Monday, October 18, 2010

A Few of the Rules

Now back to basics. Here is how I am analyzing non bank equities for the moment. Using my usual rules:

1. Only buy equities that you understand how they make money.

2. Know where to get in.

3. Know when to get out. My rule used to be 8% down out, 20% up out or reset for the 8% down assuring a 12% gain. This market does not allow for that, but you still need to determine where to get out.

4. Bears make Money

5. Bulls make Money

6. Pigs get slaughtered

Here is my criteria for valuing stocks. It is a point structure with a possible 17 points.  (Adjusted in August for revenue, now a 21 point scale) Any money website should have all of the information below, be sure you are using annualized figures and not quarterlies. I use Google finance and Rueters.

Return on Equity

< 12 = 0

12< 15= 1




Net Income

One year over previous year=1

Two years “ “ “ =2

Three years “ “ “ =3

Four =4

Cash Flow

Def: Cash from Operating Activities

One year over prev year =1

Two years " " "=2

Three years " " "3

Four" " "=4

Debt Check

From Balance Sheet

Total Long Term Debt/Net Income

Less than 5=2

-15 =1

Over 15= 0

Profit Margins

Def: Net Profit Margins

If Its Great than Industry Average =2

If its equal to IA =1

If its less than IA =0

If is greater than their 5 year average =1

Total ratings: A = 13-17 Buy  (Adjusted in Aug 18.9-21= A = BUY)

B = 16.8-18.8 Consider Buying

C = 16.7 or below, speculative or avoid

I then take the resulting number and divide it by 17  (Now 21) to give me their rating, kinda like a wine. 19 out 21 is a 90.4. I only store wines rated 88 and above. I only buy stocks 90 and above.

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