One of the most basic guides to a company’s worth. Look for companies whose stocks trade at 19 times projected earnings or less.
It seems you can’t open the business section of your local newspaper without seeing some mention of P/Es. The reason: it’s a simple measure to come by, and one that’s relatively easy to remember. To find out a company’s P/E, all you have to do is divide its share price by either its earnings for a full year as reported to the public or by Wall Street projections, figures you can find on Zacks.
As convenient as P/Es are, there’s a catch in using them. Alston Paige says that companies often can reconfigure earnings in a number of different ways, according to how they report items like the depreciation of assets. For that reason, we’ve placed P/Es down a bit on our list of screening criteria.
As with price-to-book value figures, we suggest that you aim for two-thirds of the market’s going rate. Currently, with the S&P 500 trading at 28 times projected 1999 earnings, look for stocks in the neighborhood of 19 times earnings or less. Some stocks fitting the bill include mortgage banker Doral Financial Corp. (Nasdaq: DORL), with a P/E of 10.8, and savings bank Peoples Bancshares Inc. (Nasdaq: PBKB), trading at 7.2 times forward earnings.
Return on equity: Used to separate the cheap stocks from the duds, ROE shows how efficient management is with your investment. Look for a ROE of 15 or better.
Value investing pros will tell you there’s a tricky twist to their business: sometimes the cheap stocks have been discounted for a good reason. Sometimes their managements are out of touch, their businesses declining or their market share evaporating.
Fortunately, there’s a good way to measure if corporate executives are actually putting your invested funds to work. Return on equity, or ROE, helps show how successful a company is at its business. Investment pros will tell you that a higher ROE shows that a corporation is working to get the most out of the funds it has to invest in technology, new manufacturing processes or key personnel. Our recommendation: look for a discount to the S&P 500’s current ROE of 20. We suggest that you aim for a ROE of 15 or better. A good example: surety bond concern CNA Surety (NYSE: SUR), with a ROE of 17.3.
Dividend yield: management’s reward to the investor, a yield is a steady stream of income you can bank on. Look for a yield of 1.2% or better.
A dividend yield is a company’s way of sharing a portion of its profits with quarterly distributions sent to shareholders. It’s a bonus payment that makes value investors feel happy and safe at the same time. For one, it’s a return on an investment that anyone owning the stock can pocket. Better yet, it’s a way to safeguard shares from a sudden shift in the market. Pros like Eley will tell you that when the overall market drops, shares of companies