into hard numbers, that means if IBM is predicted to grow earnings at about 20% a year, its shares look good at a P/E of 20 or less, and are not as tempting at a P/E above 20.
There are also a good number of tricks of the trade that “value” managers–the market’s bargain shoppers–love to use. One is to look for companies whose P/E multiples are well below that of the market, as measured by an index like the Standard & Poor’s 500. If the S&P 500 on average fetches a P/E of 20, that means shares in the 16 range or lower might be attractive. Dividends are another yardstick for value investors. If a stock’s yield (its dividend divided by its current price) is above that of the S&P 500 (currently at 1.48%), value investors smell a bargain in the making. Another bargain indicator is price-to-book value. A company trading at two to three times its book value or less–the worth of its concrete assets like factory space and inventory–will get a good number of value investment pros interested in finding out more.
There are also criteria that both value and growth investors use. Debt-to-equity ratio, an indicator of just how much a company is in hock, is one. Many money managers will tell you that they never look twice at a company with debt as high as 40% of its equity.
We could go on. It goes without saying that there are as many investment styles as there are managers. In many cases, it’s possible to mix and match criteria depending on your preferences or even your whims.
You should keep in mind other additional sources for ideas. BLACK ENTERPRISE’s personal finance section, Moneywise, features a monthly column called “Private Screening.” There, you’ll find investment hints, tips and techniques used by an African American portfolio manager every month. Another source is Barron’s, the weekly publication in which institutional and mutual fund portfolio managers alike boast about their investment strategies. Finally, mutual fund prospectuses can offer a wealth of investment strategies as well. A hint: dig up a few of a fund’s holdings and you can quickly determine what biases a manager might use in selecting stocks.
ONLY THE BEGINNING
You’ve screened and screened again. You’ve found a few stocks that have caught your fancy. You might be tempted to call it a trading day and be done–don’t. Even a rookie portfolio manager will tell you that once the screening is done, his or her work has just begun. After you’ve narrowed the investing universe to workable dimensions, you still have to look a bit closer at companies and their respective industries. In financial parlance, that’s called a “bottom-up approach.”
Since you can’t sit down to a power lunch with management, you’d be wise to read in financial magazines about a company that interests you to see what’s currently going on at headquarters. The reason: company data, no matter where it comes from, is fallible. The fact is that since company CEOs don’t have