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| Selecting
Investment Shares
With
the uncertainty around at the moment it is important to invest in
shares that are stable and producing an income to support their
prices if the overall market starts moving down.
We
want shares with good fundamentals and good technical structure.
We continually monitor the technical structure of the share as part
of our trading courses. Over the next few newsletters we will look
at how to find shares with good business fundamentals. I'm not talking
about reports, announcements etc. We are only interested in the
hard facts of the industry: size, assets, debt, earnings and
dividends.
The
fundamentals we want are:
Part
2: A company should have a good earnings history that will support
As
investors we are interested in the dividends a company pays. The
company can't pay dividends if it does not earn a profit. We want
to look back over the last five years (minimum) to see how profitable
a company has been. The earnings should be consistent and growing
to indicate good business activity and management. If there is
one year where earnings were down, check to see why. It could
be a one off situation and the company is still strong.
A
commonly accepted means of trailing the earnings performance of
a company compared to another company is the price/earnings (PE) ratio.
The PE ratio is calculated by dividing the share price by the
earnings per share. It is desirable for a PE ratio to be below
15, but sometimes you have to go up to 20. A good practice is
to compare the PE ratio with other companies in the same sector
to determine if the share is fairly priced. The lower the PE ratio
is does not necessarily mean it is the best. It can indicate that
the expected earning will be low and this will drag the price
down.
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