Subscribe to RSS feeds Bulkowski Blog via RSS

Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

Support this site! Clicking the links (below) takes you to Amazon.com. If you buy ANYTHING, they pay for the referral.

Picture of the head's law.
Kindle
Paperback
Nook
Chart Patterns: After the Buy
Getting Started in Chart Patterns, Second Edition book.
Trading Basics: Evolution of a Trader book.
Fundamental Analysis and Position Trading: Evolution of a Trader book.
Swing and Day Trading: Evolution of a Trader book.
Visual Guide to Chart Patterns book.
Encyclopedia of Chart Patterns 2nd Edition book.

Bulkowski's Value Investing

Class Elliott Wave Fundamentals Psychology Quiz Research Setups Software Tutorials More...
Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 04/21/2017
20,548 -30.95 -0.2%
9,134 7.68 0.1%
706 4.81 0.7%
5,911 -6.26 -0.1%
2,349 -7.15 -0.3%
YTD
4.0%
1.0%
7.0%
9.8%
4.9%
Tom's Targets    Overview: 04/17/2017
20,100 or 21,150 by 05/01/2017
8,500 or 9,500 by 05/01/2017
725 or 685 by 05/01/2017
5,950 or 5,650 by 05/01/2017
2,275 or 2,425 by 05/01/2017
Mutt Winners: None YTD

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

Value Investing: Summary

One of the questions I am often asked is how do I select stocks when building a portfolio? The FAQ provides one answer, but this article discusses how you can use fundamental analysis and value investing to improve your chances of success.

$ $ $

My book, Fundamental Analysis and Position TradingFundamental Analysis and Position Trading: Evolution of a Trader book., pictured on the left, tears apart fundamentals and tests them for performance.

If you click on this link and then buy the book (or anything) at Amazon.com, the referral will help support this site. Thanks. -- Tom Bulkowski

 

$ $ $

 

Value Investing: How to Pick Stocks Using Fundamental Analysis

When selecting stocks to build a portfolio, if you pick stocks with good fundamentals (the so called "value" investing approach), you give yourself a built-in edge because they tend to outperform stocks with poor fundamentals. But what fundamentals lead to the best performance?

On the Fundamentals page, I provide answers using numbers from Value Line (often available for free at large libraries). Here is a sample of what I found.

Value Investing: Price to book value.

Book value is what a company is worth. Many games can be played with book value by either inflating the value of assets or undervaluing them. Peter Lynch recounts a tale in his book, One Up on Wall Street by John Rothchild, that Warren Buffet had hoped to get $866,000 for the book value of machinery from a textile plant they were closing down. They bought the machines for $5,000 a few years earlier but received only $26 each. The $866,000 book value turned into $163,000.

Price to book value can tell you whether or not you are overpaying for a stock. A low ratio is good. Testing reveals that stocks with a low price to book ratio tend to outperform those with a high ratio 78% of the time.

Top of page   More

Value Investing: Price to cash flow.

Analysts love cash flow, especially free cash flow. Free cash flow is what remains after removing capital spending (reinvesting in the company to build plants and buy equipment). I found that stocks with a low price to cash flow outperformed those with a high ratio 78% of the time. A low ratio means the cash flow is high relative to a stock's price.

Value Investing: Price to earnings.

Many know what the p/e ratio means: it is price divided by earnings. The lower the ratio, the better. A low p/e means earnings are high compared to the price of the stock. A low p/e is especially good if it is half the growth rate of the company, and bad if it is twice the growth rate, according to Lynch. As in many of the ratios, you will want to compare the p/e for a company against the ratios of other companies in the same industry. That will tell you at a quick glance which companies are over, under or fairly valued. My testing showed that companies with a low p/e ratio outperformed those with a high one 71% of the time.

Value Investing: Price to sales.

You may not have heard of the price to sales ratio. I remember reading Forbes magazine in the late 70s when price to sales was in vogue, how values below 1.0 meant a good value. Testing shows that they were right, and companies with a low price to sales ratio outperform those with a high one 71% of the time.

Top of page   More

Value Investing: No dividends.

I found that stocks without a dividend outperformed those with dividends 80% of the time. Having said that, a significant portion of my portfolio is in utility or other stocks that pay a hefty dividend.

Stocks that keep their cash instead of paying a dividend reinvest the money in the company. That reinvestment often leads to a higher stock price when the value of the company rises.

A chart Great Plains Energy (GXP), on the daily scale.

For people that enjoy current income, a dividend paying stock sure beats what you can earn at a bank, especially since the government cut interest rates.

The Vanguard Prime money market fund, for example, currently yields 0.46% (as of July 16, 2009). Some of my utility stocks pay 8%. Of course, the utility stocks can and have cut their dividends, with the stock price dropping 38% (see AEE which dropped from 32 to 20 in one month starting in Feb 2009) to 50% or more.

I show a chart of Great Plains Energy, GXP, which dropped from 20 to 10, also in February, on news of a dividend cut. February was a popular month for utility stocks to pull the rug out from under investors.

Imagine if I told you about a company with a safe dividend that yielded 8%. Would you be interested in owning it? I have purchased stocks this past year for just that reason. Thus, a stock paying a high dividend offers downside protection. If the stock drops too far, the yield will go up and that is attractive to people hunting for income. Just be sure that the dividend is safe. That means the company is earning more than they are paying out as dividends and the prospect of their business growing (higher profits) is good.

If income is not important to you as capital gains, then buy stocks with little or no dividend for the best chance of capital appreciation.

If you hunt for companies with fundamental values as described in this article and then use technical analysis to time your entry and exit, you can make a lot of money. Buying a value play gives you an extra cushion as you trade the stock. Good luck!

-- Thomas Bulkowski

Top of page   More  

See Also

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. A mathematician is a machine for converting coffee into theorems.