In the full sharestutor.com course you will learn many
useful calculations to mine and find gold within the depths of the stock
exchange. Once you start investing and
reading actively on the topic, you will start asking yourself: “How much more
can I get out of ratio’s and figures?”
When digging for the gold, here are some practical tips that
will help you find shares that hold great value.
Some of what we propose might not be information that is
readily available at a click’s notice; the information we’re discussing might
require of you to keep track of some figures yourself over a period of time.
For example Dividend Yield figures: Although they are
published in the newspapers, the papers don’t give you a history. To spot
trends, you need history!
Take a peek at some Dividend Yield histories: Dividend Yield
figures could be one way to tell you how much income you could expect from your
initial investment within the first year, if dividends remained constant.
Because the Dividend Yield (DY) figure is a ratio of which
one component is the price of a share, it can be used over time as an indicator
of whether a specific share is fluctuating in how the market is pricing it.
When you plot a specific company’s DY figures on a chart, you might start
seeing a cycle, of which a high DY figure would signal a good buying
opportunity!
You might be clever and reason that you can do the same by
just watching the share price? True, but a DY ratio will tend to better
illustrate a cycle that a share price: A share price graph could be very
spikey, whereas a DY graph would move sideways between (for example) a DY of 4
and 6, hardly ever spiking above or falling below that. Therefore you can
better identify price cycles within a DY ratio that with simply watching the
share price.
Taking down the DY figures, and some of the other figures we
propose, could be a weekly item on your task list, thus not causing too much
hassle, yet affording you powerful decision-making ability.
In the Sharestutor.com course you will learn to understand
and use the Price:Earnings ratio (PE, for short).
In this article we however want to show you how you can
further use the PE value to determine whether a company is prices well or not.
Although this method is useful, it is speculative by nature, as it presupposes
the next year’s growth. We will explain by example how to PEG ratio can be
used. The PEG ratio can be used when companies as buying opportunities, and
having to decide between on or two best buys. The PEG ratio helps you to value
the shares relative to each other and considering their future growth potential
PEG is short for PE
/ %growth anticipated. The lower
the PEG ratio, the better the buy.
In this example we will compare 3 companies: ABC, DEF and
GHI:
1. Assume company ABC is currently trading at a PE of 12:1
(or often just noted as 12), and you obtain growth forecasts from their website
of 25% for the next year, then their PEG would be calculated as:
PE / %growth anticipated:
12 / 25 = 0.48
2. Company DEF trades at a PE of 11 and forecasts growth of
30% for the next year:
PEG = PE / %growth forecast
11/30 = 0.37
3. Company GHI trades at a PE of 15 and forecasts growth of
45%.
15/45 = 0.33
In this case the last company, Company GHI would be the best
priced company considering future growth (as anticipated)
Assuming these shares were in the same sector, you might
have been tempted to select a company purely based on the PE value. In this
case the company trading at a PE of 11 would have seemed to be the best price.
If you purely looked at the PE values you would have
probably discarded the company trading at a PE of 15, but doing the PEG exercise
afforded you the understanding of why the market is willing to pay relatively
more for this last share. The market is expecting this company to overtake the
others in terms of growth for next year!