Monthly Archives: March 2016

Choosing a Stock – Part 8: Let’s Practice Scoring

By now, you’re familiar with how we score stocks for our monthly recommendations. In this post we’re going to use General Motors Company to practice scoring so you can see how easy it really is. One of the goals of this blog to empower you to take control of your financial future by investing your money by yourself. It’s really not that scary and, with a few basic rules, pretty safe.

scoring_stocks_gm

This is a screen capture from Google Finance on March 14, 2016 (https://www.google.com/finance). To use our system, this is all you need. No need to worry about complicated stock analysis or expensive “hot” stock tip newsletters. Remember, the companies on the S&P 100 are all big, established companies so they’re all pretty safe. All we’re trying to do is pick the best company at the time from a list of great companies. If we do that we’ll also achieve our other goal – to sleep well at night. Let’s use the data from Google Finance to score GM.

The stock is currently trading at 20% below the 52-week high ((38.99-31.18)/38.99). In other words, it’s on sale for 20% off. It’s only fair to point out that lots of other stocks on the S&P 100 were more than 20% off their high but we’re just using GM as an example and sale price is only one of the factors we consider. We give it a score of 3 for being on sale (Choosing a Stock – Part 3: Buy on Sale). The dividend is 4.87% ((0.38 x 4)/31.18). Most online services calculate that automatically for you which saves some paper and pencil work. It earns a score of 4 for the dividend yield (Choosing a stock – Part 2: It’s all about the dividend!). The P/E ratio is 5.19 and the EPS is 6 which get scores of 5 (Choosing a stock – Part 5: Does the company deserve the price?) and 2 (Choosing a stock – Part 6: How much of the value will be mine?), respectively. Those scores add to 14 (3 + 4 + 5 + 2). On it’s own, that score means very little, but with experience you’ll learn that it’s actually really good – usually the top stocks score between 13 and 16. If you did the same for all the stocks on the list, you’d see that, for March, GM tied with three other companies that month – Potash Corporation of Saskatchewan (TSE: POT), Metlife, Inc (NYSE: MET), and Banco Santander (NYSE: SAN). Of those three, we recommended GM because Potash Corp is experiencing continued uncertainty in the price of potash and Santander is a bank in a foreign market – both riskier than we like to suggest. Neither of those is on the S&P 100 either so we don’t recommend those unless you are able to tolerate a little more risk. While Metlife was a little farther off its 52-week high, it paid a dividend of only 3.74% compared to the 5.2% (at that time) GM offered. BTW, GM is up 6% since we recommended it two weeks ago and Metlife is up 7% so you wouldn’t have gone wrong with either of them. Just sayin’.

We’re convinced (and our track record proves it if you check out our portfolio details) that you could do quite well following our simple system. Of course, if you really like this kind of thing and don’t mind spending some more time you can do more in-depth analyses of stocks but we recognize that most of us would simply rather spend our time doing lots of other things we enjoy. The appeal of our method is simplicity. The idea is passive income, after all.

Choosing a Stock – Part 7: Scoring

If you managed to stay with me through the last 6 entries, you’re familiar with the technique I use for choosing a stock. Now let’s get practical and look at how I actually apply the scoring system.

First, I find the latest price, 52 week high and low, dividend payment, P/E and EPS for shares of each company on the S&P 100. I use RBC Direct Investing (http://www.rbcdirectinvesting.com/) because it’s my online broker but you can use any site that appeals to you. Google Finance (https://www.google.ca/finance) is great and Yahoo Finance (http://finance.yahoo.com/) is another good choice that’s easy to use but there are plenty more.

scoringI have an Excel spreadsheet which lists all the companies on the S&P 100 (including any I’m considering that are not on that list) and has a column for each of the factors we’re using. There are also columns for dividend yield, % below the 52 week high and % above the 52 week low.

Now for assigning the scores. I start by sorting the companies in order of decreasing dividend yield so that I can easily assign the dividend score to each one. I use a simple 5 point scale as in the table below:

Score Yield (%) % below 52 week high P/E EPS
5 6 or greater 30 or greater 10.0 or less 15 or greater
4 4.5-5.9 25.0-29.9 10.1-12.9 10.0-14.9
3 3.5-4.4 20.0-24.9 13.0-14.9 7.0-9.9
2 – 10.0-19.9 15.0-16.9 5.0-6.9
1 – – 17.0-20.0 4.0-4.9

Notice I don’t consider a stock that pays a dividend of less than 3.5%. There are always great deals on companies that pay higher dividends so why choose a lower-paying one? Once this step is complete, I sort the stocks by the % below the 52 week high and assign scores for that. I continue doing this for each factor in turn until scores have been assigned for all the factors, then I simply add up the scores for each stock.

In a perfect world, the stock with the highest score would always be the stock to buy but, unfortunately, we don’t live in a perfect world. Rather, the score highlights the top options but you might need to decide between a few of the top contenders. My preference is usually for a stock which is currently at the deepest discount. Remember, we never consider a company that doesn’t pay a good dividend so it makes sense to take advantage of the potential growth in share price of a stock that is beaten down. I have found that this system really helps to removes the emotional or subjective element in choosing a company by using hard numbers to narrow down the options to just a few.

I don’t always assign a score for the % above the 52-week low. To be honest, that metric only becomes useful when a stock is sliding in price and you want to see if it has started to rebound. A stock that is barely above the 52-week low might still be falling and we want to buy when it is still on sale but recovering. A later version of my system might assign a score based on the 52-week low but for now it’s really not one to worry too much about. Check back for our next post where we’ll use the system to score a real stock to get some practice using the system.

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March’s Pick

It’s time to announce our stock pick for March and there’s a good chance you’ll be happy to hear we’re not suggesting IBM (NYSE: IBM) again. To be clear, if IBM came out on top after assigning the scores, we’d have no problem recommending it for a fourth month in a row – but it’s not. This is about choosing the best stock, not about diversifying for no good reason. Like last month, we’re going to offer some choice. Our pick from the S&P 100 is General Motors Company (NYSE: GM) but we’re also watching Potash Corp of Saskatchewan (TSE: POT) which, while not on the S&P 100, still represents a good opportunity. To be sure, the buyer’s market continues. With markets still a little off, more than 30 companies on the S&P 100 are trading at least 25% below their 52-week high so there are lots of bargains to choose from if you want capital growth.

Let’s look first at GM. This well-known american company is trading 24% below the 52-week high which is a good sale price and makes the $0.38 dividend a 5.15% return. That return is outstanding for a big, blue-chip stock when we compare it to companies such as Apple (2.11%), Wal Mart (3.01%), Johnson and Johnson (2.82%), and McDonald’s (3.00%). With a P/E of 4.92, General Motors represents great value at this time and the $6 EPS indicates strong earnings. We added GM to our portfolio on March 1.

So what’s happening with Potash Corp? Since we mentioned them back on January 29, the price has moved up 8% which is a decent gain for a month if you had purchased them then and sold them now. That’s great for a quick fix but our strategy is to buy value and hold it. Despite that recent gain, they’re still 49% off the 52-week high which is a significant sale. The 11.17 P/E is attractive but the $2.05 EPS is less than ideal (in fact, an EPS that low doesn’t even score on our system) but the depressed worldwide potash price is to blame for that. The company is still profitable and continues to pay that juicy 6.1% dividend. If you’re comfortable straying a little from our core system, POT is a great buy!

Finally, we wouldn’t feel right if we didn’t at least give a little update on IBM. To be fair, it’s still an attractive stock. They’re trading 24% below the 52-week high which is a good sale. With a P/E of 9.82 and EPS of over $13 they are very well-priced for their earnings. The dividend yield is not outstanding but 3.89% is nothing to scoff at. If you previously purchased IBM and are looking to increase your position, it’s still a good time.

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