Target strong contenders and weed out also-rans with a quick fundamental analysis of any stock using these web tools.
There are hundreds of criteria you can consider when you invest in stocks, and the vast amount of information that’s available on the Web makes researching a stock an overwhelming effort. Fortunately, there are some tools that can help you perform an instant analysis to see whether a stock might fit your portfolio. While none of these tools substitutes for your own in-depth research, they can spark new ideas and point out potential hazards as you consider investing in a new company.
A couple of web sites serve to focus your attention on the most important factors to consider before you invest. These research wizards take a step-by-step approach to fundamental analysis, presenting questions for you to answer as well as providing the relevant data you need to make a decision.
Quicken.com’s Stock Evaluator (http://www.quicken.com/investments/seceval) is one free tool, shown in Figure 4-40. From a stock page, click Stock Evaluator under Analysis in the left margin. The evaluator steps through a fairly thorough analysis across six areas, including growth trends, financial health, management performance, and market multiples. The Stock Evaluator also helps with industry comparisons and the calculation of a stock’s intrinsic value. In each section, data and graphs along with plain-English explanations help you to determine whether the stock meets or falls short of generally accepted guidelines.
The MSN Money Stock Research Wizard (http://money.msn.com/investor/research/wizards/SRW.asp) takes a slightly more Socratic approach to research, presenting key questions that investors should ponder before investing in a stock. For instance, in order to understand the company’s fundamentals, the wizard asks questions such as “How much does the company sell and earn?” and “How is the company’s financial health?” For each question, the wizard suggests answers with data, charts, and industry comparisons.
The main drawback of both of these tools is that they don’t dig very deeply. For example, MSN Money’s Stock Evaluator suggests future price targets based on the current P/E ratio of a stock and on one- and two-year earnings estimates. Although this provides some guidance about the stock’s potential, it ignores the fact that P/E ratios fluctuate in conjunction with price and EPS. If the current P/E ratio is high, then the price targets established by the tool are over-optimistic.
Still, these wizards can certainly help you shape your approach to long-term investing as well as suggest important areas that you might have missed in your own research.
Like discounted cash flow analysis, the dividend discount model (DDM) is a technique grounded in academic principles. DDM calculates the present value of the future dividends investors anticipate that a company will pay, as well as the expected rate of return implied by the current yield and projected growth of dividends. With this information, you can determine if a stock is over- or undervalued.
DividendDiscountModel.com (http://www.dividenddiscountmodel.com) is a free site that provides the necessary data and then performs the calculations to analyze stocks using this technique. Of course, the model only works on stocks that pay significant dividends, such as utilities and real estate investment trusts (REITs). You don’t have to accept the tool’s default values, either—you can tweak figures such as projected EPS growth rates to fit your own projections. For example, if you disagree with the 6.98 percent projected EPS growth rate for Kimco Realty in Figure 4-41, you can click the projected growth rate value in the table, type the growth rate you want in the window that opens, and click Done to view the analysis with your projections.
Figure 4-41. DividendDiscountModel.com quickly calculates the expected return of dividend-paying stocks
In Figure 4-41, Kimco Realty’s expected return is 12.06 percent based on future EPS growth of 6.98 percent. This return is higher than the S&P 500’s average of 11 percent.
If you’re scouting for ideas, DividendDiscountModel.com maintains a list of free stocks, too. These are companies that are expected to pay enough in dividends over the next ten years to pay back their initial stock price.
Back in grade school, receiving your report card was either a time of trepidation or celebration, depending on your studiousness and how well you got along with classmates. Another of Quicken.com’s tools, the One-Click Scorecard (http://www.quicken.com/investments/strategies), takes a similar approach and checks whether companies pass or fail specific criteria. Instead of taking a generic approach to fundamental analysis as the Quicken.com Stock Evaluator does, One-Click Scorecards are available for four different methodologies:
Based on Robert Hagstrom’s book of the same name, this scorecard deconstructs the investment approach of one of the all-time great investors and evaluates companies as Buffett does. Use this approach if you prefer to balance growth and value when choosing companies in which to invest.
Loosely based on the long-term approach created by the National Association of Investors Corporation (NAIC), this scorecard looks for solid growth stocks that are likely to double in value in five years. Use this approach to find companies that are likely to grow steadily over the long term.
Searches out high-quality, high-yielding income stocks selling at attractive prices. Use this approach if you want to invest in solid large-cap stocks that pay above-average dividends and that are also undervalued.
For each approach, you’ll find a concise explanation of the techniques used to qualify candidates as well as passed or failed grades for a series of specific questions.
Investment methodologies are difficult to condense into simple checklists of questions. In addition, raw data often doesn’t convey a true portrait of company performance. For this reason, you shouldn’t rely on these One-Click Scorecards to do your homework for you. However, you can use them to learn more about these methodologies and then evaluate stocks thoroughly on your own.
One of Warren Buffett’s favorite stocks is Coca-Cola. In fact, Buffett’s Berkshire Hathaway is the largest shareholder of Coca-Cola stock. Hagstrom’s “Warren Buffett Way” strategy can help you see the key considerations that Buffett uses in evaluating companies and what Buffett likes so much about Coca-Cola. Stocks are analyzed based on the following questions devised from the master investor’s value strategy:
|Has the company performed well consistently?|
|Has the company avoided excess debt?|
|Can managers convert sales to profits?|
|Are managers handling shareholders’ money rationally?|
|Has management actually increased shareholder value?|
|Has the company consistently increased owner earnings?|
|Is the stock selling at a 25 percent discount to intrinsic value?|
The One-Click Scorecard illustrates each answer with charts and data as well as a text description of the reasons that the company passed or failed each checkpoint, as shown in Figure 4-42. A summary provides a quick visual determination of the company’s strengths and weaknesses.
Figure 4-42. Quicken.com’s One-Click Scorecard offers an instant stock analysis based on any of four different methodologies
You can use these tools in two ways. First, you can visit the Scorecard and find a list of strong interest stocks for each strategy. Like any screening tool, though, the stocks that are highly rated aren’t necessarily appropriate for your portfolio. You must research to delve deeper into the specifics of each company.
The second way is to use the Scorecard as a starting point when researching a new stock idea. Enter the ticker symbol to see whether one of the methodologies finds the stock attractive at the current price.
Some stocks will fly through the Scorecard with a passing grade, but you might eliminate them based on recent bad news or other criteria that make the stock less attractive. And finally, some stocks might fail one or more criteria, but you might find them acceptable after further research shows that the company’s problems are short-lived or not significant.
One textbook approach to fundamental analysis is known as the discounted cash flow technique. Popular in academic circles and used by Warren Buffet, DCF analysis calculates the intrinsic value of a stock based on future cash flows and an estimated discount rate. ValuePro.net (http://www.valuepro.net) is a free site that allows you to analyze any stock using discounted cash flow. The resulting intrinsic value gives you a sense of whether the stock is a good buy at its current price.
You’ll find that discounted cash flow analysis is fairly complex. If this approach to investing interests you, check out the tutorials and explanations provided by the financial engineers who produce the site. These aids make their models a bit more accessible to those who aren’t mathematicians by trade.
Once you’ve analyzed a company, you can see the cash flow streams that the program used in its model, as well. If you like this approach to investing, the site also sells a software program that hooks into its web database and provides more detailed analyses.
For more online research tools available primarily on a subscription basis, check out these services:
ValuEngine.com (http://www.valuengine.com) uses quantitative analysis techniques based largely on earnings growth. A free valuation summary is available on any company, while a subscription provides access to more detailed analyses.
StockWorm.com (http://www.stockworm.com) mixes technical and fundamental analysis techniques, highlighted by innovative visual displays. Its fundamental approach places much weight on industry comparisons. Monthly subscriptions are available at several levels.