Stock Analysis And Investing For The Small Investor

Since economic conditions, technology, consumer sentiment, politics, and governments change, an investor must review his or her investment portfolio periodically. The process of analyzing and selecting investments takes time and requires some knowledge about investing. Since the effort takes time and know-how, some investors elect to retain professional investment advisors. This is not an option for the small investor, seeking to maximize return with minimal cost.

MINIMUM EFFORT, MAXIMUM RETURN
What factors can small investors who desire to make investments and manage their portfolios personally focus on to minimize time and effort and maximize investment return over a one- to two-year investment time frame? I have been investing for more than 20 years, and a few select factors, it is clear to me, may be utilized as a minimal set of conditions for selecting investments. These factors may include, but are not limited to, beta, diversification, and dividends. Understanding complexities such as volatility, trend, structure of averages in the stock market, and so on, is more appropriate to high-level, advanced trading. Formula plans based on such factors as price/earnings ratios,and other statistics can yield decisions such as selling or buying under specified conditions, such as buying at 10 times earnings and selling at 20. For the small investor, this type of data must be simplified based on the constraints of time allowed for portfolio review and management.

Example: 30 million shares outstanding x a price of $13 = $390 million compared to annual revenues of $575 million. The stock is a potential buy.

Example: The recent price of a stock is $20. The book value is 31 or 1.55 x the stock price of $20. The stock is a potential buy.

Example: EPS is 1.55 in the year 2005. The EPS in 2000 is 1.14. (1.55 - 1.14)/1.14 = 0.36 or 36%. The P/E of the stock is 12, a third of the EPS growth, and the stock looks promising.

Other considerations might include the following:

Some industry groups have run into subtle issues, the first example of which was the steel industry in the late 1970s, and now the automotive companies. The impact of pension costs has a significant impact on stock performance. While certain automotive companies are recommended, such investments would be out of the question for a small investor due to unusually high pension costs that will affect company performance overall.

VB = (Next year's dividend)/((required rate of return) - (estimated long-run dividend growth))

VB should be approximately equal to EPS.

The stock does pay a dividend. You will find there is no merger or acquisitions that would add an element of risk. Pension costs are not prohibitive. You decide to purchase 200 shares of the stock through an Internet low-cost broker. Since there is little additional time, you ascertain that the current assets/current liabilities are less than 2.0; the ratio of debt to stockholders equity is less than 1.0; and the stock price of 13 is less than three-quarters of the book value per share of 22.

The small investor's portfolio will not include Treasury bills, government bonds, or no-load investments. The typical small-investor portfolio might include the following composition:

 
High-yield utility stocks 		20%
 
Corporate bonds			20%
 
Non-utility high-yield stocks	10%
 
Stocks				40%
 
Money market instruments		10% 

The investment strategy is to drive growth with a small investment outlay. Select the high-yield stocks for dividend return. If a drop in price occurs that is 1.5 times the annual dividend return, consider selling the stock. Some high-yield stocks may have cyclic variations, particularly in oil, gas, petroleum, and foreign stocks in telephone, communications, and energy, but they may still be valuable investments.

Utilize the money market instrument for investment in stocks. You should consider selling stocks that rise above 10–15% of the original price to take profit and reinvest. Set your stock alerts at the 10–15% level so you get a timely notification on your computer. Review the stock and ascertain the investment trendline. Does this stock appear to be rising or leveling out? If the stock is rising, sell a portion of the shares. Sell the residual in the next few days as the stock rises. If the stock appears to be leveling out and the price decreasing, compare the price chart over the last year to determine the actual trend. If it appears that you will begin losing what you have gained, sell the stock and look for another investment, following the same procedure. This model has validity for investments from $25,000 to $100,000, although we have used it at the $200,000 level successfully.

The approach outlined provides a convenient, rapid, and analytical model that has demonstrated success over a period of 20 years and may be useful to help the small investor judiciously invest precious funds with minimal time and effort.