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Answer:
We
noted last week that; "recent news from Wall Street
serves as a reminder that even big name companies
can run into serious problems." This type of meltdown
should remind us of the lessons we learned from the
Enron debacle - that even big name companies are not
necessarily safe. They can run into serious problems
-- problems often triggered by too much debt.
So
in one's quest for safe stocks, we pointed out last
week that it's wise to find companies that have these
three characteristics:
1)
Plenty of cash on hand
2) Little or no debt
3) Profitability
Click
HERE
to learn how to find companies with these qualities.
This
week we will look at three additional characteristics
of safe stocks:
1)
Cash flow (which is not the same as cash on hand)
2) Earnings growth outlook
3) Revenue growth outlook
Cash
flow
Cash
flow measures the amount of cash that moves in and
out of a company's bank accounts during a stated time
period. (Remember, a company could be losing money
on a cash basis even while it has positive earnings.)
You
want to select a company whose cash flow is positive
- that is one that has more cash flowing in than moving
out. The best way to determine a positive cash flow
is via the price-to-cash-flow ratio. The ratio
is positive only when cash flow is positive. Look
for a price to cash flow ratio of 1.
Earnings
growth outlook
You
obviously want to invest in stocks that have the best
possible earnings outlook. Forget (when looking at
this component) whether the market is bullish or bearish.
When it gets down to it, solid earnings growth, rather
than the market, generally drives up the price of
a company's stock.
Because
past earnings growth does not guarantee future earnings
growth, you will need to set aside time to research
what analysts are forecasting. Once again, I recommend
the figures reported in the weekly publication, Value
Line Investment Survey (www.valueline.com.)
Check your library for copies.
There
is no magical figure here, but at a minimum you want
10% anticipated earnings growth; ideally 15% or more.
The 10% to 15% range is for growth stocks and can
be slightly less for income stocks. Although obviously
a company cannot meet its dividend payments (nor increase
them) if it has poor earnings growth.
Revenue
growth outlook
Another
key component of picking safe stocks is potential
growth.
Bear
in mind, that clever accounting and subsequent press
releases given out by a company may boast higher earnings
based on cost cutting. But
that could be only a temporary way to ensure earnings
growth. True earnings increases are derived from growth
in sales, not cost cutting.
To
evaluate revenue growth, take a look at the figures
for the last 12 months. You'll want a percentage in
the neighborhood of 15% to 20%.
A
final BUYandHOLD tip...
To
boost your safe buying quotient, buy shares in a company
whose business (products and services) you understand.
Don't follow blind tips heard on the golf course without
first doing your research.
Good
luck!
BUYandHOLD
does not recommend any securities. The securities
mentioned above are being used for illustrative purposes
only and should not be regarded as an offer to sell
or as a solicitation of an offer to buy.
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