Best Single Quick, But Inaccurate Metric

[James Boston]

The Maytag post where the OP mentions that the P/E is really low made me wonder...if you were to make a portfolio of say 20 stocks based only on one measuring guideling, what do you think would be the best over time? Let's say there's multiple portfolios:

1) 20 with the lowest P/E
2) 20 with the highest ROE
3) 20 with the highest FCF gowth rate

...20 best at _________ single measuring method.

What portfolio would likely do the best? The worst?

I know it would be silly to actually invest this way. But if you only had one piece of information, which one would you want?

[DesertCat]

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I know it would be silly to actually invest this way. But if you only had one piece of information, which one would you want?

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You are right, it would be silly to invest this way...

Seriously, there is no correct answer to your question. A company with a low PE may be a "value trap", destined to always trade at that low PE. Or it may have a great deal of earnings growth ahead not reflected in that PE.

I invest in low PE stocks. I invest in high ROE companies. I buy companies with rapidly growing FCF. I invest in companies trading below book value.

In each of these cases, the metric is where I start at. Extensive research leads me to a conclusion that the companie is more valuable than it's current market cap. For every individual company there is an individual story on why it's a good or bad business, overpriced or underpriced. That story is why I invest, not the metric.

For example, there are companies that appear to have a low PE, but actually have a high PE (due to one time or declining earnings, or over-reporting earnings). There are companies that have a very high ROE, but a very low ROA, meaning they are highly leveraged and usually terrible investments.

Even FCF can be "faked" to a certain extent. Metrics are great for stock screening, but you still have to review the annual filings and the business and decide what's really true.

[parttimepro]

PEG. Incorporating both the cost of current earnings and projected future earnings lets you avoid value trap stocks with low PEs but static or declining earnings, and lets you avoid overpaying for growth. A good PEG ratio is a necessity for any stock I buy.

Well, except for NLY and other mREITS and PTF and the CanRoys. But these are special cases.

[climber]

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PEG.

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This seems good to me too. Its kind of cheating as its calculated using afew diff bits of data but it does come down to one number.
See this link (http://www.fool.com/school/thefoolratio.htm) for more explanation on the PEG.


Stuff DesertCat said above is good.

[ajm36]

Price. Price is the metric which describes the vertical postition of ANY financial instrument. When viewed historically, price reveals the vertical movement of ANY financial instrument through time. Price is not only a single, quick metric, but a VERY accurate metric. Would you not agree DesertCAT?

[imported_bingobazza]

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Price. Price is the metric which describes the vertical postition of ANY financial instrument. When viewed historically, price reveals the vertical movement of ANY financial instrument through time. Price is not only a single, quick metric, but a VERY accurate metric. Would you not agree DesertCAT?

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Pretty pointless thread, but if you are saying that share price is important to use as a lone indicator in determining the value of a company as an investment, then you are 100% wrong. Price, viewed throgh time doesnt necessarily tell you about the company, all it tells you about is the price.//@????

As for price being very accurate, I really hope you are joking.

If I could only use 1 indicator, I would you a 10 year average return on equity.

[parttimepro]

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Price.

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Really? I'm thinking about 2 stocks. One is trading at $12, and the other is trading at $47. Which one do you recommend?

[James282]

Sorry DesertCat, I am very new to investing. Can you explain what those abbreviations mean?
-James

[James Boston]

PE - price to earnings ratio
ROE - return on equity
ROA - return on assests
FCF - free cash flow

[adios]

PE == Price to earnings ratio also referred to as the "multiple." Price of the stock divided by the yearly earnings from the income statement. Usually PEs are quoted as earnings from the previous 4 quarters. FWI IMO forward looking PEs are more important i.e. price divided on estimates of earnings in the next 4 quarters.

ROA == Return on Assets. Return on Assets Explanation (http://www.investopedia.com/terms/r/returnonassets.asp)

ROE == Return on Equity. Return on Equity Explanation (http://www.investopedia.com/terms/r/returnonequity.asp)

FCF == Free Cash Flow Free Cash Flow Explanation (http://www.investopedia.com/terms/f/freecashflow.asp)

[ajm36]

I was debating with myself wether or not to continue to respond to this drivel. I figured why the hell not?--this could be fun:
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Really? I'm thinking about 2 stocks. One is trading at $12, and the other is trading at $47. Which one do you recommend?


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I can play this game too: Two stocks, one with an ROE of 40% and one with an ROE of 15%. Which one do you recommend. How about this--two stocks, one with a PE of 15 and one with a PE of 75. Which do you recommend. Two stocks, one with a 5 year EPS growth rate of -112% and one with a 5 year EPS growth rate 300%. Which do you recommend? The point is, don't be a jerk. I don't know a whole lot about researching fundamental data, but high ROE's can mask excessive debt, PE ratios can become highly inflated for extended periods of time, EPS growth rates don't tell you when a company is going to have a negative or positive earnings suprise.

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Pretty pointless thread, but if you are saying that share price is important to use as a lone indicator in determining the value of a company as an investment, then you are 100% wrong.

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Price is the ONLY indicator which determines the value of a company. Price IS how much value the company has at any point in time. Price is what a buyer is willing to pay for the company and what a seller is willing to accept for its sale. Regardless of any analysis you do, where supply and demand intersect, price is generated and value is derived. ECO 101, first week, any po' dunk junior college.

Price is usually the first thing anyone looks at prior to evaluting a trade (even if you don't use it in your analysis) and, if not, it is DEFINITELY the last thing everyone looks at when exiting a position. Price determines where I (or anyone for that matter) enter a trade and exit a trade. In short, price determines my risk and my reward. If you are not defining your risk (the only way to do so is to use price) prior to entering a trade and the trade moves against you, how do you know when you are wrong? Do you continue holding (or even adding) through a down market, praying that your analysis is not lagging some horrific price event? If this is what you do, let me be the first person to express my gratitude to you.

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Price, viewed throgh time doesnt necessarily tell you about the company, all it tells you about is the price.//@????


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Well, you are partly correct. Price tells you where a company has been and where it is now in relation to its past. Price tells you who is winning the battle (buyers or sellers) on any given time frame. It tells you if the mass of market participants have been bullish, bearish, or neutral for any given time frame. Bullish, bearish, and neutral market conditions tend to persist (until they change, of course) and reveal the direction in which trades should be entered (don't swim against the current). Price also reveals historic levels where there has been resistance to or support of a prior move. These areas of support and resistance (especially where they converge on multiple time frames) offer very low risk high reward potential for initiating trades. Basically, I just let everyone do their mountains of research, take their best guess, and throw their money in. I just follow their footprints through the market. It is possible to trade profitably with price alone. However, I no longer do this. I now use volume in my analysis, as well, to confirm or condradict a price movement. One other benefit of using price is that it can be used in ANY financial market (equities, treasuries, futures, currencies). You do not need to create a whole new set of analysis tools to trade a different market (ROE does not translate into Wheat futures). You are not limited to trading only one market during its briefly favorable periods. What happens when (and it WILL happen) the liquidity dries up in the equity markets? If you do not switch the markets you trade you WILL NOT be able to preserve your capital.

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As for price being very accurate, I really hope you are joking.


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Only half joking. Is there really a metric more accurate (even approaching the accuracy of price--remember, accuracy was a qualification of the original post) than price? Every other metric uses some type of information which is either incomplete, may suffer from reporting inaccuracies, or may be a construct of deliberate fraud. Except during its smallest time frames (sub-minute), price can be considered to be exact.

[RocketManJames]

This is so wrong I am not sure if I want to expend the energy to discuss this.

First of all price has nothing to do with ANYTHING other than maybe the ability for a large fund to buy into it.

Take a stock with a PRICE of $50. Take another stock with a PRICE of $100.

The first stock has 100 million shares outstanding. The second has 800 thousand shares outstanding. Now tell me exactly what stock price (in and of itself) has anything to do with anything?

Useful metrics are normalized. Often times, they are normalized in a per-share sense. Ok, I really don't have time to discuss further, but I hope you do see the error in your thoughts.

The people who share your thoughts are those that promote illogical movements when a stock splits. I am not talking about the few times when a stock split will provide much needed liquidity or actually help the company in some meaningful way.

-RMJ

[ajm36]

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The first stock has 100 million shares outstanding. The second has 800 thousand shares outstanding. Now tell me exactly what stock price (in and of itself) has anything to do with anything?


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Re-read my post--I told you what price means.

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The people who share your thoughts are those that promote illogical movements when a stock splits. I am not talking about the few times when a stock split will provide much needed liquidity or actually help the company in some meaningful way

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I don't trade stock splits because price movement can be erratic. If people who think like me, think like me--then you are wrong.

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This is so wrong I am not sure if I want to expend the energy to discuss this.


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If you believe your view of the markets is correct, then I can see how you think I am wrong. However, this IS how I make my living--trading in my own account. I began trading in 2000. Being, in your opinion, wrong has been highly profitable for me.

[RocketManJames]

Okay, well, I do apologize if I came off sounding like a total ass. If you can really trade stocks just on price alone, would you be interested in a test? I'm personally curious myself, and I promise not to specifically throw in weird cases, I'll randomly pick say 5 large cap stocks with decent volume.

I'll provide you the price charts with volume for these 5 stocks. But I'm only going to show you the first half of a 2 year chart. Or you can name a time frame that interests you. I won't tell you what exact months the chart is from, otherwise it'd be too easy to just check out how the overall market did and make an educated guess.

So, basically, I show you half of a chart, you tell me how the other half looks. If you're up for the challenge, I'm definitely all ears. I think it'd be a worthwhile experiment. And, yes, I know that 5 is a small sample size, but I don't want to waste that much of your time. If you want, let me know if you prefer stocks of a certain kind. Like, if you prefer non-volatile stocks or if you prefer higher yielding stocks, etc.

-RMJ