

Ask HN: How do you evaluate Stocks? - bavidar


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itsprofitbaron
I evaluate stocks in 3 steps:

Step 1. Look At The Numbers

First of all I have a look at a company’s balance sheet.

When I am looking at a company’s balance sheet I am using the Current Ratio
and Acid Test Ratio to assess its liquidity, looking at its Long Term
Liabilities (in particular I’m looking at if they are growing at a faster rate
than assets), its Debt-To-Equity Ratio and its book value.

If they look good then I will have a look at the company’s income statement.

The first thing I look at is its Earnings, COGS, EPS and ROE (I also calculate
the P/E Ratio and PEG Ratio)

Step 2. Look At The Competitive Advantage

I assess the company’s competitive advantage in particular; I have a more in-
depth look at it to see if the company has a large enough advantage to keep
its stay above the competition and benefit from the increasing profits.

Step 3. Look At The Company’s Culture/Integrity

Finally, I look at the company’s culture and its integrity. I’m interested in
company’s who have a strong company culture and are interested in creating
long-term shareholder value.

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mayukh
Funny, I wrote a note explaining my process a couple of days ago..

1\. What is the business, do I understand it? (If no, then less likely to buy)

2\. Numbers (revenues, earnings, margins) over the last 5 years atleast

3\. Piotroski score -- more of a shortcut to quickly assess quality of the
business

4\. Annual price returns -- more to understand how the stock has been doing
over the years and over the last few months

5\. Liquidity/debt ratios -- this is very industry driven, some sectors like
tech have very low debt levels others have higher

6\. Comparables -- steps 2 to 5 for atleast one or two direct competitors.
Plus ratios ofcourse (PE,Price to Book, EV/EBITDA etc)

7\. A very quick dcf -- (I've been building a tool that helps me do this
quickly)

If I've done all these steps (takes me about 30 - 40 minutes to do these
steps), and I like the company then read the annual report (at-least twice).

Often takes me a couple of weeks if not more to decide to initiate a long
position.

blog post -- [http://equisear.ch/blog/2013/04/the-first-30-minutes-
looking...](http://equisear.ch/blog/2013/04/the-first-30-minutes-looking-at-
any-stock/)

I've been building tools that help me do this, its not ready yet but gets me
there most of the way-- <http://equisear.ch>

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gatsby
Piotroski Scoring is a quick way to evaluate stocks. You score one point if a
stock passes each test and zero if it doesn’t. The maximum score is nine.

1.) Net Income: Bottom line. Score 1 if last year net income is positive.

2.) Operating Cash Flow: A better earnings gauge. Score 1 if last year cash
flow is positive.

3.) Return On Assets: Measures Profitability. Score 1 if last year ROA exceeds
prior-year ROA.

4.) Quality of Earnings: Warns of Accounting Tricks. Score 1 if last year
operating cash flow exceeds net income.

5.) Long-Term Debt vs. Assets: Is Debt decreasing? Score 1 if the ratio of
long-term debt to assets is down from the year-ago value. (If LTD is zero but
assets are increasing, score 1 anyway.)

6.) Current Ratio: Measures increasing working capital. Score 1 if CR has
increased from the prior year.

7.) Shares Outstanding: A Measure of potential dilution. Score 1 if the number
of shares outstanding is no greater than the year-ago figure.

8.) Gross Margin: A measure of improving competitive position. Score 1 if
full-year GM exceeds the prior-year GM.

9.) Asset Turnover: Measures productivity. Score 1 if the percentage increase
in sales exceeds the percentage increase in total assets.

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blandau123
How Professionals do it: Bloomberg subscription ($1500/month) + CapIQ
($1000/month) + sell-side equity research reports + industry-specific research
reports + excel add-ins + network of management, friends. They know exactly
how their valuations differentiate from other professionals'.

How we do it: Talk about ratios, try and read articles, etc.

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codegeek
I will share my experience which is very anecdotal. I am not big into stocks
etc. but one of the companies I highly admire is MACYS (M). Simply because I
am a long time happy customer, their products/service including customer
service has been excellent in my experience and they always seem to be doing
smart business. Liking the company so much, I bought about 5 stocks back in
2008 (i think!!) for about $20 each. Today, stock is worth $40+. If only I
bought a lot more :)

Anyway, i m not expert but it will surely help if you actually understand the
company which usually means you are their customer, see how they do business,
does it seem like they actually give a damn about their business and how far
do they go to retain customers and keep them happy ? For me, those are plus
points. The numbers like price, P/E etc. all seem like , well, just numbers to
me.

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terrykohla
I look at companies that I know well, mostly companies I deal with directly
either as a customer, partner, employee, that way you get news first hand and
no bad surprises. Company numbers are easily manipulated and financial news
have their agendas and interests (different from yours).

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tachibana
From my accounting background, some common ratios I use:

1) acid ratio (liquid assets / short term liabilities)

2) gross operating margin

3) net operating profit margin

4) return on capital/equity

5) return on balance sheet assets

I also compare the stock in question to other bonds and stocks of other
companies similar in size or industry. This is just to see if the company is
managing its money well in relation to other companies.

Finally, tax consequences of sale. The conventional wisdom of market returns
of 11% (US treasuries + 8% * portfolio beta , 1.0 for market portfolio) loses
its appeal if your tax bracket is sufficiently high (i.e. software engineer in
California) .

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gesman
Intuition. I used to trade using pure intuitive signs:
<http://i.imgur.com/rFSVa8P.jpg>

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orangethirty
Go and read the Intelligent Investor by Benjamin Graham, then read Security
Analysis by the same author.

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narayankpl
What could be its future earnings? What is its price now? Lower the P/E the
better it is.

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magicmarkker
Very badly.

