P/E is the most popular method of valuing a company. You take the company's earnings per share and divide it by its stock price.
Cash flow, not earnings.
There are several reasons for this. As a dividend investor, I want to see that a company has ample cash flow to pay the dividend.
1. Earnings don't represent actual cash that comes into the company. Cash flow does.
2. Earnings are more easily manipulated by savvy CEOs and CFOs. Earnings contain all kinds of non-cash expenses. Things like depreciation, amortization and stock-based compensation are expenses that affect earnings, but do not impact cash flow.
That's why cash flow is a more accurate representation of a company's performance. So you want a way to value a company based on cash flow.
Fortunately, you calculate price-to-cash flow (P/CF) the same way you do P/E, although you may have to do a little more digging.
Companies typically don't report cash flow per share. That's something you need to calculate on your own.
You'll find a company's cash flow reported on its statement of cash flows. Just divide it by the number of shares outstanding (found on the income statement) to figure out what the cash flow per share is. Then, just like the P/E calculation, you divide the price of the stock by the cash flow per share.
Another way you could do it is by dividing the company's market cap by cash flow.
How to Use Price-to-Cash Flow
Generally speaking, a stock with a P/CF under 10 is considered inexpensive. But like any valuation metric, it doesn't exist in a vacuum. In other words, a stock's or index's P/CF should be compared to other stocks' or indexes' price-to-cash flow, historical averages, highs, lows, etc.
There will be times when a stock's P/E is pricey but its P/CF represents value. In fact, that's what's going on with the market.
For stocks to power higher, we need to see sales and earnings accelerate.However, no one has to buy the average company (or the whole market). There are plenty of sectors and individual companies with superb prospects right now. Zero in on them. Here are a few characteristics that market leaders tend to have in common:
1. 10% or better sales growth.
2. 20% or better earnings growth.
3. Double-digit profit margins.
4. High-quality management.
5. A 15%-plus return on equity. (Return on equity is earnings per share divided by book value per share. It's an excellent indicator of how efficient management is with the firm's capital.)
6. New product introductions (New product which capture market share that contributed positively to top and bottom lines)
7. Share buybacks.
8. Institutional support.
9. Strong technicals. (Good volume and the shares are trading above their 50-day and 200-day moving averages.)
10. Insider buying.
Look for companies that have all or most of these qualities and you are well on your way to making good money, even in a flat or herky-jerky market.
You can't forecast the economy and you can't predict the stock market. But there's one thing you can take to the bank: share prices follow earnings.
So focus on the very best companies with the most robust profit growth. That's how the smart money plays a lackluster market like this one.
Few, if any, market strategists could have foreseen the manner in which crude oil prices collapsed in the past few weeks. In fact, most were still predicting that oil prices would rise, given the on-going conflict in Iraq and the civil war in Ukraine. Up till May, crude oil was still holding steady at around US$110 a barrel. Oil prices have since plung to below US$60 a barrel.
Lower oil prices have a huge impact on big oil producers such as Russia and Venezula because they need oil revenue, while on the local bourse, the shares of rig-builders and marine-related plays face selling pressure from investors worried about oil majors cutting back on their expenditures for drilling activities. Falling oil prices had resulted in net oil producers such as Russia and even Malaysia currency lost in value. Food Empire will probably affected badly by the falling Russia rouble.
Asian stock markets stayed in exuberant mood ending this week on growing hopes that the United States economy is recovering and the interest rate will not rise soon. One key catalyst for the optimism was the US Federal Reserve's pledge midweek to be patient in raising interest rates. It's only a matter of times interest rate will increase. Here are four practical steps we can and should take now to prepare for the inevitable.
1. Rebalance your portfolio - Trim back your equity positions and add to other assets that have lagged. Every asset class moves in cycles - and rebalancing is a proven way to boost your returns while reducing overall portfolio risk.
2. Gravitate toward value stocks - Growth stocks are excellent investments, especially early in a bull market. But they carry higher valuations and when growth starts to fade, look out below. Value stocks, by comparison, are companies that are cheap relative to their sales, earnings, dividends and book value. They not only generate superior returns over the long term, they do it with a higher margin of safety.
3. Focus on larger companies - small companies tend to outperform early in a bull market and larger ones do better "on the back nine." This bull is now a senior citizen, so it's a good time to shift your holdings away from riskier, more volatile small caps and toward large caps. Or, better still, megacaps, the world's largest publicly traded companies.
4 Adjust those stops - I see something eerily familiar happen with each bull market. Investors - fully understanding how trailing stops protect both their principal and their profits - start to get complacent. They quit ratcheting up their stops. They start complaining about the stocks that went back up after they stopped out. And so they quit using stops... just when they need them most. A bear market takes the market lower than most people think it will go. (Often 40% or more.) Stopping out early keeps your profits from slipping through your fingers. It may also mean you realize a small loss. But it keeps small losses from turning into unacceptable ones.
Last edit: 9 years 2 months ago by min1xyz. Reason: Inserted source of content
As we say goodbye to the old and welcome in the New Year with all it's opportunities and challenges ahead:
Low crude oil price - Crude oil prices have since plung to below US$60 a barrel. So far lower oil prices have a huge impact on big oil producers such as Russia and Venezula and even Malaysia. Rig-builders and marine-related stocks already face selling pressure from investors worried about oil majors cutting back on their expenditures for drilling activities. So far lower oil prices have a huge impact on big oil producers such as Russia and Venezula and even Malaysia. As regard to cheap energy it will lower business cost.
US Economic Recovery - US Economic & strengthening of greenback will continue in 2015.
Increase In Interest Rate - The strong growth in the US comes with the flip side; higher interest rates. Higher interest rate will increase business cost.
Property Market - The physical market is likely to remain subdued, leading to a fall in residential prices. For the property stocks, 2nd half of 2015 may witness Government reverse some of the cooling measures. This may spark the beginning of the market rally for property stocks.
2015 stock market will most likely experience volatile market condition. As retail investors its best to rebalance our porfolios. To be on the safe side hold stocks that are resilence, debt free companies that able to generate free cash flow. Stocks which continue paying dividend of at less 3%.
Last edit: 9 years 1 month ago by Rock. Reason: correct error
This past week fuel oil has plung to below US$ 50. Former US Treasury Secretary Lawrence Summers says the country's next economic booster could be exporting its fossil fuels, a move that could make America the next Saudi Arabia.
Low energy cost will benefit US more than high energy cost. This means low oil price is here to stay. Fuel oil will probably stabilise at US$ 80 which I believe is ideal for oil producers and consumers. Already lower oil prices have a huge impact on big oil producers and rig-builders and marine-related plays face selling pressure from investors worried about oil majors cutting back on their expenditures for drilling activities.
The strong growth in the US comes with the flip side; higher interest rates. Many analysts have point to US to start increasing interest rate by 2nd half of 2015. Already our bank Sibor rate this week had spite sharply.
The volatility before & after interest rate hike should not be something investors are too worried about because that creates buying opportunities into equities.
REITs are vulnerable to rate increases, some are still attractive for now as they still offer relatively good dividend yields, but don't go over-weight on them. Maintain strong cash position for buying opportunities.