Selecting the right stocks for your portfolio

Source: Financial Gleaner, June 14, 2002

THE QUESTION of how one selects stocks is a vital one these days. Experts at JMMB Securities offer you some tips and ideas on what to look for when considering stocks.

Research before investing. Be sure you know exactly what you are putting your money into! Learn all you can about the company, the sector within which it operates as well as current trends in the economy. Armed with this information, you may come to a decision or a perspective on how the company is expected to perform relative to the market.

Look at the value of the stock. Evaluate whether or not the price seems low, high or just about right relative to the expected performance of the company in the future. If the price is higher than the value, then the stock is overvalued. Conversely, if the price is below the value assessed then it is undervalued.

Ratios are a good place to start in examining the value of a stock. They provide a deeper understanding of the company and its performance over time or within the industry. For example, the price per earning or P/E ratio puts different stocks on equal footing so that they can easily be compared one to another. If the P/E is high, relative to other stocks in the market or your portfolio, then it is an indication that the market is currently paying a high price for every dollar earned. For companies which seldom pay dividends or for whom earnings are not frequent, then the P/E should be supplemented with other ratios. Another useful ratio is the Book Value per share, which acts as a base indicator of the value of the company it stop as such, if the Book Value/share is usually lower than the price and indicates the value at which the company can be disbanded should that be desired.

You may also determine if a company is doing better or will possibly be more profitable than in the past by looking at 'soft indicators.' Does the parking lot have more customer cars parked in these days? Is the customer service improving? Are more and more persons using the company's products than before?

The team at JMMB Securities Ltd. recommends that you supplement whatever financial ratio analysis you do with a common sense assessment of the target company's performance, trends in sales signals or improvements in how the company is managing its assets. With this balanced reliance on financial ratios along with analysis and market assessments, most clients can decide quite well which stocks to buy or sell and most importantly when.