Hello, Good Buy (Part 2)

So, you’ve got the narrative. You know the industry well enough to know that this company has room to grow, or you know the company well enough to know that it will shoot for the stars and be on target. Your gut says yes.

But objectively, how do you know this stock is a good buy?

Let’s start with the price.

To find a stock’s price, you can go to nearly any finance-related website. My favorite for straight-no-chaser information is Google Finance (http://finance.google.com), but Yahoo! Finance (http://finance.yahoo.com) is a formidable competitor. I’ll use Google Finance on this blog, just to stay consistent.

Most finance websites these days will let you type in the name of the company to pull up data, but you’ll want to know the company’s ticker symbol as well. It’s basically an abbreviation that identifies the company most quickly on a stock exchange.

When the company profile comes up, the first thing you’ll see is the price per share of the stock. Ask yourself how many shares you can afford at that price. Some brokerages have a required minimum number of shares in order for you to purchase with them (often 1 share is enough). However, ING’s Sharebuilder is unique in that, with the right plan, it will allow you to purchase fractions of a share of stock. There are downsides, though: (a) you can only purchase on a certain day -- typically Tuesdays, (b) you have no control over at what time of day -- and thus, at what price -- the stock is purchased, and (c) you'll wind up paying full commission for a smaller portion of stock. For simplicity’s sake, I’ll assume on this blog that you have a regular broker that will only allow you to purchase full shares of stock. Either way, you should always buy a number of shares whose proceeds will make the cost of commission worth it (see Post 2 for more information).

So, you’ve got money and you know how many shares you can afford – great! But hold on.

Take a look at the information available, particularly:

Range

52-week range
Market Cap
P/E
Dividend
EPS

Range – This is the lowest and highest prices the stock traded at in the past trading day. Basically, it represents a stock’s volatility, or how much the price fluctuated in the past day. Normally, this doesn’t move very much (maybe $1 or $2, or just a few cents), but if the whole stock market went up or down, you’ll see more variability here. You should equate volatility with risk – generally, the more volatile a stock is, the riskier it is. But with high risk comes high reward [in theory]. That said, don’t be afraid if a stock moves up and down more than $2 – Under Armour fluxed between $94 and $102 today, so it definitely happens.

52-week range – Similar to the day’s range, but, in my opinion, a lot more important. This gives the range of prices the stock has experienced in the past year. It’s an even better signal of volatility, especially if the highest price is waaaaaay more than the lowest (like, 3 or 4 times as much). Sometimes, you can look at a 52-week range to judge how “expensive” a stock is – if it’s at the top of the range, you’ll probably want to wait until the price goes down to buy; if it’s at the low end….well, that depends. It could be a signal that the stock is really cheap, but if the company is not doing well financially, it’s a sign of the worst.

Market Capitalization (Market Cap) – This basically tells you how large the company is, financially-speaking (and even more specifically, equity-speaking. I’ll get to debt later.). It is the total of the number of shares the company has available to investors multiplied by the price per share. Generally speaking, large-cap companies like Wal-Mart and McDonald’s tend to have less-risky stocks than small-caps like Basset Furniture.

P/E – P/E stands for price-to-earnings (or price-earnings) ratio. I would say that it’s the most commonly used ratio to decide if a stock is expensive or not, though that idea does not always hold. The P/E ratio can be found two ways: by dividing the company’s market cap by its net income or by dividing its current price by the amount it has earned per share in the past year. Either way, you’ll get the same answer.

Basically, it tells how much you’re going to pay per share for the amount of money the company earned. If the ratio is high (and “high” depends on the company’s industry), you’re paying too much for the stock; if it’s low, you’ve found a bargain. But as I said, this doesn’t always hold. Older, more established companies like GE tend to have lower PEs (GE’s is less than 16) whereas newer companies, such as Lululemon, tend to be higher (LULU’s is 58). This is because the PE can reflect investors’ expectations of a company’s growth. In this example, one would think GE has grown as large as its going to grow, but Lululemon has room to spread itself around.

Dividend – Sometimes, you get a tip from the company to thank you for investing in it. It’s called a dividend, and it’s a portion of the company’s bottom line earnings that it felt it should share with its shareholders. Why would a company do that? Well, they want you to keep investing in the stock and sometimes, they don’t want to keep too much cash on them and a dividend is a good way to get rid of it.

EPS – Stands for earnings per share; it’s a measure of how much the company earned in net income for each share of stock it has available to investors. The higher the better, but this figure can fluctuate wildly depending on what’s going on in the company, the industry, and the world. EPS is also a shadow – what’s happened in the past. There’s no guarantee that the same (for better or worse) will happen in the future, but it can give you an idea of what the company’s stock is capable of earning.

***

Now, you’ve got the story and you’ve got the numbers. Next, we’ll put them together.

Hello, Good Buy (Part 1)

By now, you should have your brokerage account set up and your idea of the company who's stock you would like to own.

But how do you know if this stock is worth buying?

Loook at your company two ways: qualitatively and quantitatively. (Don't be scared of the numbers! Actually, don't think of them as numbers...think of them as dollars. Makes things much less intimidating somehow.) You probably already have the qualitative story down and there's more on the quantitative to come.

The Qualitative Story

Let's take my journey Michael Kors, for example. Michael Kors, the American fashion designer and famous face of Project Runway, took his company public in December 2011 in an initial public offering, or IPO. When a company "goes public," that means that its stock is now listed on a stock exchange (generally the New York Stock Exchange or Nasdaq) and the company received just about all of the proceeds from selling its stock on the IPO day. After that, the shares are traded among investors, but the company does not get any more money; only from the IPO does the company recieve funds.

Anyway, I was ecstatic beyond ecstatic when Michael Kors went public because that meant that I could own, not just a watch or a handbag designed by the wonderful MK, but an ACTUAL PIECE OF THE COMPANY. Owning stock means exactly that -- you own a portion of the company. Empowering!!!

Qualitative analysis: I knew that Michael Kors is very well respected in the fashion community. He creates trends, but is not a [laughably] trendy designer. His designs are typically composed of clean lines and classic silhouettes that flatter girly girls and menswear women alike. His label's reach goes far beyond the US, into Europe and Asia. He is arguably the next Ralph Lauren.

For me, this came through knowledge of the fashion industry and being in touch with my own preferences. I know how much my friends love MK, and how much I look forward to his fashion shows (especially fall. There's always something about fall fashion that just gets you). Basically, it was women's intuition, my gut. I believe that women have a special edge in investing because we have less tendency to get laser focused on the numbers and take the broader picture into view.

From this intuition, I knew that his company was worth more than $31 per share, where it was trading when I first looked into it in early February 2012. I mean, an MK watch is $250 at Macy's! It HAD to be worth more than $31 per share because after the company recieves its money from the IPO, investors are essentially trading the company's reputation. They may sell their shares because they feel the company has done (or not done) something it should have, or the buy shares because they believe that it's an amazing company doing amazing things (see ticker symbol AAPL for an example). The stock price can be a reflection of investors' anticipation of all the great things the company will do in the future, short- and long-term. But sometimes, the stock price hasn't caught up with company's reputation, which I felt was the case with Michael Kors.

Sidenote: Crocs is a great example of the importance of looking at the narrative/big picture. In 2007, Crocs traded at nearly $70/share, and I predicted that it would come crashing down. Why? Because Crocs are ugly. Every fashionista around the world (including Anna Wintour herself) cursed the person who started wearing them outside of a hospital. Suburbanites across the US found them comfortable, and Wall Street cleaned up. Luckily, fashion (and a global financial crisis) slapped everyone, and Crocs now trades at around $20/share. Still worth too much in my view, but meh.

I was sure that MK was a good buy in qualitative terms -- I just needed the numbers to back me up. Tune in to the next post for details!

Talk to Chuck...Or a talking baby

Now. Got that company in your head that you think would be a good buy? Good. Hold on to that thought.

In order to buy any stocks, you'll need a brokerage account. There are tons of "discount" brokerages online, many of which you might of heard of, including eTrade, with the cute babies in the commercials.

To find the perfect broker for you, think about how much you would want to pay for the privilege of investing (known as a commission fee to the brokerage) and how important customer service is to you. You'll also want assess the amount of cash you have available to begin.

The last step is where a lot of women I know get hung up: account minimums. I know shelling over $500, $1,000, or more can be an extremely daunting thought. Don't be intimidated by it. Think about how you're building security for yourself; security is worth far more than any account minimum.

That said, you may be in a situation in which it is virtually impossible for you to save more than $20 per paycheck (I've been there, too). There's a brokerage out there for you, too.

Below is a chart giving some details about some well-known online brokerages. Poke around their websites and see which one you might want to invest with. I speak very highly of Schwab, but brokers aren't one size fits all.

Once you've chosen a broker, stay tuned. The fun is just beginning...




* Why is a low price per trade important? Aside from the obvious of lower prices generally being better, commission fees eat at your overall returns. So, if you decide to buy a stock for $10, and the commission fee is $5, your return will be $5 lower. In other words, you've only bought $5 of the stock. When you sell it, that'll be another $5, leaving you with no returns (except if the price of the stock went up). So pay close attention to fees!

In the beginning...

We'll start off with the very, very basics:

- Where do you like to shop?

- What are some of your favorite [chain] eateries or cafes? (Don't gag at chains! They feed America!)

- What products do you clean your house with?

Now, notice that I didn't throw a barrage of acroynms at you. There's a time and place for everything. We'll get there eventually. Right now, I just want you to think about yourself -- that can't be too hard!

As portfolio manager of an investment fund, I take a close lens to the consumer sector and identify what shoppers are doing en mass. I chose this sector because, well, I'm a consumer. Always have been, always will be. I tell you this because beginning investors should start with themselves -- look at what you like, what your favorite companies are. If you're spending money with them, it's incredibly possible that others are spending their money in the same place. Why not invest in what you love?

In my next post, I'll delve a bit deeper, of course, but I'd like for you to start thinking about you, your habits, your hopes, your dreams. There is a large part of investing in the consumer sector that comes from intuition. Know thyself well.