Financial Planning - Eight Easy Stock Picking Tips For Baby Boomers

By David Skill

One of the biggest roadblocks to success in individual stock investing is the time to do the research. Below I have outlined eight stock picking tips that allow you to easily evaluate meaningful data in a reasonable period of time. With the internet there are numerous places to find data but my favorite is ‘Value Line’ which you can subscribe to or find in the reference section of your local library. All of the research information I discuss below can be easily found in Value Line for over 1700 stocks.

Understand the Price to Earnings ratio (PE) –

This is one of the basic measurements of whether a stock is a good value. You calculate it by taking the stock price and dividing it by the company’s earnings per share (EPS) for the year. The PE ratio is the value the market has set for every $1.00 per share the company earns in a year. A PE of 16 means the market has declared it is willing to pay $16 for every dollar the company earns.

To better understand if the PE ratio is low or high, compare it to the company’s average PE ratio over the last several years. Also, compare it to the average of the industry the company belongs to.

Buy what you know –

Buying stocks in an industry you are familiar with can be a big advantage. You can often have a better sense of how a company will do than some analysts that follow the stock.

Diversify, Diversify, and Diversify –

Don’t get caught with too many eggs in one basket. Think long a hard before you put more than 5% of your net worth in a single stock.

Are operating margins increasing? –

One measurement of a company executing well is they are growing their operating margins from year to year. This is often a sign that new products are successful.

Is the company free of debt problems? –

Every industry has a formula for how much debt is good (allowing a company to grow) and how much is too much. As a general rule of thumb, divide the company’s long-term debt by net profit. If the ratio is five or less and compares favorably to the industry then it is a positive sign.

Look for industry domination –

If the company you are researching has a #1 market share position they usually have a better chance of generating higher margins and growing sales and earnings per share than their competitors.

Stay ahead of institutions –

Try to buy stocks that do not have a large percentage of their shares owned by institutions. Once institutions get behind a stock their large purchases can make a stock rise in a hurry.

Track EPS growth versus the PE ratio –

Look for stocks whose annual EPS growth rate is 1.5 times the PE ratio. For example if a company is growing its EPS by 15% and the PE ratio is 10 then the ratio is 1.5 (15% EPS growth divided by a PE of 10 = 1.5). If earnings are growing faster than the PE ratio, the stock has to rise as long as the PE ratio stays the same

Picking stocks by using the above data can greatly improve your investment returns… Good Luck.

David Skill, a ‘Chartered Retirement Planning Counselor’ has created an easy retirement system that enables conscientious baby boomers to determine how much money they need to retire. David asks all the vital questions, uses common language and plenty of examples so the participant builds confidence they will outlast their money and not burden their children.
Check out http://babyboomerseasyretirement.com/

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