Monday, May 20, 2019

Stock picks by others: Caveat Emptor

From Barron's this weekend

5 Cheap Stocks to Ride Out the Trade War
After stocks tumbled on trade tensions this past week, Wall Street quickly offered more repositioning advice than a yoga class, with none of the relaxation .Get defensive. No, defensive stocks look expensive. Avoid companies that import from China. No, buy them, as long as they have enough pricing power to pass along higher costs to customers. Reduce large-caps. No, look to them as havens.
Not so fast. If you're taking stock picks from writers in magazines, I'd hesitate.  Look before you jump. 

Here's was my response to Jack Hough's article (which by the way was well written, but still caveat emptor.)
I have certain criteria that must be met before I invest in a stock. P/E is just one. If a stock is trading at a historical low p/e, I want to know why. Other factors such as 5-year P/E growth, revenue growth, ROI, Free Cash Flow, Dividend growth (if it pays a dividend, which is not a deal killer); I'll even look at corporate governance, i.e., is the CEO ethical and not a dirt-bag. I use a screener (free to use at my Schwab account) that looks at five years ROE (5 year trend at a minimum), Current Ratio (less than 2) Rev Growth Rate (at least 15%), EPS Growh (15%) can Cash Flow per share (above 5). Then I look a dividend growth, if there is any, and it can be a plus, if i'm looking for an income play (not a deal killer, but if it's paying divs, are they growing?) Then I get into technicals. I don't want to buy a company that my be overvalued. Only REGN made my initial list from the stocks above on my initial screen. I do not invest in stock picks made from this or any other magazine. But I do like the market analysis in Barron's and the ideas I might get for future investments. My advice: ALWAYS DO YOUR OWN DUE DILIGENCE. Don't invest in companies or sectors you don't understand. If you don't know how, learn how. Otherwise, my advice would be turn your money over to an "advisor" and hope for the best.

**P.S. On a side note: I don't care how much hyperbole there is in the media or the markets, I don't like to invest (buy) companies with liabilities greater that they can pay for in three years with free cash flow, and that don't make money. Make sense?

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