Benjamin Graham, the mentor of Warren Buffet on investment, believes that value investment is the only kind of investment, all other investment are speculation, not investment. For any serious investor, research is the most important part of their money increment process. However, for most individual investors, professional stock research tools are too expensive. This article goes through some important ideas in value stock research and how to implement them with free tools such as Yahoo stock screener. The investment ideas discussed in this article are summarized from Benjamin Graham’s book The Intelligent Investor.
Most people have seen and experienced the market fever in a bull market when most common stocks are overvalued. While the market overvalues some stocks for various reasons, it is reasonable to expect that the market undervalues some other stocks, stocks of those companies that are not doing well temporarily in earnings. This general phenomenon of the market indicates a conservative but rewarding investment strategy – to look for undervalued large companies. Large companies is highly recommend for this strategy because the market will react must faster to any improvement shown by a large company than by a small company. And because large companies have more resources and capital to take them through hard times while small companies entail the risk of not being able to recover from the unsatisfactory earnings.
The easiest way to find undervalued large companies is by choosing from the DJIA (Dow Jones Industrial Average) the issues with the lowest P/E of the current year, or the past year. Choosing from DJIA issues ensures that your choice is from large companies. And choosing the lowest current P/E finds you the undervalued ones. Without a tool, you will need to manually check the current P/E of each issue and then choose the lowest ones. With Yahoo stock screener, it is very easy to present all DJIA issues in the order of P/E low to high.
To start Yahoo Stock Screener, simply get on http://screener.finance.yahoo.com/newscreener.html, then click on “Launch Yahoo! Finance Stock Screener”. A new page will pop up, which will launch the stock screener. Make sure you do not close the pop-up page, otherwise the stock screener will also be closed. It normally takes a little while for the stock screener to show up.
The Yahoo Stock Screener gives you options on choosing which parameters you want to use to select your stocks. With the idea of choosing stocks with lowest current P/E within DJIA, you will need to set: Descriptive->Index = DJIA; Valuation->P/E
Besides looking at the current P/E, average P/E over several years is also necessary to make sure the company has a sound earning history. The average P/E over several years is obtained by dividing the current stock price by average earnings over the last few years, say 5-7 years.
There are also other parameters that you can set to get your own portfolios. For example, instead of using DJIA as a standard for selecting large companies, you can use market value as a standard, say, set market value as being higher than 10 billion. If you are a defensive investor who seeks the safety of principal, you can set another standard to filter out companies with too much debt. Yahoo Stock Screener has a parameter under Balance Sheet->Total Debt/Equity. This parameter gives you an idea of how much debt the company has compared to its equity.
There are lots of investment principles and tools out there. Only a few are covered here. To be an intelligent investor, you will need to do lots of study and research. You can start with playing around with Yahoo Stock Screener and learn about what each parameter indicates about the company behind the stock. Value stock research requires a lot of time and energy. Ultimately, your return from investment depends largely on how much time and effort you are willing to spend in doing research.