The first thing to consider about investing isn't technical
at all. EPS, P/E, P/S, MA and EMA, RSI and dozens of other indicators are all vital.
But begin your start by looking not outside, but in.
What kind of investor are you? Young with a little capital
to risk but a large earnings potential over several decades? Retired, or near
it, with a healthy savings but living on limited income?
And, more psychologically, what's your temperament for
research and your lenience for risk? Are you comfortable with statistics or
intuitive? Are you detail oriented, or tend to observe the big picture? Not
mutually exclusive categories, to be sure.
All these factors will influence your investment strategy.
You do have a strategy, right? If not, go back to square one and develop that
first.
PEG - Projected Earnings Growth
Usually, Price to Earnings (P/E) ratio was a supportive
indicator of value. Low price, relative to large earnings (per share) suggested
a company's share price would likely go up in the future.
But that was before
thousands of new companies entered the public markets and when investing meant
buying Coca-Cola stock.
But P/E isn't entirely useless, even today. Just supplement
it with a little more information to calculate the PEG - Projected Earnings
Growth.
Calculate PEG by taking the P/E and dividing it by the
projected growth in earnings. For example, a stock with a P/E of 20 and
projected earning growth next year of 10% would have a PEG of 2 (20/10 = 2).
The lower the number the less you're paying for a unit of future earnings
growth. Therefore, a company with a high P/E may still be a value if it has high
projected earnings.
Of course, the key is getting accurate projections. While no
one can predict with certainty, many Internet sites provide those numbers and
over time, with diligence, you can find one you trust.
Just as deciding to buy is, in small part, finding a large
PEG stock, electing a time to sell means estimating when PEG is likely to take
a turn downward. So, tracking PEG over time in the form of a simple chart
should be a weekly (or more often) task on your research list.
ROE - Return On Equity
Some companies couldn't make a profit if they were given
Apple's engineering and marketing teams for free, while others can make silk
purses out of pigs ears.
Return on Equity is one measure of how well a company
uses its assets to produce earnings. (By the way, silk comes from worms, not
pigs.)
Easy to calculate; simply divide Net Income by Book Value (assets
minus liabilities). Both numbers needed are easy to obtain from Internet sites.
Three percent is low, 15% is healthy - but ensure to compare to other companies
in the same economic sector, and track the number over the long term.
Obviously, you want to buy when projected ROE is high (based
on historical trend). When ROE is trending downward, timing the sell is a
matter of estimating.
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