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Frequently
Asked Questions
Here are some of the more interesting questions
that you’ve sent me recently.
Q):
What’s the latest news on the proposed changes to tax laws
affecting Canadian trusts?
A):
Judging by your mail, many readers are keenly interested in the
status of the Canadian government’s proposal to tax energy trusts
based in Canada the same as regular corporations. These trusts pay big
dividends because they haven’t been required to pay corporate taxes if
they distribute most of their profits to shareholders. Trust share
prices dropped on the news because those hefty payouts would disappear
if the changes become law as originally proposed.
The Toronto Globe & Mail is the best resource for
keeping up with the status of the proposed tax law changes. From the
daily newspaper’s home page (www.theglobeandmail.com),
click on
Business & Investing and then on
Trust Centre.
Q):
Where can I find charts that show a stock’s total return, including
dividends?
A):
Your total return on a stock is the sum of its share price
appreciation plus any dividends received while you hold a stock.
Nevertheless, the stock price charts shown on most financial sites
show trading prices only and ignore dividends. In fact, these sites
don’t offer total return information in any form.
Morningstar (www.morningstar.com),
however, does tabulate total returns over periods ranging from
one-month to 10-years. Morningstar also displays a chart going back
five-years comparing each stock’s total return to its industry and to
the S&P 500 index. Find the total return data in the
Dividends & Returns report for each stock, not in the Charts
section. The price charts shown in the Charts section show trading
prices only, the same as on other sites.
Q):
Where is the best place to track my portfolio?
A):
My favorite portfolio tracker is on MSN Money It’s flexible and
easy to use. You can track stocks, mutual funds, exchange-traded
funds; just about any security. You can view returns by individual
security, by account, or for your entire portfolio, over a variety of
time spans. You can use MSN’s preset portfolio views or define your
own custom views.
The Portfolio Review report shows you just about
anything you’d want to know about your portfolios including
allocations (stocks, funds, cash, etc.), potential income tax
liabilities, returns by portfolios, top holdings, and recent
transactions. From MSN Money’s homepage (moneycentral.msn.com),
select
Investing, and then
Portfolio Manager. You may have to
download special free software to get started (disclosure: I also
write investing columns for MSN).
Q):
I’ve heard some stock market gurus say they follow a “top-down”
approach to picking stocks. What does that mean?
A):
The two basic strategies for finding stock investing candidates
are called the “top-down” and “bottom-up” approaches.
The top-down method starts by picking economic
sectors, that in your view have the strongest outlooks, and then
picking the best stocks within those sectors. For instance, say you
think that interest rates will fall next year, and that large banks
would outperform the market in a falling interest rate environment. In
that case, you would look for the best large bank stocks, based on
growth prospects, profitability, recent price action, or whatever
factors you think most effective for picking stocks within that
sector.
By contrast, bottom-up investors don’t try to
predict which sectors will outperform. Instead, they look for
individual stocks that best meet their selection criteria.
Generally, top-down investing works best if you
prefer large companies in well-defined industries. For instance, large
pharmaceuticals such as Merck and Pfizer, or energy firms such as
ExxonMobil and Chevron, tend to move together. Bottom-up investing
works best if you’re looking for fast-growing, smaller companies,
which generally aren’t affected much by overall economic conditions.
Q):
Where can I find fundamental information such as annual sales,
profitability measures, and valuation ratios for stocks?
A):
Yahoo’s Key Statistics report is the beast place to start.
Yahoo lists a wide variety of current data including valuation,
profitability and financial strength ratios, insider and institutional
ownership measures, and dividend data. Find it from Yahoo Finance’s
homepage (finance.yahoo.com)
by first getting a
price
quote and then selecting
Key
Statistics report.
If you want to see long-term trends, MSN Money’s
Key Ratios 10-Year Summary is a good resource. From MSN Money’s home
page (moneycentral.msn.com),
get a
price quote, select
Key Ratios in the Financial Results section, and then
10-Year Summary.
Please
keep your questions coming. I try to answer as many a possible
personally, but sometimes I do fall behind.
Here
Are More FAQs From Earlier Columns
Q):
What happens to my shares if I own stock in a company that files
for bankruptcy?
A):
Most often, a firm files for bankruptcy when its debts exceed
its assets and it sees no way to dig itself out of that hole. Several
airlines have recently found themselves in that situation. While a
bankrupt firm could face total liquidation, larger companies usually
keep operating while creditors work out a recovery plan. Creditors
usually have to settle for less than what’s owed to them. Since
creditors have priority over shareholders, the shareholders typically
get nothing when the company gets reorganized. By that I mean; their
shares become worthless.
Interestingly, not all players accept that
notion, and frequently, a bankrupt company’s shares continue to trade
for months, and sometimes years, after a company has filed for
bankruptcy.
Q):
I’ve been told that the dividend yields listed on financial
websites are not accurate. What gives?
A):
Dividend yield, as commonly used, is the return you expect to
receive over the next 12 months from dividends. It’s calculated by
dividing the expected next 12-month’s dividends by the latest share
price. For instance, the yield would be 5 percent for a stock trading
at $20 that is expected to pay $1 per share in dividends over the next
year.
The problem is, in most cases, nobody knows how
much a company will actually pay in dividends that far into the
future. Companies typically only announce dividends one at a time and
reserve the right to change subsequent payout amounts as they see fit.
So the dividend yields listed on financial
websites are calculated assuming that each firm holds its dividend
constant for a year. For instance, if a stock pays quarterly
dividends, the estimated total dividends over the next 12-months is
simply the last payout multiplied by four. Ideally, you want to pick
stocks that regularly increase their payouts. If that happens, your
actual yields will be higher than what you see listed on financial
sites.
Q):
Is the dividend yield the same as a stock’s return?
A):
A stock’s return is the total of dividend yield plus stock
price appreciation. For example, your total return is 15 percent if a
stock you own paying a dividend equating to a five percent yield goes
up 10 percent over a year. Unfortunately, that calculation also works
in reverse. In the same example, a 10 percent share price drop would
result in a 5 percent loss for the year.
Q):
You often advise sticking with no-load funds you’re describing how
to pick mutual funds. I have several load-funds that I’ve already
purchased. Should I sell them?
A):
Loads are basically sales commissions that mutual funds charge
to pay the financial advisor or stockbroker who sold you the fund.
These people should get paid if you rely on them to help you pick
funds. However, if you are picking funds on your own, there’s no point
in paying the fees, so, in that case, it makes sense to stick with
no-load funds.
However, once you own a load-fund, usually,
you’ve either already paid the load up front, or you are obligated to
pay when you sell. So, all else equal, at that point, there is no
advantage to dumping your load fund to buy a no-load fund.
Q):
In a recent column you said that Money manager Ken Fisher, who
writes for Forbes Magazine (www.forbes.com),
correctly predicted the bursting of the tech bubble in 2000. What about
Bob Brinker who made a similar forecast on his
national radio show in early 2000?
A):
My column was about the Guru Grades section of CXO Advisory
Group’s website (www.cxoadvisory.com),
which tracks the accuracy of 31 different commentators’ forecasts.
However, CXO only tracks forecasts that are available for free on the
Web. So, it wouldn’t have known about Brinker’s call
(after this column was published, CXO had advised me that they are now
tracking Brinker's market calls).
Q):
Why did you say that about James Cramer?
A):
My column about CNBC’s stock market tipster James Cramer drew a lot of
response, and like his on-air stock advice, you didn’t mince words.
Some of you found
Cramer’s stock tips valuable while others thought his buy/sell opinions on
specific stocks were, to put it kindly; not well thought out. Others
observed that even when Cramer is right about a stock, the share price
reacts before most investors can take advantage of his advice. All in all,
the positive and negative comments split about 50/50.
In my view, there is
much to be learned from Cramer, but not by watching his “Mad Money” TV
show or acting on his stock tips. Cramer surrounds his stock tips with
good advice about how to identify the most promising industry sectors at
any given time and how to pick the best stocks within each industry. You
can learn how Cramer thinks by going to theStreet.com (www.thestreet.com)
and perusing the “Mad
Money Recaps,” which are almost verbatim transcripts of each of
Cramer’s shows.
Q):
I tried setting up the stock screen for finding value stock candidates
using the MSN Money screener as you described in a recent column. But the
MSN screener didn’t work as you described.
A):
Stock screening is a process for scanning the entire market for stocks
meeting your specific requirements. The MSN Money Deluxe Screener is one
of the better stock screeners available, and it’s free. However, the MSN
Deluxe Screener is only available if you’re using Microsoft’s Internet
Explorer Web browser. If you are, you must download free software to
activate the screener. You can do that from MSN
Money’s homepage (moneycentral.msn.com)
by selecting Investing and then
Stock Screener (left menu). Once there, click on the Deluxe Stock
Screener link to download the screener program.
Q):
I have recently graduated from college and want to start investing in
stocks. I have a job but I don’t have enough money saved up to open an
account with a regular stockbroker. Are there any brokers that cater to
people just starting out?
A):
ShareBuilder (www.sharebuilder.com)
is set up for small investors who want to set up a regular investment
program.
There are no minimums.
If you set up an IRA account, the total fee is $25 per year. However, if
you don’t have an IRA, it costs $4 for every transaction. That can be
significant if you’re investing small amounts, say $50 per month. In that
case, it would be better to invest $100 every two months.
Q):
Where can I see the dividend history
for a stock?
A):
I’m a big fan of dividend
paying stocks because they are the only stocks that pay you to own them.
One of the most important factors to evaluate when you analyze dividend
stocks is whether the dividends are likely to increase or decrease while
you hold the stock. Increasing dividends usually lead to higher share
prices. For dividends, history is a good teacher. Stocks with a track
record of consistent dividend growth are likely to continue on that path.
Yahoo is the best place
to check on historical dividend payouts. From Yahoo’ s Finance homepage (finance.yahoo.com),
get a price quote, click on “historical prices,” and then select “dividends
only.” Yahoo lists the dividends going back to August 1986, if the
company has been paying them that long.
Q):
In a recent
column, you used the term “200-day moving average.” What does that mean?
A):
A moving average is the average of a stock’s closing prices over a
specified number of market days. For instance, the 10-day moving average
would be the average of the last 10 days closing prices.
Many investors believe that stocks move in trends. They compare a stock’s
last closing price to its moving average to determine which way it’s
heading. If it’s above its moving average it’s considered to be in an
uptrend and likely headed higher. Conversely, a stock is in a downtrend if
when it’s trading below its moving average.
The most widely used moving averages are 50 days and 200 days. The 200-day
average reflects the long-term trend, while the 50-day shows the
shorter-term action. A stock trading above its 200-day moving average, but
below its 50-day average would be in a long-term uptrend, but a short-term
downtrend. In other words, a dip.
Many investors think the best time to buy a stock is when it has already
been trading above its 200-day moving average, and has just crossed above
its 50-day moving average.
Q):
In your column about Reuters’ portfolios, you quoted performance figures
based on the stocks remaining in each portfolio for one-month. But,
Reuters builds new portfolios daily, and many stocks remain in a portfolio
for only a few days. So how valid are the performance statistics based on
the stocks remaining in each portfolio for a month?
A):
I described the performance of three stock portfolios out of 18 that
Reuters makes available at no charge in the
Ideas
& Screening section of its investors’ site (investor.reuters.com).
Reuters creates the portfolios using its
Reuters
Select screens that were developed by its director of investment
research, Marc Gerstein.
I said that,
according to Reuters, since their January 2000 inception, the three best
performing portfolios, Contrarian Opportunities, Lesser-Known Stocks, and
Favored Value Plays, had each produced better than 300 percent cumulative
returns.
However,
although Reuters runs a new screen every day, it tabulates its published
returns using the portfolios generated by the screens run on the last
Friday of each month. It holds the stocks until the last Friday of the
next month. Then it sells the old stocks and buys the stocks turned up by
the screen on that day.
So, the many
readers who questioned the quoted returns have a valid point. Reuters’
numbers portray only what you would have experienced had you done the same
thing it does, that is, build a new portfolio (rebalance) on the last
Friday of each month.
It’s an open
question what returns you would have achieved had you instead rebalanced
on, say, the second Tuesday of the month. Further, readers should bear in
mind the oft-repeated saying about past performance being no guarantee of
future results.
Q):
I enjoyed your column about PowerShares exchange-traded-funds (ETFs), but
I’m not clear on how I actually buy shares in an ETF. Do I need to open
an account with PowerShares?
A):
Exchange-traded-funds are similar to index mutual funds except they can be
bought and sold just like stocks. So, if you have an account with a
stockbroker, you are already set up to trade ETFs. You’ll pay the same
trading commissions that you would for stocks.
Q):
What is a reverse stock split, and is it good for shareholders?
A):
You’re probably familiar with a regular stock split. If it’s a
two-for-one split, shareholders end up with two shares for each share they
originally owned. However, the shares usually trade, at least initially,
at half the pre-split price. So even though you’ll have twice as many
shares, the value of your holdings remains the same.
A reverse stock
split works the opposite of a regular split. Shareholders wind up with
fewer shares than they held before the split, but, initially, the new
shares trade at a higher price.
For instance,
communications equipment maker JDSU (formerly JDS Uniphase) shares are
currently changing hands for around $2. Many institutional investors have
rules precluding them from buying stocks trading for less than $5 per
share, so they can’t buy JDSU.
To overcome
that obstacle, JDSU plans to propose a reverse split in the range of
one-to-eight, to one-to-ten, at an upcoming shareholders’ meeting. If
JDSU decides on the one-to-ten split, shareholders will end up with one
share for every ten they held before the split. But, at least in theory,
their shares will be fetching $20 each, so they won’t have lost any
money.
Of course,
there’s no guarantee that the JDSU’s shares will stay at that level.
That depends on how the market views the firm’s future earnings
prospects.
Q):
I’ve heard that institutional trading is what moves share prices. Where
can I see whether these big players are buying or selling a stock?
A):
Institutional investors such as mutual funds, pension plans, and other big
holders often control the bulk of a company’s outstanding shares. So it
makes sense that their buying and selling account for much of a stock’s
price movement.
Unfortunately,
institutional holders are only required to report their holdings
quarterly, and even that information can be almost three months old by the
time they report it. With that in mind, I find MSN Money (moneycentral.msn.com) is a good place to view
institutional holdings
(full disclosure: I also write investing columns for MSN Money). Get a
price quote, then select Ownership (under Research), and finally, select
Institutional Ownership to see the report.
Q):
Where can I find a good portfolio manager?
A):
Portfolio managers are useful for tracking the performance of stocks that
you own, or are just watching. My favorite portfolio manager is also on
the MSN Money site. You can view the returns of individual stocks and
mutual funds, of separate accounts, and of your entire portfolio over a
variety of selectable time spans. It automatically records dividends and
adjusts for stock splits.
Besides for the
return data, you can display fundamental and technical data items,
including MSN’s StockScouter rating, for each stock. The StockScouter
rating, which ranges from one to 10, where 10 is best, reflects MSN’s
take on each stock’s near-term performance outlook.
From MSN
Money’s homepage (moneycentral.msn.com), select Investor, and then
Portfolio. You’ll have to download special free software to get started.
published 10/16/05 &
10/23/05 (S.F. Chron)
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Q:
Explain the debt ratios you mention in your columns?
A:
I plead guilty to sometimes using stock market lingo without fully
explaining the terms. The two debt measures that I usually mention are the
current ratio and the debt/equity ratio.
The current
ratio gauges short-term debt and the debt/equity ratio measures long-term
liabilities. What’s short and what’s long? Your credit card bills are
short-term debts because they are due within a year, but your 30-year
mortgage is a long-term liability.
For reasons
known only to accountants, the two ratios are calculated upside-down from
each other. Here’s what I mean.
The current
ratio compares current assets such as cash, inventories and accounts
receivables to current (short-term) debts. The ratio would be 1 if
short-term assets equal liabilities and 2 if the assets were double the
liabilities. So, if you’re looking for low debt, higher ratios are
better.
By contrast,
the debt/equity ratio compares long-term debt to its book value
(shareholders equity). Here, the lower the ratio, the lower the debt.
The total
debt/equity ratio that I mentioned in my recent column about picking the
strongest stocks is similar to debt/equity except it takes both short- and
long-term debts into account. That’s important, because in recent years,
some firms have shifted long-term debt to continually renewed short-term
loans.
There’s
nothing wrong with debt if, say, a firm can generate 10 percent returns on
money that it borrows at five percent. However, I prefer low-debt firms
because its makes for easier analysis. You don’t have to worry about
solvency issues or whether debt-servicing costs will drag down earnings if
interest rates increase.
As a rule of
thumb, I usually require a minimum 1.5 current ratio, and a maximum 0.4
total debt/equity ratio. However, you can’t apply these rules to banks
and similar institutions. For them, money is their inventory, and they all
look high-debt by these measures.
You can see the
debt/equity and current ratios on many financial sites. But to my
knowledge, Yahoo (finance.yahoo.com)
and Reuters (investor.reuters.com)
are the only places you can see total debt/equity ratios. Reuters'
Ratios
report is especially useful because it compares each firm’s ratios
to its industry and to all stocks making up the S&P 500 index.
Q:
How can I find out whether institutions are buying or selling a stock?
A:
Institutional investors such as mutual funds and pension plans often own
most of any given company’s shares. Obviously, institutional buying and
selling moves stock prices, so it would be helpful to know if these big
players are accumulating or dumping your stock.
MSN Money is a
good resource for institutional ownership and trading information. From
MSN Money’s homepage (moneycentral.msn.com),
get a price
quote for you stock, then select
Ownership
from the Research menu, and finally, select Institutional Ownership on the
View menu. MSN lists the 15 biggest institutional holders including the
shares held and the change in holdings since each institution’s prior
report.
Unfortunately,
the value of the data is limited because it can be stale. Unlike insider
trading, which must be reported almost immediately, mutual funds are only
required to report their holdings quarterly. So the data can be three
month’s old when posted, and even older by the time you see it.
Q:
Where can I see earnings and balance sheet data for a stock going back 10
years?
A:
Morningstar’s financial statements have earnings, profit margins, taxes,
cash flows, balance sheet figures, and tons of other annual data items
going back 10-years. From Morningstar’s home page (www.morningstar.com),
enter the ticker symbol and then select
Financial
Statements or
Key
Ratios.
Q:
What do you think of XYZ stock?
A:
I’m sorry, but there is no way I could do the research required to
answer your questions about specific stocks.
published 6/11/05
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Q:
I want to invest, but I know nothing about the subject. Where do I start?
A:
The best place to start is with the American Association of Individual
Investors (www.aaii.com). Joining AAII
costs only $29 per year and for that you receive a monthly journal that,
over time, will teach you everything you need to know about investing.
Members also receive a yearly “Individual Investor’s Guide to the Top
Mutual Funds,” an annual income tax guide, and much more.
Look for the
list
of local chapters on AAII’s Website. Most have an active calendar of
local educational events. Attending those helps you two ways: you usually
hear a presentation by an investing professional, and you learn by
mingling with other local investors who may have already solved the same
questions that you are currently pondering.
Q:
In your column
about Merrill Lynch’s institutional survey, you said that the money
managers probably avoid stocks with price/book ratios around 10. Did you
mean to rule out stocks with ratios above 10?
A:
The column in question
described the results of a Merrill Lynch survey of institutional
investors. Merrill asked over 200 money managers how they picked stocks.
The price/book ratio, which compares the recent share price to its book
value (shareholders equity), was one of the top factors mentioned.
Price/book is a valuation measure typically used to rule out overpriced
stocks. Merrill didn’t ask the money managers for specific values, so I
opined that most managers who used price/book would certainly avoid stocks
with P/Bs above 10. That rule of thumb applies only to growth stocks.
Managers specializing in beaten-down value-priced stocks prefer P/Bs below
2 and probably wouldn’t consider stocks with P/Bs above 4 or 5.
Q:
You suggested using the MSN Money Deluxe Stock Screener in a recent
column. But when I went to the MSN site, I couldn’t find it.
A:
Stock screening involves searching through the entire universe of listed
stocks for those meeting particular requirements, say, annual sales
greater than $100 million. In these columns, I frequently describe how to
use free Web screeners to search for stocks that fit particular selection
strategies. MSN Money’s Deluxe Screener is one of the Web’s best
screeners, and I refer to it frequently.
However,
I recently discovered that MSN’s screener works only with Microsoft’s
Internet Explorer. You can’t use it with Netscape or with the new crop
of browsers you’ve been reading about, such as Firefox.
If
you do have Internet Explorer, you can find the screener from MSN
Money’s homepage (moneycentral.msn.com)
by selecting Investing
and then Stock Screener (left menu). Once there, scroll down to the Deluxe
Stock Screener link near the bottom. Clicking on that link takes you to a
page for downloading the free software needed to run the screener. Once
you’ve downloaded the software, the
Deluxe
Screener will appear automatically when you click on Stock Screener in
the left menu.
Q:
Where can I find charts of a stock’s historical price/earnings ratios?
A.
The price/earnings (P/E)
ratio, which is the recent share price divided by 12-month’s earnings,
is the most widely followed valuation measure. Some investors,
particularly those seeking value stocks, believe that many stocks trade
within a definable range of P/Es. When a particular stock is in favor, it
trades at a high P/E, say 50. Then when the stock falls out of favor with
the market, its share price, and hence its P/E, drops to a lower value,
say 20. These investors seek out stocks trading near the low-end of their
historical P/E range. If everything else checks out, they buy, and then
sell when the stock approaches the top of its historical range.
Obviously,
this strategy hinges on seeing a stock’s historical P/Es. Big Charts is
the only site I know of that displays the needed information. From Big
Charts homepage (www.bigcharts.com),
enter your stock’s ticker symbol and select
Interactive
Charts. Then click on Indicators and select P/E Ratio from the Lower
Indicator list.
When
I looked up Wal-Mart, I found that it typically trades at P/Es between 20
and 40. It’s currently trading at a 20 P/E, the low end of its
historical range.
Q:
In your column about using Morningstar (www.morningstar.com)
to evaluate mutual funds, you
advised eliminating funds with price/sales ratios greater than 5, but you
didn’t say where to find the P/S ratio.
A.
Price/sales is a valuation ratio similar to P/E, except it compares the
recent share price to 12-months’ sales instead of earnings. A mutual
fund’s price/sales ratio is the average P/S of the stocks in its
portfolio. I suggested avoiding funds with high P/S ratios because I’ve
found them to be riskier than low P/S ratio funds. But I neglected to tell
you where to find the P/S ratio. It’s listed in the Valuation and Growth
Rates section of the
Portfolio
report.
published 3/6/05
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Q)
When do I have to own Microsoft shares to collect its recently announced
special dividend?
A)
Microsoft recently declared a hefty $3 per share special (one-time)
dividend. But judging by my mail, many investors are unclear about the
meaning of the various dates pertaining to a dividend payout. Here’s a
rundown.
The
“declaration date” is the date the company announces a particular
dividend. For instance, on Tuesday, July 20, Microsoft announced
(declared) its special dividend.
The “record
date” is the day you actually have to own the shares to collect the
dividend. In Microsoft’s case, the special dividend will be paid to
shareholders of record on November 17.
The
“ex-dividend date” is first day that new buyers are not
eligible to receive the dividend. Because of the settlement period, it
takes three business days for a stock purchase to take effect. So, to
collect a dividend, you must purchase three days before the record date.
Consequently, if you procrastinate and purchase two days before the record
date, you won’t collect the dividend. Thus, the ex-dividend date is two
business days before the record date. The ex-dividend date for
Microsoft’s $3 per-share dividend is November 15.
The “payable
date” is the day the company actually pays the dividend. Microsoft will
pay its special dividend on December 2.
You have to own
Microsoft’s shares on November 17, the record date, not on December 2,
to collect the dividend. So you could buy the shares on November 12 (The
market is closed on November 13 and 14) and sell them on November 18 and
still collect the dividend.
Since shares
bought on the ex-dividend date aren’t eligible for the dividend, in
theory, the share price drops by the dividend amount on that day. However,
the normal day-to-day share price volatility often diminishes that effect.
Yahoo (finance.yahoo.com)
lists the ex-dividend and payable date in its
Key Statistics report for
each stock. However, since Microsoft will be paying an $0.08 per share
quarterly dividend on September 14, you probably won’t see the dates for
the special dividend until after that date.
Q)
Where can I find recommendations on penny stocks?
A)
Although there is no exact definition, penny stocks typically trade for
less than $1 per share. Most don’t qualify for listing on the Nasdaq or
other major exchanges, and consequently trade on the bulletin board or
pink sheet exchanges. While good stocks trade on these venues, many stocks
of dubious quality do also. Despite the lack of enthusiasm that I’ve
expressed repeatedly in this space, I receive a continuous stream of
emails asking where to find recommendations on penny stocks.
Sorry to say, I
haven’t found any sites specializing in penny stocks that I could
recommend. The only ones I’ve found collect payments from a company to
feature its stock. In many cases, the company itself, not the site,
produces the report. Thus, the result can hardly be considered an unbiased
report.
Q) Where can I
find information about which industries are moving in or out of favor?
A)
Many experts advise that picking the right industry is more important than
picking the best stock. They argue that even in a weak market, some stocks
move up, and pinpointing the strongest industry is the key to finding
those stocks. Big Charts (www.bigcharts.com) is the best place to see
what’s what in terms of industries moving in and out of favor. Select
Industries on Big Charts’ homepage to see a list of the 10 strongest and
10 weakest industries over the past three months. Use the dropdown menu to
vary the timeframe measured from one-week to five-years. Then click on an
industry name to see the 10 best and worst performing stocks within the
industry.
published 7/25/04 & 8/1/04
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Q.
In your column about using Yahoo' Key
Statistics report to quickly disqualify bad stock ideas, you recommend
as one of your tests a maximum PEG ratio of 2.0 and warn against PEG
ratios below 1. However in a column last spring about screening for
undervalued stocks, you recommended a maximum PEG of 0.9. Why the
inconsistency?
A.
PEG is shorthand for P/E (price/earnings ratio) versus forecast earnings
growth. For instance, PEG of 2 means that the P/E is twice the expected
earnings growth rate. The P/E ratio (and thus the PEG) is a good gauge of
a stock’s popularity with investors. High P/Es signal in-favor stocks,
while low P/Es indicate unpopular or out-of-favor stocks.
In my last
column, I described five quick tests to get rid of stupid growth stock
ideas. Growth stocks, sometimes called glamour stocks, are companies
thought to have strong earnings growth prospects, and are, by definition,
in-favor.
By contrast,
the earlier column the reader mentioned, where I advised looking for low
PEG stocks (and thus low P/Es) was about finding value stocks. These are
usually former growth stocks that stumbled, and were dumped by the growth
crowd.
In terms of
PEG, value candidates should have low ratios, typically below 1. But
viable growth stocks should PEGs above 1. In fact, many run much higher
than the 2 maximum I suggested in my growth stock column.
Q.
I use institutional and insider ownership figures as part of my stock
analysis. But sometimes I’ve noticed that the institutional and insider
ownership figures add up to more than 100 percent. How can that be?
A.
Institutional ownership is the percentage of a firm’s outstanding shares
that are held by mutual funds, pension plans, and other institutional
buyers. Insider ownership measures the percentage of shares outstanding
held by top management, directors, and anyone else holding at least five
percent of the total shares issued. So if a large buyer, say a mutual
fund, holds more than five percent, then its shares would be counted in
both the institutional and insiders’ holdings. Thus, the two totals
could add up to more than 100 percent. MSN Money (moneycentral.msn.com)
is a good place to see ownership figures because MSN also lists the names
of all shareholders holding at least five percent of the outstanding
shares. For instance, if you looked up Microsoft, you’d find that
William H. Gates holds around 1.2 billion shares, amounting to more than
11 percent of the total. When I looked, the value of Gates’ shares
totaled almost $32 billion. Get there by getting a
price
quote on MSN’s homepage, and then selecting
Ownership
under Research (left menu).
Q.
I’ve read that Morningstar’s ratings are not very effective for
predicting the future performance of a mutual fund. How come you keep
recommending their use?
A.
Morningstar rates funds from one
to five stars, where five is best. It’s true that some research found
Morningstar’s ratings lacking, but the company made a major improvement
when it changed its rating formula about a year ago. Now it compares a
fund’s historical performance only against other funds in its category
(e.g. technology, large-cap, value, etc.) instead of against all domestic
stock funds. Before, funds that were in “in-favor” sectors such as
tech in the late 1990s, dominated the ratings. The change should make
Morningstar’s ratings more useful. Still, I don’t advise buying funds
simply because they are rated five stars. But it’s a good resource for
finding worthwhile candidates.
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Q.
I found some old stock shares that my grandfather bought. The company is
no longer publicly traded. How can I find out what happened to those
companies?
A.
Stock Search International (www.stocksearchintl.com)
and Goldsheet Mining Directory (www.goldsheetlinks.com/obsolete.htm)
are the best places to research old stocks.
Q.
Where can I find information on preferred stocks?
A.
Preferred stocks are somewhat like a cross between common stocks and
bonds. Both bonds and preferreds pay dividends. But unlike bonds,
preferreds do not necessarily mature at a specified date. They are called
preferred stocks because in the event of bankruptcy, they have priority to
the assets over common shares. Some preferreds can be converted into
common stock at a predetermined price on a specified date.
In contrast to
common stock, information on preferred stocks is hard to find on the Web.
Private investment manager Quantum Investment (www.quantumonline.com)
is the best resource that I’ve found. Quantum lists the maturity and
redemption dates, the payouts, links to current quotes, and more for 1,100
plus preferreds.
Q.
What’s up with all of this short selling, what is short interest, where
can I find short-interest data for a stock?
A.
Short-sellers profit when a stock they’ve “sold short” falls in
price, so they are having a field day in this market.
Short
sellers borrow shares that they don’t own from their broker, then sell
those borrowed shares in hopes of buying them back later at a lower price.
The process is termed “selling short” because they’ve sold shares
that they don’t own.
“Short
interest” is the number of shares that have been sold short for any
given stock. Short interest by itself isn’t particularly meaningful, so
it is usually compared to the stock’s daily trading volume. The
resulting “short interest ratio” is the short interest divided by the
trading volume. For instance, the short interest ratio would be 10 days if
100,000 shares had been sold short, and 10,000 shares trade daily, on
average (100,000 divided by 10,000).
The
Nasdaq site (www.nasdaq.com) is a good
place to look up short interest because it displays data going back 12
months instead of just the most recent figures shown by most sites.
You
can access the short interest data by getting an
InfoQuote
(select InfoQuotes from the dropdown quote menu) and then selecting
short
interest when the InfoQuote displays. Short interest figures are
collected monthly, as of the 15th, or as of the last trading day prior to
the 15th.
Nasdaq
displays the number of shares sold short, the average daily trading
volume, and the “days to cover” (short interest ratio), for each of
the past 12 months.
Most
stock’s short-interest ratios range from zero to two days. Ratios of
five or more days reflect strong short selling activity. Normally, not
many stocks fall into that range. However short sellers love bear markets,
and when I checked last week, more than 2,000 stocks reflected five-days’
or more short interest.
Some
experts advise that high short interest ratios are a good thing because
eventually the short sellers will have to buy back all of their borrowed
shares to cover their positions, and the resulting buying pressure will
drive up the share price. Nevertheless, large short interest ratios
reflect risk because the short sellers may have detected fundamental
problems that could affect a firm’s long-term outlook.
Q.
Where can I see analysts’ recommendations on individual stocks by major
brokerage houses?
A.
MarketWatch (www.marketwatch.com)
displays summaries of major brokerage’s analysts’ ratings changes
going back to November 2000. Marketwatch lists the date, broker, new and old
recommendations, and a short synopsis of the analysts’ comments for each
ratings change listed (Get a quote and then click on Analyst).
You’ll
find important information there if you read it carefully. For instance,
when I looked
up Intel, I noticed a August 6, 2001 note from Salomon Smith Barney
reiterating its advice to “buy” Intel shares. However the report also
noted that Salomon was, at the same time, cutting its revenue (sales) and
earnings forecasts for Intel. Salomon’s comments, in my view at least,
contradict its “buy” rating, since lower revenues and earnings usually
lead to lower share prices.
Q.
Where can I find information on foreign stocks traded on U.S. stock
exchanges?
A.
Foreign stocks trade in the
U.S. in the form of ADRs (American Depository Receipts). An ADR represents
a specified number of shares of the foreign company’s stock and trades
just like a stock. The best place to learn about ADRs is ADR.com (www.adr.com),
a free service of J.P. Morgan, the inventor of ADRs. For me, the site’s
most powerful feature is its industry analysis. Click on Industry (top
menu) and then click on “6 mo. return” to see a list of industry
groups represented by ADRs sorted with the industries with the highest
six-month returns at the top. Click on an industry group name to see a
list of the companies making up the group, including the year-to-date
return for each company. When I looked last week, the strongest industry
group was Construction/Building Materials and the best performer of the
five stocks making up the group was Cemex SA, a Mexico-based cement and
concrete producer with a 49 percent year-to-date return.
Q.
Do you know of a site with information on California municipal bonds?
A.
Bonds Online (www.bondsonline.com)
is the place for everything you want to know about corporate, municipal,
and U.S. Government treasury bonds.
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Q.
Where’s the best place for mutual fund information?
A. Morningstar (www.morningstar.com)
gives you much of what you need to know to evaluate mutual funds. Access
to some information requires a subscription, but everything you need to
evaluate funds is free. Be sure to check Fund Alarm (www.fundalarm.com)
to make sure the fund management hasn’t changed before you buy.
Q.
I don’t know anything. How can I learn the basics of investing?
A.
The American Association of Individual Investors (www.aaii.com)
is your best source of basic and intermediate level investing information.
They have a monthly magazine, loads of information on their site, and an
extensive selection of local educational programs. Membership costs $39
per year. You can sign up for a two-week free trial on their site.
Q.
Where can I find a Relative Strength rating on a stock, similar to the
ratings listed in Investors Business Daily?
A. Relative Strength rankings for three, six, and 12-months periods are
listed on MSN Money (moneycentral.msn.com).
Click on Investor, get a quote and then select Company Report. The Relative Strength rankings are listed in the Stock
Price History section.
Q.
Where can I learn about charting or technical analysis?
A. Chartists, or technical analysts, believe everything they need to know
about whether to buy or sell a stock is contained in the stock’s price
chart. Naturally, not everyone agrees with that claim, but many investors
could benefit by knowing how to read a stock chart. Equis, a maker of
stock charting software, offers an excellent free tutorial called
"Technical Analysis From A to Z" on their site (www.equis.com).
It’s equivalent to books selling for $50 to $75. Click on TAAZ Book
under Free Stuff. Use the table of contents on the left to find specific
indicators.
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