Month: May 2022

Spotting Low-Priced Stocks Ready to Bounce Back

Posted on by eduserv

 

Low-Priced Stocks

The key to success in the stock market is knowing how to recognize the value. Here is the successful approach of Robert Ravitz, director of research at the investment management firm David J. Greene & Co.
At the Greene operation, value has little to do with a good company versus a bad company. A top-quality large company selling at a high price/earnings multiple is less attractive than a lesser-quality company trading at a depressed price in terms of its past and future earning power, working capital, book value, and historical prices. Here is where Greene’s analysts look for value:
Stocks that have just made a new low for the last 12 months. Companies that are likely to be liquidated. In the process of liquidation, shareholders may get paid considerably more than the stock is selling for now.
Unsuccessful merger candidates. If one buyer thinks a company’s stock is a good value, it’s possible that others may also come to the same conclusion.
Companies that have just reduced or eliminated their dividends. The stock is usually hit with a selling wave, often creating a good buying opportunity.
New management comes on board with an established track record of success with turnaround situations.
Management begins buying the company’s stock in the open market. Also, follow 13d statements filed with the Securities and Exchange Commission (SEC). A company or individual owning 5% or more of a public company must report such holdings to the SEC. If any substantial company is acquiring a major position in a company, it’s possible a tender offer at a much higher price is in the wind.

Three Ways to Determine

Sector characteristics

Sectors are represented by the stocks in your portfolios. Sectors are simply groups of publicly traded companies and stocks from the same industry.

Price and quantity

Once you’ve identified your stock’s sector, some other indicators can give you confidence that it’s nearing a bottom.

Keep an Ear to the Ground

The general public’s perception of a stock may be an overlooked indicator of when it is about to bottom.

READ ALSO: The Rules for Getting Out Stock Market Safely

Bottom line

Ideally, investors want to know when price trends are about to shift significantly in either direction, whether they are approaching tops or bottoms.

Big Opportunities in Small Companies

Posted on by eduserv

 

Big Opportunities in Small Companies

Charles Allmon has been analyzing small, fast-growing companies for over two decades. What he looks for in a young, growing company:
Please read what we wrote about Low-Interest Loans For Homeowners.

Balance sheet

The current ratio (current assets matched to current liabilities) should be at least two to one. The company should have no long-term debt. Preferably: No short-term debt, either. The return on shareholders’ equity should run at least 22% and, ideally, 30%.

Ideal

As few shares are outstanding as possible. (This is where the real leverage comes in.) If a company has only 250,000 shares, a fast-growing rate will have a real impact on the equity position. Try to stick with companies that have less than one million shares outstanding, and preferably less than 500,000 shares.

Income statement

Look for a company with very high-profit margins. An after-tax profit margin that is over 10% is excellent. (By the same token, avoid those companies that have after-tax margins that are 1 less.) 1½ % to 2% or

Pay attention to the company’s tax rate

Many investors buy the stock of a company with very high after-tax profit margins only to realize a year or so later that the tax rate was artificially low. Then, when the tax rate returns to normal, the margins shrink dramatically. Thus, if a company pays a full tax rate, give it more points in your rating system than a company with a low tax rate and a higher profit margin.

Management

This is the hardest to evaluate, but the most important. Prime management ingredient: Integrity. The best way to check on honesty is to get hold of the annual reports for the last five to ten years. Read the president’s letter to the stockholders.
How many of his predictions came true? Did he consistently make outlandish statements that never came to pass? Did everything that he forecast happen?

Try to find out what motivates the chief executive now

What might motivate him in five years? All too frequently, a company president suddenly decides to sell out, and the company loses its momentum.
Focus only on companies in which management holds a very large interest (50% to 70% of the stock). That way, you can be sure they will do everything in their power to get the stock up. That’s your goal, too.

Geographical location

Concentrate on companies located in the Sun Belt, preferably in Texas. That part of the country is growing much faster than any other region. It has a pro-business economic and political environment. The Northeast, on the other hand, is losing population, and it is not so positive toward business. Also, after the 1982 elections, the southern and western states will elect half or more of the representatives to Congress, so the political influence of the Sun Belt will grow as well.

Best-situated industries

For the rest of the 1980s, concentrate on energy (North American oil and gas producers), communications (radio, TV, and cable TV), data processing and data communications, and food (convenience stores are booming due to the need to conserve gasoline).

When to sell

Many entrepreneurs don’t have the ability to take their company beyond a certain annual sales level. The first major hurdle is $10 million in sales; the second is $50 million. Be sure to watch the company closely as its sales volume approaches these points. If the company gives signs of languishing there, it’s probably time to sell.
 
Don’t forget that It Really Pays to Ask Questions,

 

How to Be Your Own Securities Analyst

Posted on by eduserv

 

Securities Analyst

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.
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, and more likely to answer straight rather than evade or smooth talk. Steps to take:
Inventory figures are crucial: Not only the turnover ratio changes, but also the mix of raw materials, work in progress, finished goods, etc. 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 the number of days of sales in the receivables total, indicating the level of activity compared with previous years.

Accounts payable

  • Are they stretching out payments? Why?
  • Credit problems?
  • What is the company’s liquidity situation?
  • Is it going to need new financing?

Sources and uses of funds statement

A sources and uses of funds statement is a summary of a company’s financial position changes from one period to the next. It is also known as a statement of changes in financial position or a flow of funds statement. In US audited annual reports, it has been replaced by the cash flow statement (1989).
The cash flow statement depicts a company’s cash inflows and outflows over an accounting period, which is usually a quarter or a year. A cash flow statement summarizes a company’s changes in cash and cash equivalents by categorizing cash flows as operating, investing, or 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).

 

Who Wins and Who Loses in The Stock Market

Posted on by eduserv

 

Who Wins and Who Loses

Investment brokers’ lore: They can tell whether a new client will be a winner or a loser within the first few minutes. Investors’ mistake: Forgetting that the broker is essentially a salesperson working for a commission. (Often a loser makes more money for the broker.) Don’t rely on a broker for financial and money-management advice.

Classic losing syndrome

An investor loses money in the stock market and swears never to get involved again. Then, after resisting the early publicity about the latest investment fad, the investor moves back into the market just before prices collapse. Worse: Investors who buy a glamour issue on margin after a substantial and fast advance. They get hit the hardest during the inevitable correction.
Investment advisory services and systems and inside information don’t help much either. Please check Low-Interest Loans For Homeowners.
 

Facts:

Advisory services establish a reputation after making a few good investment predictions or good calls on a specific kind of stock. But they have to keep making predictions, and soon end up with losses. Technical analysis is as subject to change as is dart throwing.
Only 65% to 70% of insider trades work out for insiders. Investors usually tend to overestimate the impact of the “insider news” on the stock’s price. Or they miscalculate the effect.

Wall Street analysts are too slow

By the time their buy/sell recommendations make the rounds, all the action has been taken. The sound way to become a winner:

Keep your neuroses under control

While you will never escape fears and doubts, don’t allow your emotions to override your judgment.
Initiate your own investment decisions. Don’t let someone talk you into buying or selling.
The average investor doesn’t need to talk to his broker more than once a month.
Do your homework before entering the stock market. Most winners educate themselves and manage their own money. Read books and financial papers. Take basic investment courses. Learn investment jargon so that you can’t be intimidated.
Break away from the fear-greed-guilt cycle that produces losers with the belief that gains are made by magic and fantasy. Learn to deal with reality.

Think about taxes as well as investment

Tax consequences are an important part of success. Picking stocks: If the fundamentals of the company sound good and are high quality, and if the price/earnings ratio is under 10, buy at the low end of the stock’s trading range for the past two years.

Divide savings into four investment categories

(1) Ready cash to meet emergencies.
(2) Income to help maintain your standard of living.
(3) Growth to make capital grow and, at the least, keep pace with inflation.
(4) Mad money to speculate on the long shot.
 
Distribute investments appropriately, if there’s enough capital. Don’t forget you can find excellent conversation this from Quora.

 

WARNING: The Lure of Easy Bankruptcy

Posted on by eduserv

 

Easy Bankruptcy

True tale: A husband-and-wife team of practicing psychiatrists, with a joint income of $78,000, accumulate personal debts totaling $22,000 plus a $33,000 mortgage on their comfortable suburban New York home. They’re not in arrears, nor even over their heads. They simply want more discretionary spending power.

Solution

They file for bankruptcy and reduce their debt load to less than 10 cents on the dollar, repayable on an extended painless schedule. Notes an officer of one of their finance companies: They could have sold the house or refinanced the mortgage, and paid off all their bills in full. But why should they?
Traditionally, personal bankruptcy has been a life-wrenching last resort for people so deeply in debt, and so harried by creditors, that no other option seemed viable. The typical profile: Low-income, under-educated laborers or clerical workers. Very young or over 65. Rootless non-homeowners.
The profile today: People with good jobs. Quite often two-income families. Household incomes are as high as six figures. Declaring bankruptcy, not from dire necessity, but merely to rid themselves of debts that cramp their lifestyle.

Most common

Recent college graduates, file for bankruptcy to avoid paying back government-guaranteed student loans. Rationale: Society owed them the education.
Older, keep-up-with-Joneses types. From suburban executives to Park Avenue professionals, they’re unwilling to live within their means.

Making it easier

Passage of the Federal Bankruptcy Act of 1978. This significantly liberalized personal filing procedures in the name of consumer rights:
• Chapter 7 makes no reference to the deb tor’s income. It permits debtors to clear the slate by turning over all their assets except those specifically exempted to creditors, Among the exemptions: Up to $7,500 equity in the debtor’s house ($15,000 if both spouses file); $4,000 in accrued dividends; $1,200 in automobile equity; $500 in jewelry; $200 per category of household items (clothing, books, etc.) and more.
Chapter 13 requires that debtors show only a regular income to handle a reasonable three-year pay-back plan. Court definition of reasonable: As little as 1% to 10% of the total debts, even where 50% or more could easily be managed.
Payoff: Either way, the law does not require a bankrupt to show financial hardship. The debtor merely claims bankruptcy, eliminates a most outstanding debt, and keeps the most tangible assets. Even the stigma is gone because the law forbids the use of the term bankrupt when legally describing a “debtor.
The economic recession. The Federal Reserve Board’s credit controls that were imposed early in 1980 tightened the screws on many people with debts.
Federal Trade Commission approval of the right of lawyers to advertise their services. This opened the eyes of debtors to the opportunities.

Result

Lawyers are aggressively promoting this new way out of debt. Focus: California, Florida, New York.
Two things lawyers don’t mention in their ads: 
(1) Lawyers always get paid upfront, even before filing the papers; some even accept credit cards.
(2) The bankruptcy goes on the client’s credit record for up to 10 years, meaning the slate is not clean. 
 
Clients cannot even seek to square matters with past creditors.

Reason

Reaffirmation of debts, once they have been wiped out, is prohibited, unless the offer is court-approved. (Chances for that are slim).