Your Questions About How To Pick Stocks

Betty asks…

If a stock had a beta of 2.5, would you invest in it? Why or why not?

What if a stock you were looking at payed dividends of .39 cents per share? Would you invest in it?

What if it had a 2.1 debt to income ratio?

Please don’t give answers like “I’d invest to earn a return”.

That is obvious to all that invest and obvious to me as well. I want to know what makes people choose a stock over another stock.

Greed is not an answer. Greed is what people do when they want tons and tons and tons of money. I’m talking about picking one stock over another.

John answers:

If you are looking for a magic formula for picking stocks, there isn’t one. Everyone does it a little bit differently, and there are lots of ways to do it successfully. None of the statistics you quote mean anything by themselves. They are like pieces of a jigsaw puzzle…they don’t mean anything until you see the entire puzzle. Taking your examples…Beta 2.5…that means it is very volitile. Doesn’t mean much to me by itself. Some people say volitility = risk…I don’t agree, and I don’t think there is any backup for the notion. Dividend of $0.39…means nothing by itself. What is the share price, what is the yield? Does the company have the cash flow to continue to pay the dividend? Could it be increased, or is a decrease in the offing? The expectations for the future are as important as the current payout. How much is the company investing in new businesses? A high dividend may not be a good thing if it is because all cash flow is being paid as a dividend, and nothing is being invested for future growth. I remember one REIT which had a great payout…but it turned out that they were defering vital maintenance on their properties. When they finally liquidated, the properties were sold for far less than what was predicted because they needed so much work. Then you have Berkshire Hathaway, which has never paid a dividend in its existence, but is one of the best performing stocks ever because they do a great job of reinvesting earnings. 2:1 debt to income (did you mean debt to equity?)…2:1 debt to income says to me the company has a light debt load (they could pay the debt with two years income). Again, only one piece of the puzzle. Debt can be a good sign, or it can be a bad one. I can remember seeing a very leveraged company a few years ago…equity on the balance sheet was actually negative. However, the company cash flow was huge…they could have paid off the debt in 2 1/2 years out of cash flow, if they had wanted to. Usually, high debt is a sign of trouble and risk, but given the huge cash flow, in this case, it didn’t mean a whole lot because of the ease which they could afford payments on the debt. The owners were trying to minimize the amount of cash they had to keep in the company…which is good financial management in a case like this. I actually had an accountant argue with me that the company was headed out of business…that was 12 years ago, and they are still going strong.

I guess what I’m trying to illustrate is that picking stocks isn’t about picking out a few pieces of information, and by themselves, each of the numbers you mentioned don’t tell you much. It is about using those and many other pieces of information to understand the company’s story, and given the story, deciding whether it is underpriced or overpriced. You have to understand the company and its financials, then the industry it is in, what affects it, etc. In order to do that, you need to do a lot of reading. If I’m trying to understand a company, then I start with their latest financial reports, then try to read up on the industry…try to understand the business they are in, its prospects, does what is going on in the world help or hurt the company, etc.

Then there are the folks who don’t even look at the fundamental data at all…they are watching market psychology, or charts (sometimes referred to as technical analysis) to make their decisions. Some do very well this way.

Me, I try to understand the company and where it is as a starting point, then try and judge the market psychology. I won’t buy a stock just because it is undervalued. I’ve seen plenty of undervalued companies become more undervalued, and vice versa. I’m usually looking for some sort of announcement, new product, improved earnings…something that I think is going to turn the stock’s fortunes around…a catalyst to send the shares higher.

FWIW

Jenny asks…

I need help picking stocks.?

I started a game in school called the stock market game, we are given 100,000 dollars of fake money and we have to invest it. Does anyone know any stocks that are doing well or any high risk stocks that are predicted to do well?

John answers:

You don’t want high stocks. You want stocks that will go up.

Buy low, sell high.

Daniel asks…

could you pick things for stocking stuffers?

well i was wondering if you guys could pick as much things as you want for a stocking stuffer like make-up and stuff from bath and body works ty so much
lol yeah sorry about that mistake i was rushing ty for spotting it out

John answers:

I don’t get if you mean for me to pick stocking stuffers ,
Or if you personally want to know if you can pick them .
Yeah you could if that’s the question ..
But if it’s for my ideas then here’s some :
– Perfume
– Mascara
– Moisturizer
– Candy
– Bracelets
– Bath&&Body Works Cookie Room Spray (It Smells Amazing)
– Random Makeup Brushes I Guess ?
– Primer Potion
– Eyeliner
– Chapstick

These are random things ..
I don’t personally want some of them 😛

David asks…

Multiple Stock Picks?

I’m looking for another stock to buy in addition to the GE that I own. What are everyone’s thoughts on Walmart, Target, Macy’s, Microsoft, Apple, and Google?

John answers:

In the current market if I had to choose between the 6 you’ve mentioned it would be either Walmart or Google. Probablly Walmart only just because Google doesn’t pay dividends.

If you bought GE specifically for the high dividend, Pfizer’s the other Dow listed stock offering a high dividend yield.

Robert asks…

Finance HW: Pick any 3 stocks?

all i have to do is pick 3 stocks list their ticker symbol and say why i want them.
I’m a college freshman girl so please pick something realistic that I would have known about to pick
I would do it myself but I dont want to pick stocks that are doing badly and look stupid. I dont really understand the market at all.
thank you, remember, say why you picked the stock!

John answers:

You should look around you.
Maybe you like shopping, you have a favorite brand, you should look which company is making your favorite clothes or the company who distribute it. (no offense it is just an example).
Look on internet about the company, you will find the ticker with Yahoo finance or Google finance.
Once you have elected your stock, go to their website and read the last financial statements, read the latest news…
It will be more easier for you if you know your topic!

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