When reading bloomberg, you can find out which “Stocks On The Move”. The stocks has unusual price changes, and are usually signs of future price movement. On 9 August, the list was:
- BankUnited Financial Corp. (BKUNA:US): Florida’s largest bank posted a quarterly loss after setting aside more money to cover defaulting loans as borrowers fall behind on payments.
- Berkshire Hathaway Inc. (BRK/A US): Billionaire investor Warren Buffett’s Berkshire Hathaway Inc. posted its third consecutive profit decline on slowing returns from insurance.
- National City Corp. (NCC:US) dropped 2.7 percent to $4.98. The U.S. Securities and Exchange Commission started an informal probe at Ohio’s largest bank into the lending and the sale of its subprime home unit to Merrill Lynch & Co., according to a company filing.
- Lions Gate Entertainment Corp. (LGF:US): The independent film and television company reported first-quarter profit of $7.1 million as the comedy “Meet the Browns” lifted sales.
- Radian Group Inc. (RDN:US) rose 2.2 percent to $2.80. The third-largest U.S. mortgage insurer reduced its quarterly dividend 88 percent to boost liquidity amid the slumping housing market.
Dogs of the Dow is a strategy that buys the 10 Dow Jones Industrial Average (DJIA) stocks with the highest dividend yield at the beginning of the year. The portfolio is adjusted at the beginning of each year to include the 10 highest yielding stocks. Michael O’ Higgins first popularized the strategy in his book, “Beating the Dow,” published in 1991. O’Higgins showed that over the 17-year period from 1973 to 1989, his Dogs strategy averaged a return of 17.9% annually, compared to 11.1% for the Dow. You can find the top ten highest yielding stocks in dogsofthedow.com. There are variations to Dogs of the Dow, like only select five companies with the lowest stock price from the 10 highest yielding stocks (the Dogs). This strategy is called Small Dogs of the Dow. However, I think that selecting based on price is a not a good strategy, because low price does not mean that they are undervalued, although low price means more liquid. I prefer using P/E and PEG for the top 10 highest yielding stocks (I haven’t tested this strategy). You can create your own strategy by choosing not only the 10 highest yielding stocks, but maybe top 20, or top 30. Then select using P/E or PEG or even price from that list. You can check the result using historical data. Do your homework and you will be rewarded.
Dividend Reinvestment Plans (DRIPs) is a program run by public companies, which allow to reinvest dividend and/or make cash purchases directly from the company. A DRIP does not require a lot sum of money, so almost anyone can invest in it. Typically a shareholder only needs one share to participate in a company’s DRIP plan, mostly the company will not charge fee or commission for the dividend reinvestment.
Company will benefit from DRIP because it provide stable base of shareholder who are likely long-term investment strategy (buy and hold). This makes the companies stock price stable, low fluctuation. The nature of DRIP makes it difficult to liquidate shares, making it more as an instrument for long-term investing. By doing DRIP, the company keeps the capital inside thus raising additional capital.
For investor, DRIP enables them to participate into it with as little money as $10. Buying stocks from the company and bypassing the broker, will lower the cost of investing because there is no fees or commission for the broker. DRIP also helps investor by with cost averaging, because they will invest in a fix dollar amount on regular basis. Sometimes they will buy at high price, and sometimes at low price, thus averaging the price and saving investor from buying stock at high price.
Because company in this case gives dividend, it is also a form of income and therefore stills a subject for tax.
DRIP is suitable for long-term investing. You can start with a solid company with good management, and financial performance.
Cost averaging strategy is buying a stock at a fixed amount on a regular basis. Cost averaging is very useful because you won’t know whether current stock price is low or high. By buying on regular basis, you’ll average the cost of stock you bought. You might buy some stocks when price are low and some stocks when price are high. The cost per share will then averages out. So it will minimize the risk of buying shares at the wrong time (when price is high). For example when you have $1,000, instead on spending all the money once on a stock, spread the investment for several months. You can buy stock $200 a month for the next 5 months.
Bank has different business than other company. They are selling and buying money. Therefore, measuring bank performance is different from measuring other company. Things you should know when checking bank performance are:
1. Return on Equity (ROE) and Return on Asset (ROA). Just like other company, you can check these financial ratios to find out whether they are giving enough return or not. Always compare your finding with equal bank in size and business.
2. Net Interest Margin (NIM), measures how large is the spread between interest revenues and interest cost. Find banks with high NIM.
3. Loan to Deposit Ratio (LDR), measures how much loan have the bank gave compared to the deposit it receives. Higher LDR means that the bank is good at distributing the deposit it receives through loan. Loan is the source of income for the bank. More loans given usually mean more revenue.
4. Non Performing Loan (NPL) is loans that are not paid. High NPL means that many of its loans are not paid, causing lower interest revenue. These troubled loans can be handled through making loan-loss provision.
5. Capital Adequacy Ratio (CAR) is capital requirements for facing bank’s credit, market, and operational risk. According to Basel II, the CAR must be no lower than 8%.
Financial ratio can tell a lot about a company. You can see how much they make profit, or how healthy they are. Financial ratio can help making decision in picking a stock. To know whether a company is healthy or not, you can check their current ratio (current assets / current liabilities), debt ratio (total debt/total assets), and debt to equity ratio (total debt / total equity). To know the performance of making profit, check the Return on Asset (ROA = Net Income / total assets) and Return on Equity (ROE = Net Income / total equity). Another important ratio is Earning per Share (Net Income / total outstanding shares), Price/Earning ratio (P/E = market price per share / earning per share), and price/book value ratio (market price per share / book value per share). The higher the current ratio, ROE, ROA is better. The lower the debt ratio and debt to equity ratio is better. Low P/E and price/book value ratio means the stock is cheap. Cheap stock means that it has poor performance or people didn’t realized that the company is good. To make decision on which stock you should buy, compare financial ratios between each company in the same sector / business.
Income investing pick companies which provide steady stream of income. Stock can provide steady income by paying a solid dividend. Established company which has reached certain size and growth is limited, will use its earning as dividend.
How?
Income investing is done by picking stock with high and steady dividend or established company.
How’s the performance?
Income investing will give steady income and the price wouldn’t raise much. A thing to remember, that in most countries dividend is taxed at the higher than capital gain.
For who?
Income investing is for people who want steady income like coupon in bond.
Growth investing is done by looking at company which has high growth. In the late 1990s, when technology company flourish, this method gives very high return.
How?
This method is focusing on growth, so it will find company with high growth, high earning growth. But you must also watch other aspect, like it’s debt to equity, and ROE.
How’s the performance?
Also analysis done by many people, stock with high growth usually beat other stock in return. But you also must remember to check that company not just by looking at its growth projection. Other things to consider like will it be likely that the company find any new technology, product, or project which will significantly influence its earning.
For who?
Growth investing is long term horizon, more than 1 year. Company with high growth will always reinvesting their self to produce new technology and product, so that future earning will rise significantly in the future.
Value investing is a popular stock-picking method. Benjamin Graham and David Dodd, finance professors at Columbia University, laid out what many consider to be the framework for value investing. The concept is actually very simple: find companies trading below their inherent worth. Warren Buffet is the second riches man on earth by this article made, uses this strategy.
How?
Value investing uses screener to choose stock. The basic of the screener is:
• Low price, can be seen through it’s Price Earning (P/E) Ratio and Price Book Value (PBV)
• Good growth, through it’s Earning growth.
• Safety, no more debt than equity, and current asset should be two times current liabilities.
• Income, the stock should give us sufficient dividend yield, at least two-thirds of the long-term AAA bond yield.
How’s the performance?
According analysis done by many people, stock with low P/E usually beat other stock in return. But you must remember that not all low P/E is a good stock, maybe people won’t buy low P/E stock because the company has poor earning. The second riches person uses this strategy, so there is proof of the goodness Value investing.
For who?
Value investing is long term horizon, more than 1 year. So if you’re patient, then maybe this is your stock pick style
Technical analysis is done by looking at previous price, and volume data. Technical analyst look at past chart of price and different indicator to make prediction about the future prices. The human emotion is an important aspect here. Their willingness to buy stock at a certain price will determine future price. This analysis assumes that price moves at trend, and history repeats itself. It is believed that this analysis is more art than science. Because of that, there has been plenty of critics to this analysis, due to lack of evidence of it’s performance. But it is still a popular method in the world, through its easiness. Critics also came from well known fundamental analyst, Warren Buffet. It is also inconsistant with market hypothesis, like Efficient Market Hypothesis (EMH) and Random Walk Hypothesis.
How?
The most popular method used in this analysis is support and resistance, bollinger band, moving average, momentum, stochastic oscillator and indicator such as MACD. Moving Average is the average closing price. They also look at pattern at chart like the popular head and shoulder. There at a lot of software out there which can help you with this kind of analysis.
How’s the performance?
Sometimes it works sometimes it don’t. But due to it’s activeness in trading, it has high cost transaction. So you must deduct your return with this transaction cost.
For who?
Technical is for short term player. They are usually very active in their trades. Whatever the price movement, they can go in by going long or short. This analysis is easy to do, especially by looking at charts, making is a very popular analysis.