In order to understand the fundamentals of a quality stock for long-term investing, we need to know the meaning behind what we are looking for and more simply; how to find the information.
One of the best tools an investor can use is something that most people have never heard of before; a Stock Screener. Yahoo has a great Stock Screener and can be found here. After opening the screener we find a bunch of variables. This article will go through various aspects of this stock screener to ensure we are buying a quality stock. I will go through them in order from top to bottom as well as describe which ones are more important.
The first variable is share price. This is as simple as it sounds. You can set a limit on what you are willing to spend at the least for a stock and what you are willing to spend at the most. After you learn enough about value investing you will learn that the price of a stock isn’t nearly as big of an aspect as it is in growth investing. This is because of dividend reinvestment.
Market Cap is the next variable and ranks as one of the highest three in importance. When we are evaluating a single stock, stocks with higher market caps have been around longer and are less likely to go bankrupt. We are going to want to set this value at around a 25billion minimum market cap. This means the value of the company is at or above 25 billion dollars.
Dividend yield is the second of the highest three in importance. For value investing we are going to use our dividends to greatly impact how many shares we have over the long term. I prefer to search for stocks that have between 3% and 6% dividend yield. While it may be enticing for a stock to have extremely high dividends of > 6%, it can actually be an indicator that the company is struggling and attempting to secure investors through high dividends.
While sales revenue has its place, it isn’t of great value in our evaluation. Profit margin is however. It shows us exactly how profitable our company is. If our company isn’t profitable, we certainly can’t count on it being there in the long term. We want to set the profit margin at >10-20%. All of these are variable and you can play with them as you see fit.
Under the valuation criteria, the only one we will focus on is the Price/Earnings Ratio. This is our third of the three most important variables. This is more commonly known as a P/E ratio. This number is extremely valuable information and will let us know how ‘cheap’ we are buying a stock for. Just because apple is valued at over 400 dollars a share doesn’t mean that it can’t be bought cheap. Cheap is a relative term used in value investing to describe a stock with a very low P/E; typically less than 10 or 15.
Testing the Data
Let’s enter some data and find out what stocks come through the screener. I will set a value of 25billion for market cap, 3% to 6% dividend yield, profit margin of >10% and
Some of the stocks that pop up that I actually own myself are as follows:
Symbol Company Market Cap Div/Yld Profit Margin P / E
BMO Bank Of Montreal 40.43B 4.60% 26.1% 10.27
COP ConocoPhillips 80.70B 4.20% 12.8% 10.71
FE Pfizer, Inc. 206.34B 3.40% 27.0% 13.93
INTC Intel Corporation 114.69B 3.90% 18.1% 12.45
As you can see, I actually own 4 of the 18 stocks that come up when you screen stocks with those criteria. All of these stocks are quality stocks that long-term investors can rely on. The goal of buying single stocks opposed to a mutual fund is being able to customize your portfolio by buying only the best of each company in the sector you wish, instead of relying on a mutual fund to select the best stocks for each sector. I like to buy quality companies and diversify my portfolio on my own.
I truly believe that customizing your own portfolio by buying individual, quality stocks by using a stock screener and buying the stock when they are cheap relative to their earnings is the absolute best way to go. You aren’t relying on a mutual fund to decide which stock is best and you have complete control over your purchases.