HOW TO VALUE A STOCK 📈 When Should You Buy A Stock? #Best Education Page #Online Earning

so today we're going to be talking about

how to find the value of a stack and

this has been one of the most requested

videos on my channel mostly because of

the content of been putting out lately

talking about being a value investor in

talking about some of the great lessons

from the intelligent investor and

talking about trying to find the value

of a stock and then buying a stock or

investing in something when the price is

below the value so the question i've

been getting is how do you determine the

value of a stock and it's tricky there's

a lot of different ways to do it but I'm

going to give you six things that I look

at when I'm trying to determine the

value of a stock so as you've know if

you've watched my videos previously the

price of a stock swings between optimism

and pessimism that's straight out of the

intelligent investor again if you guys

are looking to learn about investing

that's the number one book I recommend

and it's linked up in the description

but the price always swings between

pessimism and optimism neither of which

is sustainable value investors buy from

the pessimists and sell to the optimists

so you are greedy when others are

fearful and fearful when others are

greedy in the words of Warren Buffett so

value investors are looking to buy when

the price is below the value the thing

is the market prices a stock wrong from

time to time and this is due to a number

of reasons

it's an overreaction that there's one

thing that's consistent with the stock

market

it's an overreaction this can be in

either direction it can be an

overreaction to good news or an

overreaction to bad news you'll see this

frequently because as we said that

stocks the price of a stock swings from

pessimism to optimism on a pendulum so

you're always going to see stocks that

are overly optimistic and stocks that

are overly pessimistic but what causes a

stock price to get out of whack first of

all there's disappointing earnings so if

they start reports quarterly earnings

that disappoint investors you will see

that stock fallen value for those of you

who saw what happened to AMD stock on

their quarterly earnings in May you are

familiar with what I'm talking about

here an industry or market correction so

if the overall industry is doing poorly

or if the overall market is doing poorly

this will drag down the stocks

themselves as well any bad news

surrounding the company will trigger

this as well as well as economic and

business

cycles so there are cycles within an

actual business I mean for example you

got to think certain stores do better

during back-to-school certain businesses

do better in the summer certain

businesses do better closer to Christmas

so there's different things those are

business cycles that will affect the

stock price and all these things

oftentimes push a stock below the actual

value it pushes the stock price below

the actual value of that investment so

as a value investor you're looking to

find the value of a stock and then buy

it when the price is below the value so

how do you find the value of the stock

there's six things I'm going to show you

guys number one is the price to earnings

ratio this is the one that most people

are familiar with this is also known as

the p/e ratio to determine this you

basically take the current share price

of the stock divided by the annual

earnings per share

obviously earnings per share would be

the total earnings divided by the

outstanding shares that would give you

earning per share so the best way to

look at price to earnings ratio is what

you pay for one dollar of company

earnings and it's used to compare

companies within a sector this is one of

the biggest mistakes people make is

they'll compare the p/e ratio of a tech

stock to a utility stock you can't do

that because every industry has a

different p/e ratio so the best way to

use the p/e ratio is to determine what

the average p/e ratio is of that sector

and then compare the p/e ratio of one

company to the sector or industry

average and then to another company to

determine whether the price to earnings

ratio is above equal to or below other

companies within that sector or the

sector average now the problem with the

p/e ratio one problem anyway is that it

does not work for a company that is

losing money they will have a negative

p/e ratio or they will have no p/e ratio

at all and then if you look forward or

backwards you do have the trailing p/e

in the forward p/e which are also useful

metrics when looking at the value of a

stock but we're just going to focus on

the regular old price to earnings ratio

because I didn't want this video to be

half an hour long so I'm going to give

you as an example of how to calculate a

p/e ratio we're going to look at Apple

for example and you don't need to

calculate this stuff guys if you just

Google Apple p/e ratio you can find it

on Yahoo or I think it's right on the

home page of Google there when you're

searching for a stock so you don't need

to do this but I want you guys to

understand where the

comes from so we're going to go through

the actual examples so let's take Apple

so we're going to look at the last four

quarters for Apple as far as their

earnings per share so over the last four

quarters they've reported a dollar

sixty-nine 336 210 and 167 so right

there we see a perfect example of a

business cycle obviously whatever

quarter that was Apple made a lot more

money so that is the cycle of a business

that's one example of business cycles

which can cause stocks to be to become

undervalued the total between these four

will give us our annual EPS over the

last four quarters so that gives us

eight dollars and 82 cents and if we

take the current share price for Apple

which as of August second closing was

150 oh five divided by the annual EPS

that gives us a p/e ratio of 17 point

zero one so what does that mean that

means you need to invest 17 dollars in

one penny in order to yield one dollar

of company earnings that is what the p/e

ratio means so you would take apples p/e

ratio and compare to other companies

within that sector as well as the

average p/e ratio of that sector to

determine whether or not shares of Apple

are more expensive equal to or less

expensive than other companies out there

so number two the second thing when

determining the value of a stock is to

look at the price to book ratio or the

PB ratio it's very similar to calculate

but instead of using the annual earnings

per share you're going to be using

equity per share so you take the current

share price divided by equity per share

and if this figure is below one it means

that stock is trading less than the

value of the actual assets and if that

is above one it means the stock is

trading at more than the value of the

actual assets let's look at the monster

energy drinks for example this is the

monster beverage corp so their total

equity is at three point five three

billion dollars so to calculate the

actual equity per share you have to take

their total equity divided by

outstanding shares which gives us a

price of six dollars and 22 cents which

would be the equity portion or book

value again this is something you can

use Google if you search for monster

beverage corp Book value it's going to

give you this figure but I just want you

guys to understand where that number

comes from so then if you want to

actually calculate the price to book

ratio you would take the price for the

share you would take the share price

which as of August 2nd was 53:12

/ that actual figure there the equity

per share that gives you an eight point

five four

so that means shares of Monster Energy

Corp are trading at eight point five

four times the actual book value of that

company or the actual equity per share

so you would use this to compare the

multiple on the company assets between

companies of the same sector so the

third thing I like to look at is the

price to earnings to growth ratio or the

p/e G ratio to calculate this you

basically take the price to earnings

ratio and divide it by the projected

five-year earnings growth rate again you

don't need to calculate this yourself

you can find the p/e G on Yahoo Finance

or a couple of different places you can

find the p/e G so you don't need to sit

there on paper and write this out I just

again want to show you guys how this is

actually calculated this is a good

metric to use for a company that's

experiencing rapid growth it's a good

way to determine whether the current p/e

ratio is justified or if the company is

overvalued and if you find a PE G below

one that company is undervalued what I

will tell you right now is with the

current economy we're in with this bull

market it's going to be very uncommon to

find a company with a PE G below one

that's a sound investment simply because

many stocks are fairly valued if not

overvalued because we are in a very

highly valued market right now if you're

in a bear market it's much easier to

find value so actually the best time to

go value hunting is during a bear market

the more overextended a bull market

becomes the harder it becomes to

actually find value so if you're someone

who's looking for a value investment and

you're not finding anything it might be

because we are in a bull market and it's

very difficult to find a stock that is a

good value that the price is below the

value but once we're in a bear market

they're all over the place so that's

actually the best time to go hunting for

value so for example let's look at a

company that is going to be seeing rapid

growth let's look at invidia so

currently they have a price to earnings

ratio of fifty five point six four which

is quite high and they have a five-year

growth rate of 13% so their PE g would

be that fifty five point six four

divided by thirteen so four point two

eight so that's nowheres near that one

it's not below one so this is not

undervalued meaning that much of their

growth is factored into that

share price so if you look at the p/e

gee that's kind of high that's a little

bit higher than I would be comfortable

with as far as price to earnings to

growth goes and then you can again take

this metric and compare it to other

companies to see whether or not there

actually will growth is factored into

that share price yet or not the fourth

thing to look at is the return on equity

this is the annualized net income to

shareholder equity or in simple terms

how well a company uses investments to

generate growth in earnings these are

the general guidelines that people

follow there's no set standards but

seventeen to twenty percent is

considered very good 20 to 25 percent is

excellent and if a company is generating

above 25 percent that is superior the

best way to look at this is the average

return on equity just four examples I

pulled the ROI of three companies as of

March 2017 but to get a better snapshot

you would look at their average roee or

maybe their return on equity over the

last one or five years but just for

example Amazon's return on equity for

march of 2017 for the quarter ending in

march of 2017 was fourteen point three

four percent Samsung's return on equity

was sixteen point five six percent and

Intel's return on equity was seventeen

point six two percent so you need to

figure out what your criteria is for

this and what you're looking for and if

that company doesn't have a return on

equity that you are comfortable with

then that would be a company you would

not invest in as a value investor the

fifth thing to look at is the debt to

equity ratio this is the total debt

divided by the shareholder equity and

the lower the better and you want to

avoid any company with a debt to equity

ratio above two so I took Google which

is one of the best companies as far as

their debt to equity ratio goes as of

June of 2017 their report for June of

2017

they have three point nine five five

billion dollars of debt on one hundred

forty eight point two eight six billion

dollars of equity giving them a debt to

equity ratio of zero point zero two six

six

so that is nowhere near to that is a

very low number that is a fantastic debt

to equity ratio so you want to look for

a great debt to equity ratio that's

probably as good as they're going to get

number six we have their current ratio

this is very important too it's also

sometimes called the liquidity

ratio this is a measurement of the

ability to pay short-term and long-term

obligations this is a very simple one to

calculate you divide the liabilities

from the assets now this is an

interesting one because you want it to

be within a certain range you don't want

it to be too low but you also don't want

it to be too high so if the current

ratio is below 1 that means the

liabilities exceed the assets which is

not a good thing if the current ratio is

above 1 that means the assets exceed the

liabilities however if the current ratio

is above 3 that might mean they're

holding back they could actually have a

little bit more liabilities and be more

invested in the business that might mean

they're actually holding on to too much

cash at that point usually what I look

to what I look for is a current ratio of

1 to 2 so let's look at AMD for example

this is just something you would search

for you would search like AMD current

ratio and you'll find that number but as

of March 2017 they had a current ratio

of 1.8 to so that falls between 1 and 2

which is what I look for that's a good

current ratio so what you're going to do

with all this because this is a lot of

information what I recommend you do you

figure out after doing some research

what numbers you're looking for and

you'll create a checklist so then when

you're out there hunting for value when

you're looking at a stock you're going

to go through and you're going to look

up all these metrics and if they meet

your criteria you add them to your list

and if they don't meet your criteria you

say well I don't think there's value in

this company and you may not find

companies that meet every single piece

of your criteria here but you're going

to look at them each individually and

there's also other factors to consider

as well outside of just this fundamental

stock analysis so I might actually do a

follow-up video talking about what that

would be but you're going to kind of

just look at this and you're going to

look for the best possible scenario

you're going to look at the companies

that meet most of your requirements so

maybe your checklist would look like

this you want to look for a company with

a price to earnings ratio below the

sector average you want to find a

company with a low debt to equity ratio

you're looking for a return on equity of

17% or more that's considered very good

I mean if it's in the 20s that's

fantastic you're looking for a current

ratio of 1 to 2 they have a responsible

amount of liabilities and they're also

not holding back you know they do have a

good amount of debt and that can be good

because that is helping them grow the

business

then you're also looking for a

reasonable price to earnings to growth

ratio as well as the price to book value

and this is how you are a value investor

you're looking at things like this and

determining whether or not the prices

above the value or the prices below the

value there's a lot that goes into this

this is certainly no easy task and

there's no there's multiple ways to

actually do this you guys can figure out

what metric makes most sense to you and

there's also other ones you can use

these are just the ones that I look at

when I'm trying to determine the value

of a stock anyways guys I hope you

enjoyed this video I know this one's

more technical than what we usually get

into it here but you can do more

research on each one of these things on

their own and learn more about them if

you enjoyed this video please drop a

like and if you are new to my channel

please consider subscribing to be

notified of any future uploads and as

always I thank you for taking the time

to watch this video

you

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