Steve Rules for Stock Selection Value Investing
1. Select a stock at or near its’ 52-week low - Here, here!
2. The difference between the high and the low share price should be 100% or more. Normally the beta of such shares is 1.0 or more (beta compares the ups and downs of the stock's price relative to the general market. A stock with a beta of 1.5 tends to move 50% more than the total market, a stock with a beta of 0.5 move 50% less. A stock with a beta of 1.0 moves exactly as the market does).
3. Select stocks with at least 200,000 shares traded weekly on average. 150,000 shares is acceptable for smaller companies.
4. Select low P/E ratio stocks. The Price/Earnings ratio should be well below the P/E of the market as a whole, see Value Line, Part 1.
5. Select a company with a Debt to Equity Ratio of less than 40%. Debt to Equity Ratio equals Total Current Liability plus Long-Term Debt, divided by shareholder common equity. The smaller the company, the smaller this ratio should be.
6. Select a company with Earnings to Equity Ratio of 15% or better. Earnings to Equity Ratio equals net income after taxes divided by shareholder common equity.
7. Select stocks with at least $100 million market capitalization. Market capitalization equals common stock outstanding multiplied by the current share price.
8. Select companies with a history of earnings growth. Avoid a company with an earnings deficit unless you are sure this is a strong company with a promising future.
9. If possible, check out the company's product. Steve checked out Liz Claiborne and hated the product, I believe women's dresses.
10. Find out the stocks’ knock. The prices low for a reason. The best choice will be a good company in an out-of-favor industry.
11. Avoid stocks rated a buy any newsletter (including Value Line). I totally agree, the newsletters usually take a short-term outlook and generally favor stocks that are their years high, not low. Of course this rule would never apply to Jeff's newsletter because I am always picking the type of stocks that you should be consider buying at the current time.
12. Pick stocks with at least 35% institutional ownership.
I really like Steve's final comments. "Sometimes you can overanalyze the stock. Sometimes the gut feeling is the best formula."
I'd really like to thank Steve for sharing his ideas and I encourage you to do the same so I can share them with other readers. We are all in this together. Let's help each other achieve our dreams.