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Disclaimer l.jpg

  • Stock speculation is very risky

  • Do not trade with more than you can afford to lose.

  • Seek professional investment advice.

  • This is not investment advice.

  • No warranties, you are on your own.

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What Makes Stocks Cheap?

  • Stocks are cheap when the underlying value of the stock is much less than the current price

    • Rubber band

  • Price is much less than value = cheap

  • NOT future value – actual, hard, present value

  • No pie in the sky

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What is VALUE?

  • Value is almost always based on two things

  • 1. Assets

  • 2. Earnings

  • The other things claimed to be value – reputation, goodwill, good management, blah, blah, have to show up in earnings to be valuable

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  • Price earnings ratio – low P/E is good

  • You put $100,000 in a bank Certificate of Deposit (CD) for a year and get 2% interest

  • You paid 50 times earnings = the price of the CD divided by the earnings (interest)

  • How smart is this when you can easily find stocks selling at 10 times earnings or less?

  • But stocks' prices change and CDs are insured

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Earnings Yield

  • If the stock sells at $10 and makes $1.00 per share in earnings, the price-earnings ratio is ten

  • And the “earnings yield is 10%

  • In other words, all things being equal, your stock should grow 10% per year

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Valuing Assets

  • Cash – no haircut = 100%

  • Receivables – not all may be collected

  • Inventory – may be stale – how fast does it turn

  • Property, plant and equipment – what price was it bought at, how much deprecation

  • Intangibles – I usually value at zero, can be inflated

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Shareholders Equity

  • Adjust for preferred stock, warrants, etc.

  • Treasury stock – At what price does the company buy its own stock?

  • Calculate book value per share

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Cash and Working Capital

  • Calculate cash per share, working capital per share

  • Working Capital is current assets minus current liabilities

  • Calculate current ratio by dividing current assets by current liabilities – two or better is good

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Summary – Buy Cheap Stocks

  • Cheap stocks are cheap comparing price with value

  • Value is book value and earnings power

  • Do NOT use future value – only present value

  • Calculate book value per share, cash per share, working capital per share, and price earnings ratio

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Cheap Stocks Can Stay Cheap

  • Cheap stocks can stay cheap forever

  • But you want to reduce risk by buying cheap

  • Figure out which cheap stocks may go up – see my other videos or buy my books on Amazon.com

    • How to Find a Home Run Stock

    • How to Pick Hot Reverse Merger Penny Stocks

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Subscribe to my videos

  • And subscribe to my blog:

  • www. investing-performance.com

John lux l.jpg
John Lux

  • Trader, investment banker, former OTC market maker and attorney

  • Lux.Investor@ gmail.com

  • Copyright ©John Lux 2011