How to Know Whether a Stock is a Bargain?
By
J. Royden Ward, Analyst and Editor of
Cabot Benjamin Graham Value LetterFrom Cabot Wealth Advisory 5/22/08
Sign up for free Cabot Wealth Advisory e-newsletterI'm a value investor, which means I'm constantly looking for bargain prices in the stock market. The question is: how can we determine whether a stock is a bargain?
Today, I'd like to pass along the methodology I use to find the true worth of a company. I find the estimated value of a company by doing a few calculations with the help of my trusty computer. As a true value investor, I need to know what a company's stock is really worth before I can determine whether it's a bargain.
I download a large amount of data into my computer each month and then turn my computer loose to determine preferred buy and sell targets for my stocks. My database includes 10-year history for sales, cash flow, earnings, dividends, book value and price per share for about 1,000 companies.
The initial objective is to organize the numeric history of each company, so that future stock prices can be predicted. Calculations can be a little tricky, because anomalies such as deficits, exceptionally good or bad years, or a multitude of other variations could throw the predictions out of whack. But I've programmed my computer to deal with anomalies, and the resulting stock price forecasts are quite accurate.
Each month, I publish my price predictions for 250 companies in the Cabot Benjamin Graham Value Letter. I recommend that investors buy at or below my Maximum Buy Price and sell when the stock reaches my Minimum Sell Price. It's that simple.
For instance, let's take a look at
Garmin, Ltd. (Nasdaq: GRMN). My computer tells me that a reasonable price for Garmin today is $54.05. In other words, investors should pay no more than $54.05 for the stock during the next four weeks. The Minimum Sell Price for Garmin is $87.22, meaning investors should wait until Garmin's stock price increases to $87.22 before selling. The target sell price will change over time, as I update the firm's sales, earnings and other results into my computer. But like I said before--the forecasts tend to be quite accurate.
So you see, each piece of the puzzle must be assigned a value before buying, or endorsing, it. Everybody wants to buy when a stock is undervalued and sell when the stock price is fully valued. But the trick is having a proven, time-tested system that helps you spot bargains, and rip-offs. t's taken years to hone, but that's what my system is able to do!
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