I am starting to write this as tech stocks have declined over the past couple three weeks. But market values have no real view into a company’s stock values. They really show the emotion of the market participants. So as a reason to buy or sell, market values mean nothing.
Similarly, the larger economy, changing demographics, or the next new fad really play very little predictor value to buying or selling stocks. These are macro-economic factors. We are more interested in the micro-economic factors in buying a particular company’s stock. That will be the predictor for what the stock will do in the future. The future could be 1 year or 5 years, but as the company does well, so does the value of the stock.
Perhaps not everything is important at all times. To me in these times, cash means a lot. A company that I’ve bought in during the past year had to have a good amount of cash on it’s books. You can see that in a current ratio of greater than 1. In the past year I’ve looked for 2 or greater.
Another micro-economic factor to look for in a company is low or no debt. I prefer zero debt. If a company has a lot of cash and a little debt, that might also be acceptable.
Growth is another factor. If a company is profitable, look for profit growth of 30% or more per year. I also look at return on equity which can be another indicator of shareholder value growth. If a company is not profitable, look for a reason the company will be profitable in the future. For instance, revenue growth. If revenue is growing 30% or more per year and expenses are nearly the same, there is a very good chance the company will be profitable in the future.
Deciding to buy a stock and actually buying it are two different things. If you like a company based on the above factors, calculate a price target using discounted net present value. That will give you an idea what price you should buy a stock at. From there you can make a decision.
What’s going on in the general market or elsewhere in macro-economics means very little. Look at the individual company.
- Recessions: Explained – New Economics Foundation
- Coronavirus Perceptions and Economic Anxiety – Institute for New Economic Thinking
- A Look At Inflation Around The World – Macrobond
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