Tag Archives: picking a stock

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September’s Pick

Well, the scores have been assigned to identify our stock pick for September and the winner is… General Motors Company (NYSE: GM) or Ford Motor Company (NYSE: F). You choose. Maybe you like a tie and maybe you don’t, but here’s the scoop.

GM earned a higher score (14) than Ford (12) but they both offer strong reasons to own them. GM came out on top for its strong earnings (EPS is 7.82) but is trading at only 14% below the 52-week high. To be sure, that’s a decent discount for a solid company. Ford’s earnings are not as good (EPS is 2.25) but they are currently trading at over 21% below the 52-week high. That’s a much better sale! The dividend yield for the two companies is essentially the same at 4.78% and 4.82% so we left that factor out of our decision. The price of each company has been pretty flat for the last few months so when they begin to recover Ford has a greater potential for capital appreciation. That’s not something to ignore, especially if you get the benefit of the same dividend in the meantime.

Soooo, if you want a company that is earning more per share for you buy GM. If you want to add the potential capital appreciation of Ford to the dividend yield, choose Ford. Our strategy identifies potential stocks to purchase using an objective method of assigning scores for a variety of factors. If you’re a regular reader, you know that we don’t always just simply buy the stock with the highest score. The system identifies potential purchases from which we then make a choice. Because the dividend yields are the same, we’re going to hope for the greater eventual price increase with Ford so that’s our official pick. Honestly, whichever you choose, you can’t lose in the long run with these two.

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July’s Pick

Well, it ain’t GM. After recommending General Motors Company (NYSE: GM) for each of the last four months, we’re offering something different for July’s stock choice. Before we do, it’s important to be completely transparent and let you know that GM was actually tied again this month with another stock at 14 points each. If you’ve already built a position in GM based on our suggestions, go ahead and add to your holdings this month. It’s still a great-looking stock scoring 14 out of a possible 20 points. More on that later.

Our choice this month is MetLife, Inc (NYSE: MET). MetLife is paying a dividend of 4.05%, considerably less than the 5.26% you’ll get from GM. The P/E ratio for MetLife is 8.46 which is nearly double GM’s 4.33, meaning GM could be viewed as being a little better-priced. GM is also more profitable as measured by their EPS of 6.68 compared to 4.67 of MetLife. Ok, you might be wondering, “Ummm, then why are you going with MetLife instead of GM?” One main reason: MetLife is 32% off their 52-week high while GM is only 22% off theirs. That means MetLife is at a better sale price compared to what people were willing to pay over the last year. Put another way, the price of MetLife stock could appreciate more compared to that of GM in the next several months. We think that possibility will compensate for the lower dividend yield. To be clear, we don’t advocate buying a stock just because you think it might increase in value. That sounds an awful lot like acting on a ‘hot stock tip.’ That’s not the case here. We’re simply trying to choose between two solid, reliable companies and we’re using potential capital appreciation to break a tie. It’s worth noting that another minor advantage to buying MetLife this month is that it increases the diversity in our portfolio by adding an insurance company to the mix.

Honestly, we don’t think you could go wrong with either one of these companies. If you prefer the higher dividend yield of GM then buy them instead. Either way, you can sleep at night and that’s a really nice spot for investors like us to be.

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June’s Pick

To be honest, we had a hard time settling on a stock pick this month. There was a couple of companies at the top but a couple of really tempting, slightly more risky options, too. If you’re looking for something with a little greater reward we still like Potash Corporation of Saskatchewan (TSE: POT) and you could also think about Williams Companies (NYSE: WMB). Beware though, with greater reward comes greater risk. Potash Corp did cut their dividend in April but they’re still paying an attractive 5.9%. Add to that the fact that we think the world will need fertilizer again in the future and this stock has room for growth. Since we started talking about them a few months ago, Williams Companies has risen from $11 to $21, an increase of about 90%. Not bad if we do say so ourselves. As the uncertainty caused by low oil prices levels out, their share price will continue to rise and they’re paying a juicy 12% dividend in the meantime. Remember that means even if the price was flat for a year you could sell it and walk away with a 12% return.

But enough avoiding the issue. The idea is to recommend a single stock each month, so let’s get to it. There’s something inherently uncomfortable about repeatedly recommending the same stock but one strength of our scoring system is its ability to remove subjective biases like that. That said, we’re suggesting General Motors Company (NYSE: GM) – again.

After we assigned the scores this month there was a three-way tie between General Motors, IBM (NYSE: IBM) and Gilead Sciences (NASDAQ: GILD). Although it scored high in other categories, GILD offers a dividend of only 1.9% which is well below our threshold of 3.5% so we eliminated it right away. If this feels a little like deja vu it’s because we had a tie between GM and IBM last month too. Our reasons for choosing GM again are going to read just like last month as well. The 4.7 P/E for GM is significantly better than IBM’s 11.5 which puts GM at a better price even though IBM produces more income per share with an EPS of 13.3 versus GM’s 6.7. The dividend return for GM is still nearly a full percentage point higher than for IBM (4.9% and 3.7%, respectively). Remember, this blog is still about dividend income so GM gets the nod once again.

Like we said last month, you can’t go wrong with either of these. Buy whichever you want – or both – and sleep at night.

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May’s Pick

It’s time to announce the results of our stock analysis for May and there won’t be any surprises this month. We actually had a tie between two stocks we previously recommended: General Motors Company (NYSE: GM) and International Business Machines (NYSE: IBM). After assigning all the points, both earned a final score of 13. If you’re the type of person that wants a little investment advice but also likes some choice, you’ll be happy with our post this month. In fact, there were some other companies that also scored very well but we like to minimize risk so we’re not recommending those ones. Potash Corporation of Saskatchewan (TSE: POT) also scored 13 and is currently trading 46% off their 52-week high while paying an attractive 5.8% dividend. If you don’t mind a little short term uncertainty, buying or increasing a position in POT would be a good move.

Every month we try to simplify things as much as possible so we feel compelled to actually choose a winner in the tie this month. We’re going with GM and here’s why. GM is 17.4% off their 52-week high and IBM is 17.1% off theirs so nothing notable there. We do see a difference in the P/E ratio, however. GM is at 4.8 while IBM is at 11 so, while they’re both similarly depressed from the 52-week high, GM is at a much better price overall, considering the P/E. In other words, their 52-week high should be higher so, technically, they’re on sale at a better price right now. IBM is more profitable on an EPS basis (13 versus 7 for GM) but we’re more interested in looking for a good price on a good company than current profitability. Finally, this is a blog about dividend income so the dividend difference between the two was the most important factor in our decision. The dividend for GM is currently 4.7% while that from IBM is 3.8 – almost a full percentage point difference!

To be honest, we feel both of these are great choices. If you previously bought IBM when we recommended them, it makes sense to buy more shares of that company to increase your DRIP (or compounding) potential. The same could be said for GM if you previously bought them. If you’d like to increase the diversity in your portfolio, buy the one you don’t already own. It’s really a no lose situation so whichever you choose you can sleep at night.

Choosing a Stock – Part 8: Let’s Practice Scoring

By now, you’re familiar with how we score stocks for our monthly recommendations. In this post we’re going to use General Motors Company to practice scoring so you can see how easy it really is. One of the goals of this blog to empower you to take control of your financial future by investing your money by yourself. It’s really not that scary and, with a few basic rules, pretty safe.

scoring_stocks_gm

This is a screen capture from Google Finance on March 14, 2016 (https://www.google.com/finance). To use our system, this is all you need. No need to worry about complicated stock analysis or expensive “hot” stock tip newsletters. Remember, the companies on the S&P 100 are all big, established companies so they’re all pretty safe. All we’re trying to do is pick the best company at the time from a list of great companies. If we do that we’ll also achieve our other goal – to sleep well at night. Let’s use the data from Google Finance to score GM.

The stock is currently trading at 20% below the 52-week high ((38.99-31.18)/38.99). In other words, it’s on sale for 20% off. It’s only fair to point out that lots of other stocks on the S&P 100 were more than 20% off their high but we’re just using GM as an example and sale price is only one of the factors we consider. We give it a score of 3 for being on sale (Choosing a Stock – Part 3: Buy on Sale). The dividend is 4.87% ((0.38 x 4)/31.18). Most online services calculate that automatically for you which saves some paper and pencil work. It earns a score of 4 for the dividend yield (Choosing a stock – Part 2: It’s all about the dividend!). The P/E ratio is 5.19 and the EPS is 6 which get scores of 5 (Choosing a stock – Part 5: Does the company deserve the price?) and 2 (Choosing a stock – Part 6: How much of the value will be mine?), respectively. Those scores add to 14 (3 + 4 + 5 + 2). On it’s own, that score means very little, but with experience you’ll learn that it’s actually really good – usually the top stocks score between 13 and 16. If you did the same for all the stocks on the list, you’d see that, for March, GM tied with three other companies that month – Potash Corporation of Saskatchewan (TSE: POT), Metlife, Inc (NYSE: MET), and Banco Santander (NYSE: SAN). Of those three, we recommended GM because Potash Corp is experiencing continued uncertainty in the price of potash and Santander is a bank in a foreign market – both riskier than we like to suggest. Neither of those is on the S&P 100 either so we don’t recommend those unless you are able to tolerate a little more risk. While Metlife was a little farther off its 52-week high, it paid a dividend of only 3.74% compared to the 5.2% (at that time) GM offered. BTW, GM is up 6% since we recommended it two weeks ago and Metlife is up 7% so you wouldn’t have gone wrong with either of them. Just sayin’.

We’re convinced (and our track record proves it if you check out our portfolio details) that you could do quite well following our simple system. Of course, if you really like this kind of thing and don’t mind spending some more time you can do more in-depth analyses of stocks but we recognize that most of us would simply rather spend our time doing lots of other things we enjoy. The appeal of our method is simplicity. The idea is passive income, after all.

Choosing a Stock – Part 7: Scoring

If you managed to stay with me through the last 6 entries, you’re familiar with the technique I use for choosing a stock. Now let’s get practical and look at how I actually apply the scoring system.

First, I find the latest price, 52 week high and low, dividend payment, P/E and EPS for shares of each company on the S&P 100. I use RBC Direct Investing (http://www.rbcdirectinvesting.com/) because it’s my online broker but you can use any site that appeals to you. Google Finance (https://www.google.ca/finance) is great and Yahoo Finance (http://finance.yahoo.com/) is another good choice that’s easy to use but there are plenty more.

scoringI have an Excel spreadsheet which lists all the companies on the S&P 100 (including any I’m considering that are not on that list) and has a column for each of the factors we’re using. There are also columns for dividend yield, % below the 52 week high and % above the 52 week low.

Now for assigning the scores. I start by sorting the companies in order of decreasing dividend yield so that I can easily assign the dividend score to each one. I use a simple 5 point scale as in the table below:

Score Yield (%) % below 52 week high P/E EPS
5 6 or greater 30 or greater 10.0 or less 15 or greater
4 4.5-5.9 25.0-29.9 10.1-12.9 10.0-14.9
3 3.5-4.4 20.0-24.9 13.0-14.9 7.0-9.9
2 – 10.0-19.9 15.0-16.9 5.0-6.9
1 – – 17.0-20.0 4.0-4.9

Notice I don’t consider a stock that pays a dividend of less than 3.5%. There are always great deals on companies that pay higher dividends so why choose a lower-paying one? Once this step is complete, I sort the stocks by the % below the 52 week high and assign scores for that. I continue doing this for each factor in turn until scores have been assigned for all the factors, then I simply add up the scores for each stock.

In a perfect world, the stock with the highest score would always be the stock to buy but, unfortunately, we don’t live in a perfect world. Rather, the score highlights the top options but you might need to decide between a few of the top contenders. My preference is usually for a stock which is currently at the deepest discount. Remember, we never consider a company that doesn’t pay a good dividend so it makes sense to take advantage of the potential growth in share price of a stock that is beaten down. I have found that this system really helps to removes the emotional or subjective element in choosing a company by using hard numbers to narrow down the options to just a few.

I don’t always assign a score for the % above the 52-week low. To be honest, that metric only becomes useful when a stock is sliding in price and you want to see if it has started to rebound. A stock that is barely above the 52-week low might still be falling and we want to buy when it is still on sale but recovering. A later version of my system might assign a score based on the 52-week low but for now it’s really not one to worry too much about. Check back for our next post where we’ll use the system to score a real stock to get some practice using the system.

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March’s Pick

It’s time to announce our stock pick for March and there’s a good chance you’ll be happy to hear we’re not suggesting IBM (NYSE: IBM) again. To be clear, if IBM came out on top after assigning the scores, we’d have no problem recommending it for a fourth month in a row – but it’s not. This is about choosing the best stock, not about diversifying for no good reason. Like last month, we’re going to offer some choice. Our pick from the S&P 100 is General Motors Company (NYSE: GM) but we’re also watching Potash Corp of Saskatchewan (TSE: POT) which, while not on the S&P 100, still represents a good opportunity. To be sure, the buyer’s market continues. With markets still a little off, more than 30 companies on the S&P 100 are trading at least 25% below their 52-week high so there are lots of bargains to choose from if you want capital growth.

Let’s look first at GM. This well-known american company is trading 24% below the 52-week high which is a good sale price and makes the $0.38 dividend a 5.15% return. That return is outstanding for a big, blue-chip stock when we compare it to companies such as Apple (2.11%), Wal Mart (3.01%), Johnson and Johnson (2.82%), and McDonald’s (3.00%). With a P/E of 4.92, General Motors represents great value at this time and the $6 EPS indicates strong earnings. We added GM to our portfolio on March 1.

So what’s happening with Potash Corp? Since we mentioned them back on January 29, the price has moved up 8% which is a decent gain for a month if you had purchased them then and sold them now. That’s great for a quick fix but our strategy is to buy value and hold it. Despite that recent gain, they’re still 49% off the 52-week high which is a significant sale. The 11.17 P/E is attractive but the $2.05 EPS is less than ideal (in fact, an EPS that low doesn’t even score on our system) but the depressed worldwide potash price is to blame for that. The company is still profitable and continues to pay that juicy 6.1% dividend. If you’re comfortable straying a little from our core system, POT is a great buy!

Finally, we wouldn’t feel right if we didn’t at least give a little update on IBM. To be fair, it’s still an attractive stock. They’re trading 24% below the 52-week high which is a good sale. With a P/E of 9.82 and EPS of over $13 they are very well-priced for their earnings. The dividend yield is not outstanding but 3.89% is nothing to scoff at. If you previously purchased IBM and are looking to increase your position, it’s still a good time.

Choosing a stock – Part 6: How much of the value will be mine?

In the last entry we talked about using the P/E ratio to help us determine if the current stock price is overvalued. Let’s now take a look at another measure that lets us see how much of the company’s value will be ours as a shareholder. This is the earnings per share (or EPS).

choosing a stock 6If we think of the P/E ratio as being the number of positive reviews our prospective purchase has, the EPS tells us how many of the total number of reviews these positive ones represent. Think again about online reviews posted by customers. For any product we might be considering, there are generally three categories it can be in (if we ignore bad products with only negative reviews). First, it might have lots of reviews that are all positive. This is a stock that has a great (i.e., low) P/E ratio. We like those. Second, it might have only positive reviews but they have been posted by few customers. This is a stock with a poor (i.e., high) P/E ratio. We want to avoid those. Third, it might have lots and lots of reviews but they’re mixed. In order to make our decision we have to decide what fraction of those reviews need to be positive for us to feel comfortable making the purchase. The EPS can help inform our decision.

EPS tells us the portion of a company’s profit allocated to each outstanding share. In other words, how much money does the company make compared to how many shares are out there. This is like asking “how many of the reviews are positive?” If the EPS of company A are higher than those of company B, company A generates more money per share, and, as a shareholder, you own part of that income. Experts will say that EPS is the single most important factor in determining  a share’s price, but as buyers of blue chip companies on the S&P 100 we needn’t be very concerned about it. It’s more important to institutional investors and speculators who might be making decisions to own a stock for the short term. That’s not us. As with the other 4 factors, I assign a score to each company on the S&P 100 but, admittedly, I put less weight on EPS than the others. These established companies are long-lived because they’ve shown the ability to be profitable. EPS serves as a good tie-breaker if I need it.

That’s it. That’s how I choose a stock. By considering these five factors, each stock earns a score and, often, the stock with the highest score wins. That’s the one I buy. In the next post we’ll look at the scoring system I use and practice applying it using an example.

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February’s Pick

If you’re trying to pick a stock to purchase in February, just throw a dart at a list of the S&P 100 and you’ll likely do well. More than 50 of the companies on the index are currently trading at more than 20% off their 52 week high and another 40 or so are at least 10% off that mark. If capital growth is your goal, it’s hard to go wrong. But we want more. While it might sound like a broken record, we are, for the third month in a row, recommending International Business Machines Corp. (NYSE: IBM). Before we get to the reasons, let’s look at three other front-runners.

When all the scores had been assigned, Potash Corporation of Saskatchewan Inc. was in our top 3. It’s 55% off the 52 week high with a low P/E of 10.05 and they’re still profitable despite the collapse of potash prices. That collapse, however brings with it some uncertainty about their future price and we’d rather buy them on their way up than down. There are also some rumors about them cutting their jaw-dropping 10% dividend. Mind you, even if they slashed it by half you’d still earn a respectable 5%. If that dividend outweighs the price risk for you, buy them!

National Oilwell Varco (NYSE: NOV) is also a good-looking stock. They are 49% off the 52 week high with P/E of 10.57 and EPS of 3.29. This company designs and builds equipment for oil and gas drilling so they enjoy some protection from the oil price market. Still, the current uncertainty in oil prices makes this stock a little uncertain also. Of course, we all know that oil prices will recover and that means drilling will continue and eventually expand also. Their 6.2% dividend certainly makes them rewarding in the meantime.

Finally, Caterpillar (NYSE: CAT). This company was on our radar back in December but was nudged out by IBM. Well, they still look good. At 35% off the 52 week high, and with a P/E of 14.39 and EPS of 4.82 they continue to offer a juicy dividend of 5.3%. Caterpillar has its work cut out for it as low oil prices and sagging commodity prices mean less demand for their equipment. Nevertheless, they are a profitable company at a good price. Again, we prefer to buy on the way up but that dividend might make them attractive for some investors in the meantime.

To be honest, we’d be happy buying and holding any of these three, but we’re settling on IBM again. There are some mixed reviews about the near future of the company and time will undoubtedly prove half of those analysts right. For us, we want a solid company at a good price that pays a nice dividend. This month, that’s IBM. They are 31% below the 52 week high and, while they are still losing ground, we’re willing to ignore that and increase our position because the P/E and EPS are both so great at 9.5 and 14.8, respectively. They have a long history of rewarding investors with a steady (and growing) dividend which is currently at 4.3%.

Seems like the current market has something for every investor so you should find it relatively easy to pick a stock this month. We thought we’d give you a few options because, while the scores say one thing, it never hurts to consider some outside factors that influence prices. Remember, the name of the game here is buy and hold so no matter which of the four you go with, a few years from now you won’t have any regrets.

Choosing a stock – Part 5: Does the company deserve the price?

I have to admit that the metrics we discussed in the previous three posts (the dividend return, whether  the stock is on sale, and the percentage above the 52 week low) are the most important for me and, of those three,  the first two are the most important. When I’m buying my piece of camping gear, I want a trustworthy company that offers a good-quality product and I want to buy it on sale. On sale or not, I also want to know whether the value of the product warrants the price. To help me make the best decision, I routinely read customer reviews online. What better way to judge the quality of something than to read the opinion of others who have purchased the same item. If the item seems a little pricey (even on sale) but lots of people have reviewed it favorably, I might go ahead and spend the money. If, on the other hand, the reviews are positive but only a few people have written a review, I might think twice. Some people might purchase the product at that inflated price based on a handful of positive reviews but, sooner or later, the supplier will realize that shoppers think the item is over-priced for what they’re getting and they’ll have to drop the price.

choosing a stock 5How do we figure this out when it comes to buying stocks? Shareholders don’t write reviews after buying shares but there is a way they indirectly tell us what they think of the value of the company – it’s the price-to-earnings ratio (or P/E). This is the ratio of the company’s share price to its earnings per share. In other words, it’s a way of comparing the ability of the company to earn money (certainly an important way of determining value) to how much people are willing to pay for a share. To calculate the P/E, we take the current stock price and divide by its earnings per share (or EPS). The P/E allows us to evaluate what people are willing to pay for one dollar of the company’s earnings. In the Telus example, the P/E is 15.4 which means you’re paying $15.40 for every dollar of earnings the company generates. We can think of the P/E as a way of asking “does the company make enough money to warrant the price of the stock?” A low P/E is like a product with lots of positive reviews – it’s good quality at a good price.  A high P/E means the stock price could be out of whack with the earnings of the company and, eventually, people will realize that and the price will experience a correction – possibly a major one.

Sometimes share prices are affected by speculation on events which might happen in the company’s future. Maybe they’re releasing a hot new product that is expected to do well and their share price takes off as investors drive it up in anticipation. What if that hot new product turns out to be a dud? We want to avoid buying that stock at an inflated price and then suffering through the correction. Of course, lots of people have made lots of money speculating on future prices but we aren’t interested in risking our money. It`s easy to find headlines online like “5 Stocks Set to Double This Year” or “Stock Secrets Insiders Don’t Want You to Know.” Don’t be fooled – nobody can predict what a share price will do. We want to play it safe by making purchases to hold for the long term and then sleeping well at night. As with the other factors, I assign a score to each stock on the S&P 100 based on the P/E. Remember that a low P/E is good so high scores are awarded to stocks with low ratios.

My strategy makes it unlikely to get fooled by a temporary volatility in a stock price because I’ve already considered the 52 week high and low so we know how the price has behaved recently. Still, it is possible that a stock price was dramatically inflated sometime over the last year (thereby increasing the 52 week high) while being currently well below that (thereby seeming to be on sale) and still be overvalued (i.e., has a high P/E). There are lots of companies on the S&P 100 so why take a chance?

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