HOW TO VALUE A STOCK 📈 When Should You Buy A Stock?

[Music] so today we're going to be talking about how to find the value of a stack and this has been one of the most requested videos on my channel mostly because of the content of been putting out lately talking about being a value investor in talking about some of the great lessons from the intelligent investor and talking about trying to find the value of a stock and then buying a stock or investing in something when the price is below the value so the question i've been getting is how do you determine the value of a stock and it's tricky there's a lot of different ways to do it but I'm going to give you six things that I look at when I'm trying to determine the value of a stock so as you've know if you've watched my videos previously the price of a stock swings between optimism and pessimism that's straight out of the intelligent investor again if you guys are looking to learn about investing that's the number one book I recommend and it's linked up in the description but the price always swings between pessimism and optimism neither of which is sustainable value investors buy from the pessimists and sell to the optimists so you are greedy when others are fearful and fearful when others are greedy in the words of Warren Buffett so value investors are looking to buy when the price is below the value the thing is the market prices a stock wrong from time to time and this is due to a number of reasons it's an overreaction that there's one thing that's consistent with the stock market it's an overreaction this can be in either direction it can be an overreaction to good news or an overreaction to bad news you'll see this frequently because as we said that stocks the price of a stock swings from pessimism to optimism on a pendulum so you're always going to see stocks that are overly optimistic and stocks that are overly pessimistic but what causes a stock price to get out of whack first of all there's disappointing earnings so if they start reports quarterly earnings that disappoint investors you will see that stock fallen value for those of you who saw what happened to AMD stock on their quarterly earnings in May you are familiar with what I'm talking about here an industry or market correction so if the overall industry is doing poorly or if the overall market is doing poorly this will drag down the stocks themselves as well any bad news surrounding the company will trigger this as well as well as economic and business cycles so there are cycles within an actual business I mean for example you got to think certain stores do better during back-to-school certain businesses do better in the summer certain businesses do better closer to Christmas so there's different things those are business cycles that will affect the stock price and all these things oftentimes push a stock below the actual value it pushes the stock price below the actual value of that investment so as a value investor you're looking to find the value of a stock and then buy it when the price is below the value so how do you find the value of the stock there's six things I'm going to show you guys number one is the price to earnings ratio this is the one that most people are familiar with this is also known as the p/e ratio to determine this you basically take the current share price of the stock divided by the annual earnings per share obviously earnings per share would be the total earnings divided by the outstanding shares that would give you earning per share so the best way to look at price to earnings ratio is what you pay for one dollar of company earnings and it's used to compare companies within a sector this is one of the biggest mistakes people make is they'll compare the p/e ratio of a tech stock to a utility stock you can't do that because every industry has a different p/e ratio so the best way to use the p/e ratio is to determine what the average p/e ratio is of that sector and then compare the p/e ratio of one company to the sector or industry average and then to another company to determine whether the price to earnings ratio is above equal to or below other companies within that sector or the sector average now the problem with the p/e ratio one problem anyway is that it does not work for a company that is losing money they will have a negative p/e ratio or they will have no p/e ratio at all and then if you look forward or backwards you do have the trailing p/e in the forward p/e which are also useful metrics when looking at the value of a stock but we're just going to focus on the regular old price to earnings ratio because I didn't want this video to be half an hour long so I'm going to give you as an example of how to calculate a p/e ratio we're going to look at Apple for example and you don't need to calculate this stuff guys if you just Google Apple p/e ratio you can find it on Yahoo or I think it's right on the home page of Google there when you're searching for a stock so you don't need to do this but I want you guys to understand where the comes from so we're going to go through the actual examples so let's take Apple so we're going to look at the last four quarters for Apple as far as their earnings per share so over the last four quarters they've reported a dollar sixty-nine 336 210 and 167 so right there we see a perfect example of a business cycle obviously whatever quarter that was Apple made a lot more money so that is the cycle of a business that's one example of business cycles which can cause stocks to be to become undervalued the total between these four will give us our annual EPS over the last four quarters so that gives us eight dollars and 82 cents and if we take the current share price for Apple which as of August second closing was 150 oh five divided by the annual EPS that gives us a p/e ratio of 17 point zero one so what does that mean that means you need to invest 17 dollars in one penny in order to yield one dollar of company earnings that is what the p/e ratio means so you would take apples p/e ratio and compare to other companies within that sector as well as the average p/e ratio of that sector to determine whether or not shares of Apple are more expensive equal to or less expensive than other companies out there so number two the second thing when determining the value of a stock is to look at the price to book ratio or the PB ratio it's very similar to calculate but instead of using the annual earnings per share you're going to be using equity per share so you take the current share price divided by equity per share and if this figure is below one it means that stock is trading less than the value of the actual assets and if that is above one it means the stock is trading at more than the value of the actual assets let's look at the monster energy drinks for example this is the monster beverage corp so their total equity is at three point five three billion dollars so to calculate the actual equity per share you have to take their total equity divided by outstanding shares which gives us a price of six dollars and 22 cents which would be the equity portion or book value again this is something you can use Google if you search for monster beverage corp Book value it's going to give you this figure but I just want you guys to understand where that number comes from so then if you want to actually calculate the price to book ratio you would take the price for the share you would take the share price which as of August 2nd was 53:12 / that actual figure there the equity per share that gives you an eight point five four so that means shares of Monster Energy Corp are trading at eight point five four times the actual book value of that company or the actual equity per share so you would use this to compare the multiple on the company assets between companies of the same sector so the third thing I like to look at is the price to earnings to growth ratio or the p/e G ratio to calculate this you basically take the price to earnings ratio and divide it by the projected five-year earnings growth rate again you don't need to calculate this yourself you can find the p/e G on Yahoo Finance or a couple of different places you can find the p/e G so you don't need to sit there on paper and write this out I just again want to show you guys how this is actually calculated this is a good metric to use for a company that's experiencing rapid growth it's a good way to determine whether the current p/e ratio is justified or if the company is overvalued and if you find a PE G below one that company is undervalued what I will tell you right now is with the current economy we're in with this bull market it's going to be very uncommon to find a company with a PE G below one that's a sound investment simply because many stocks are fairly valued if not overvalued because we are in a very highly valued market right now if you're in a bear market it's much easier to find value so actually the best time to go value hunting is during a bear market the more overextended a bull market becomes the harder it becomes to actually find value so if you're someone who's looking for a value investment and you're not finding anything it might be because we are in a bull market and it's very difficult to find a stock that is a good value that the price is below the value but once we're in a bear market they're all over the place so that's actually the best time to go hunting for value so for example let's look at a company that is going to be seeing rapid growth let's look at invidia so currently they have a price to earnings ratio of fifty five point six four which is quite high and they have a five-year growth rate of 13% so their PE g would be that fifty five point six four divided by thirteen so four point two eight so that's nowheres near that one it's not below one so this is not undervalued meaning that much of their growth is factored into that share price so if you look at the p/e gee that's kind of high that's a little bit higher than I would be comfortable with as far as price to earnings to growth goes and then you can again take this metric and compare it to other companies to see whether or not there actually will growth is factored into that share price yet or not the fourth thing to look at is the return on equity this is the annualized net income to shareholder equity or in simple terms how well a company uses investments to generate growth in earnings these are the general guidelines that people follow there's no set standards but seventeen to twenty percent is considered very good 20 to 25 percent is excellent and if a company is generating above 25 percent that is superior the best way to look at this is the average return on equity just four examples I pulled the ROI of three companies as of March 2017 but to get a better snapshot you would look at their average roee or maybe their return on equity over the last one or five years but just for example Amazon's return on equity for march of 2017 for the quarter ending in march of 2017 was fourteen point three four percent Samsung's return on equity was sixteen point five six percent and Intel's return on equity was seventeen point six two percent so you need to figure out what your criteria is for this and what you're looking for and if that company doesn't have a return on equity that you are comfortable with then that would be a company you would not invest in as a value investor the fifth thing to look at is the debt to equity ratio this is the total debt divided by the shareholder equity and the lower the better and you want to avoid any company with a debt to equity ratio above two so I took Google which is one of the best companies as far as their debt to equity ratio goes as of June of 2017 their report for June of 2017 they have three point nine five five billion dollars of debt on one hundred forty eight point two eight six billion dollars of equity giving them a debt to equity ratio of zero point zero two six six so that is nowhere near to that is a very low number that is a fantastic debt to equity ratio so you want to look for a great debt to equity ratio that's probably as good as they're going to get number six we have their current ratio this is very important too it's also sometimes called the liquidity ratio this is a measurement of the ability to pay short-term and long-term obligations this is a very simple one to calculate you divide the liabilities from the assets now this is an interesting one because you want it to be within a certain range you don't want it to be too low but you also don't want it to be too high so if the current ratio is below 1 that means the liabilities exceed the assets which is not a good thing if the current ratio is above 1 that means the assets exceed the liabilities however if the current ratio is above 3 that might mean they're holding back they could actually have a little bit more liabilities and be more invested in the business that might mean they're actually holding on to too much cash at that point usually what I look to what I look for is a current ratio of 1 to 2 so let's look at AMD for example this is just something you would search for you would search like AMD current ratio and you'll find that number but as of March 2017 they had a current ratio of 1.8 to so that falls between 1 and 2 which is what I look for that's a good current ratio so what you're going to do with all this because this is a lot of information what I recommend you do you figure out after doing some research what numbers you're looking for and you'll create a checklist so then when you're out there hunting for value when you're looking at a stock you're going to go through and you're going to look up all these metrics and if they meet your criteria you add them to your list and if they don't meet your criteria you say well I don't think there's value in this company and you may not find companies that meet every single piece of your criteria here but you're going to look at them each individually and there's also other factors to consider as well outside of just this fundamental stock analysis so I might actually do a follow-up video talking about what that would be but you're going to kind of just look at this and you're going to look for the best possible scenario you're going to look at the companies that meet most of your requirements so maybe your checklist would look like this you want to look for a company with a price to earnings ratio below the sector average you want to find a company with a low debt to equity ratio you're looking for a return on equity of 17% or more that's considered very good I mean if it's in the 20s that's fantastic you're looking for a current ratio of 1 to 2 they have a responsible amount of liabilities and they're also not holding back you know they do have a good amount of debt and that can be good because that is helping them grow the business then you're also looking for a reasonable price to earnings to growth ratio as well as the price to book value and this is how you are a value investor you're looking at things like this and determining whether or not the prices above the value or the prices below the value there's a lot that goes into this this is certainly no easy task and there's no there's multiple ways to actually do this you guys can figure out what metric makes most sense to you and there's also other ones you can use these are just the ones that I look at when I'm trying to determine the value of a stock anyways guys I hope you enjoyed this video I know this one's more technical than what we usually get into it here but you can do more research on each one of these things on their own and learn more about them if you enjoyed this video please drop a like and if you are new to my channel please consider subscribing to be notified of any future uploads and as always I thank you for taking the time to watch this video you

Channel: Ryan Scribner

Views: 313,402

Rating: 4.9454513 out of 5

Keywords: stock market, stock market for beginners, how to value a stock, how to value a company, how to value an investment, when to buy a stock, when should you buy a stock, when you should buy a stock, how to buy a stock, where to buy a stock, when should I buy a stock, what to look for when buying a stock, what to look for in a stock, what to look for in a company, what to look for in an investment, stock value, value of a stock, value of a company, value of an investment, stock

Id: BdsFurc-ohg

Length: 14min 27sec (867 seconds)

Published: Mon Aug 07 2017