In working with my reports, you do not need a recently dated one of mine to make a judgment call on a stock. This is because I look at a stock over the last 5 and 10 years, I do not just look at what they are doing now. The only reason you would need to do a second review is if there is an unexpected material change in the company. To find this out just Google the company and do a search for "news". If you are a long term investor, stocks do not change that much over a year. The thing you need to look for is unexpected material changes.

You need to make two decisions when looking to buy a stock. The first one is "Does my report describe a stock you would like to own?" If so, then second question is, "Is the stock selling at a relatively reasonable price?"

The first questions can be answered by reading the first part of my report on a stock, or if the stock report has two blog entries then read the first blog entry. The second questions can be answered in the 2nd part of my report on a stock, or if the stock report has 2 blog entries, then the 2nd blog entry. The second part of my report or the second blog entry should give you a good idea on what is a relatively reasonable stock price.

Since the values I give for these tests cover 5 or 10 years, the test values will not change much and test values from my last report can be used to check the current stock price to see if it is good or not.

My first test is the Price/Earnings Ratio test. I generally give 5 year low, median, and high median P/E Ratios. That is I am giving you the 5 year low median P/E Ratio, the 5 year median P/E Ratio and the 5 year high median P/E Ratio.

If they are, say 10, 12.5 and 15, you want a stock with a P/E closer to 10 than 15. Say around 12.5 or lower, although between 12.5 and 15 is not an unreasonable price. If the P/E Ratio is higher than 15, then it probably means the stock price is relatively too high. The Globe and Mail Investor site is a good place to get this information. "What you want to use is the "Forward P/E" found in the Summary section.

The next test I use to see whether or not a stock price is reasonable is the Graham Price Test. I give the current Graham Price in my write up. I generally say what the low, median and high 10 year median Price/Graham Price Ratio is. If the P/GP Ratios are 0.93, 1.07 and 1.23, then the better price is when the current P/GP Ratio is between 0.93 and 1.07 (or the ratio is lower than 0.93). A P/GP Ratio over 1.23 probably indicates the stock price is probably too high. When P/GP Ratio is below 1.00, then the stock price is lower than the Graham Price. (This, by itself shows that the stock price is good.)

I do not know any site that gives a P/GP Ratio. You can get it by dividing the current stock price by the Graham Price I give. If I give a Graham price of $48.04 and the Stock price is $69.29, then $69.29 divided by $48.04 gives a P/GP of 1.44. If the 10 year median high P/GP Ratio I give is 1.23, then a current P/GP ratio of 1.44 says that the stock price is relatively too high.

I give the 10 year median Price/Book Value Ratio. You would want a stock with a P/B Ratio close to or below the 10 year median P/B Ratio. The Reuter's site is the only one I know with this information. For Canadian Stocks follow the symbol with ".TO". For example, for Fortis Inc., use FTS.TO. See this under the Financials tab. (MRQ means Most Recent Quarter and TTM means Trailing Twelve Months.)

The last test I talk about is the dividend yield test. There are analysts that feel the only stock price test to use is the Dividend Yield one. Basically you buy a stock when the Dividend Yield is relatively high. I generally compare the current yield to the 5 year median yield and I want the stocks yields to be at or above this one. Some people like to see the yield at or above the 10 year median yield. My spreadsheet shows both. The dividend yield can be found at the Globe and Mail Investor site under the Summary tab.

If you get mixed results from these tests, look to see if I said one of these test had any problems. If so, eliminate that test. Otherwise look to the Dividend Yield and P/B Ratio tests. If they disagree, use the Dividend Yield test. The thing is both the P/E Ratio and the P/GP Ratios use estimates and the P/B Ratio and the Dividend Yield tests do not.

My report covers the last 5 and 10 years because I am a long term investor - not a short term trader. I use short paragraphs so it is easier to scan a report for specific information.

On my other blog I am today writing about Goodfellow Inc. (TSX-GDL, OTC-GFELF)...continue...

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my site for an index to these blog entries and for stocks followed. Follow me on Twitter.

great post!

ReplyDeletePattirose: Thanks

ReplyDeleteSusan

Thank you, I am your big fan!

ReplyDeleteWould love to see a review of Kirkland Lake

ReplyDeleteThank you very much

Sabrina

I do not understand the question?

DeleteMs Brunner, would you please show me how to calculate with the Graham formula? Thank you

ReplyDeleteSabrina

www.spbrunner3.blogspot.ca/2013/09/graham-number-or-price.html and the Index to my blog entries is here www.spbrunner.com/investblog.html

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