From: 6500amd@ucsbuxa.ucsb.edu (Amitav Das)
Newsgroups: misc.invest
Subject: parameters to investigate in selecting a stock (LONG)
Date: 20 Jan 93 21:38:49 GMT



To All the Guru's/semi-Guru's (Guru == expert) of the net.misc.invest-land:

I am not sure whether there was such a question before, but I would like to hear
from you what "parameter"s you compute/watch/investigate/wink at when you look
at a stock for buying? I am putting down what I have been using in my relatively
inexperienced effort over last six months and I want to enrich my knowledge with
your inputs. Perhaps we can put it in the FAQ. Here are my parameters: 

Please add your own or comment on these and their merits/usefulness:

=======================================================================================

1. HEALTH OF THE COMPANY & MANAGEMENT:
   a. Financial strength rating as given by Value line (should be > than B+)
   b. Debt/Asset ratio (need more input in this area, how do you seperate new
                        companies vs. giant old ones, how do you rate differently?)
   c. Growth rate(EPS) for last 5 years: Is it all UP UP UP UP UP? If not some
                                          reasonable explanation 
   d. Growth of sales & Book value: same as above

   e. Any other indicators?

2. CURRENT PRICE

   a. current PE (preferred to be less than 20, unless it has tremendous growth potential)
   b. Relative value (cur PE/ Avg PE over last 5 years) : shd. be less than 1 which
                     indicates that the stock is underpriced. If greater than one. look
                     at the avg. relative value in the past 5 years see whether it was
                     similar all the time(a favorite stock always boughta bit  overpriced?)
   c. Compute Estimated High Price (HI) and estimated low price (LO): you can get it
                     from value line or get then my mutiplying the avg hi/lo PE and 
                     projected EPS at 5 years from now.
   d. Spread(SP) = HI - LO;
   e. Buy range is bet. LO and LO+SP/3: (Cur Price should be in the middle of this)
   f. Sell range is HI-SP/3 to HI
   g. Price/Book Value (P/B) ratio: should be less than or around 3 (depends on sector
                                    and should be compared with other similar stocks)
             (need input on this too)

   h. Short position on the stock if any? (need info how to analyze this data: high
      short interest or short interest ratio -- how does it affect the price? Simple
      thinking tells that a high short interest(no of shares people has to purchase to
      cover their short position) and low short interest ratio(avg no of days one need
      to cover the above as estimated from the trading volume) should indicate a price
      increase in the future (people soon have to buy these shares). Am I correct?
   
   i. Upside/Downside ratio (U/D): U/D = (HI - Cur price)/(Cur price - LO) indicates
         the risk/reward poetential of this stock, should be greater than 3 (so that
         you get better sleep at night) Any input on this?

   j. PE/growth rate projected: For example if PE is 20 and projected growth rate is 20
      and current price is 40 then EPS is 2 and in 5 years it should be 4 and the price
      should be 80 and you would get your money back (doubled) (assuming everything goes
      properly and relative value wasless than 1). Does it make sense? What should be 
      this ratio?

   k. Any other indicators?

3. GROWTH POTENTIAL

   a. Yield(Y): % of dividend as to cur price.
   b. Growth rate of dividend over last 5 years.

       (note a & b are important if you are selecting it for "income" purpose, however
        it does not hurt to get dividend from growth stocks, does it?)

   c. Hi return (HIR): HIR = 100*(HI - Cur)/Cur + Y (should be very temptingly high!!!)
   d. LO return (LIR): LIR = 100*(Cur-LO)/Cur + Y   (should not be too negetive)
   e. Avg return(R)  : R   = Avg. growth rate (over last 5 years) + Y

              this should be more than 15 since I plan to at least double my money in
              5 years.

     any comments on above?

  f. Any other indicators?

4. MISC FACTORS.   So far all we have seen are only numbers and statistics. This is the
   "heard in the street" or "I know since I work in the same industry" etc part. Its
   hard to quantify any of these and I am just begining to get some sense out of my
   observation of the market over last 6 months. Here are my (vague) factors:

  a. It seems to me if some analyst put it on their buy list or specially if they remove
     it there is small or big jump (Market sentiment?), how can you perceive that in
     advance? Should we ignore these (temorary?) fluctuations?

  b. Market shares of the company (can be obtained from them/their quarterly reports)

      ... any other sources?

  c. Net profit margin (can get it from value line) but how to digest this data, specially
     how can you read it? Do you compare with similar industries? Need input (I sound
     like the robot in "Short Circuit" if you have seen the movie!)

  d. Bylines from newsletter/magazines praising/hating it (But Peter Lynch advises to 
     discover it before THEY do!).

  e. Sensing Cyclical stock before they climb up (How?)

  f. Buying before the release of their earning report is released and getting some
     prediction from analysts/company (I wish I could have done it for Intel!)?

  g. WSJ runs some nice articles about companies, their new/future products sometime
     on a particular product(group) and what company has what market share.

  h. Read economic indicators:
       short term / long term interest rate: How does it affect the stock?
       strength of dollar : how does it affect the stock?
       M1,M2 etc          : how does it affect the market in general

  i. Anything else that you look at:

========================================================================================

I am definitely expecting comments from Art Kamlet, Larry Watanabe and other experts
but everyone please send your opinions regarding this. I'll post a summary if there
is enough and significant replies.

Please email to das%kane@ece.ucsb or post

Thanks in advance.

.... Amitav Das.
     ECE Dept. UCSB.