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 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

ROE == Return on Equity. Return on Equity Explanation

FCF == Free Cash Flow Free Cash Flow Explanation