as this deemed to be a higher risk. Learn the basics of financial statements to help identify the difference between assets and liabilities. A cash (asset)-rich company suggests a lower risk while a debt-rich company suggests a higher risk.
I plan to share my analysis on selected 17 stocks (refer old posts) in my future posts.
Stay at home and stay safe!