In the fall of 2008 at the height of an economic crisis, Warren Buffett invested billions of dollars into numerous companies in the space of just a few weeks in rapid succession.
How did the most successful investor on earth have the confidence to invest billions of dollars into each of the companies in such a short time frame when the market was in freefall?
His long-time business partner at Berkshire Hathaway, Charlie Munger, provided a glimpse into the answer when he commented: “we just try to stay rational”.
What Charlie Munger was alluding to was how investment decision-making at Berkshire Hathaway is made without emotion. Instead, management strives to make rational, quantitative investment decisions irrespective of the share prices on any given day in the stock market.
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Table of Contents
Cash Is King
During economic hardship, companies who have taken on too much debt can easily lose market share or worse, ending up in bankruptcy because they don’t have sufficient cash to pay ongoing expenses and cover interest payments. Financially sound companies build up cash to ensure their viability during difficult times and frequently use that cash to build market share by buying competitors who are struggling. If you are looking for stocks to buy now, cash rich companies are a great place to begin your search.
One reason Warren Buffett had the confidence to invest so much money in such a short time period is that Berkshire Hathaway had an abundance of cash when the economy was at a low point.
The viability of Berkshire Hathaway was not in question. To the contrary, the general economic woes were an opportunity to buy companies at a discount and gain market share.
In times of economic hardship, a plentiful supply of cash not only protects a firm against bankruptcy but creates opportunities for it to scoop up competitors at lower prices.
When you look for stocks to buy now, cash rich companies are a good place to begin. Research analysts might criticize company management for having too much cash on the balance sheet during rosy times.
But it is easy to take on a lot of debt during the good times when access to capital is unrestricted and interest rates are low.
A prudent management team doesn’t succumb to the temptation of so-called “easy money” or the criticisms of analysts. They build up cash reserves based on the premise that when times get tough, cash is king!
To begin your search for companies with hefty cash hoards, view this snapshot below.
Find Benjamin Graham Stocks
Applying Benjamin Graham’s stock valuation formula to companies in the current stock market while factoring in adjustments to input variable assumptions, such as risk-free rate and growth rate, surfaces undervalued stocks.
The legacy of Ben Graham as the father of value investing has stood the test of time as his most famous student, Warren Buffett, applies the lessons to become one of the richest people in the world. So how does Ben Graham value a company?
When Ben Graham was publicizing his work, he required a minimum annual rate of return of 4.4%. This figure was the risk-free interest rate at the time.
To account for current market conditions whereby some companies grow very fast due to technology advancements, adjustments to Graham’s formulas can be applied to produce a present day list of companies that pass his screening filters.
Ben Graham was not only an investor, economist and Professor, but also a bestselling author. Avid stock market investors can still pick up a copy of his founding texts on neoclassical investing: Security Analysis and The Intelligent Investor. Both are well worth the time reading.
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Find Stocks To Buy Now With A Margin of Safety
When a company’s intrinsic value is high but its share price is low, it is said to have a high margin of safety.
Buying stocks with a high margin of safety is a core principle used by value investors to lower risk. The margin of safety is the difference between the company’s intrinsic value and its market price.
Buying stock with a large margin of safety is designed to sway the odds in your favor, so the downside risk is low and the upside potential is high.
It is important when looking for stocks to buy now not to confuse the share price with the company valuation.
Beginner investors sometimes assume that a high share price means a company is overvalued. And similarly that a low share price means a company is undervalued.
Penny stocks are an example of low-priced stocks that attract beginner investors.
Some of the reasons trading penny stocks is so popular is because:
- the costs to purchase these stocks is low;
- the downside risk is limited to just the price paid; and
- the upside potential is high.
But low-priced stocks are not necessarily cheap. Sometimes, the most overvalued stocks have the lowest share price. If you are looking to trade penny stocks, it is especially important to select a good penny stock broker.
The best penny stock brokers don’t charge variable commissions but instead charge flat commissions regardless of how many shares you purchase.
|Broker or Trading Platform||For Traders Who Are||Commissions||Account Minimum||Promotion||Open Account|
|Fee sensitive||$0.005 per share||$10,000||None unless under 25|
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|Overall||$4.95 per trade||$1,000||Up to $500 cash bonus|
|Overall||$4.95 to $6.95 per trade||$500||60 days free commissions|
|thinkorswim®||Options traders & penny stock traders||$6.95 per trade||$0||Up to $600 cash bonus|
|Penny stock short sellers||$5 per trade||$5,000||20% off commissions|
If you’re keen to go bottom fishing for stocks that are priced low relative to their theoretically calculated values but don’t fall into the penny stock bucket, here’s a list you can consider.
How To Buy Dividend Paying Stocks
Dividend paying stocks contribute the vast majority of portfolio gains over the long-term. High dividend stocks should be scrutinized to understand why annual yields are higher than market norms and to ensure no major issues lurk beneath the surface.
From 1926 to 2008, 95% of the total return in the stock market was attributable to the gains from reinvested dividends according to Professor Jeremy Siegel of the Wharton School of the University of Pennsylvania in his book, Stocks For the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies.
If you are looking for stocks to buy now, dividend paying stocks should be high on your list of candidates, especially if your focus is on long-term investing as opposed to short-term trading.
Most dividend stocks pay a fixed amount quarterly, and the best dividend stocks have long histories of paying dividends in up and down markets, as well as increasing dividend payouts to shareholders every year.
When you compare top dividend paying stocks, scrutinize the highest dividend paying stocks to make sure no major issues hide behind what seems like “easy money”.
High annual yields can be found, but be careful that the yield is not high because of some major company issue that has caused the share price to fall severely.
The losses from share prices that continue to decline will generally not be offset by the gains from continuous streams of dividends.
Plus, you cannot rely on dividend payments when companies run into trouble. When major issues surface in a company that cause a share price to fall for an extended time period, dividend payouts are frequently among the first costs to be cut.
View stocks with strong dividend yields here:
Find Stocks On The Rise
Stocks on the rise with strong upside potential can be golden opportunities to profit over the long term, especially if they have previously been sold for reasons unrelated to their fundamentals or their market opportunity.
Stocks on the rise with strong upside potential fall into the bucket of having positive expected outcomes.
In a nutshell, this means the probability of losing money multiplied the amount of money that could be lost is lower than the probability of making money multiplied the amount of money that could be made.
Think of a positive expected outcome in simple terms as a favorable reward to risk tradeoff.
Stocks with strong upside potential are likely undervalued stocks, even if their share prices have not yet moved higher.
These stocks have often been sold for reasons unrelated to their fundamentals. For example, when the market sells off, many stocks move in tandem.
But nothing fundamentally is different from one day to the next with how the company generates revenues or manages operations.
As an investor, finding a company that has been unfairly sold off is a golden opportunity to take advantage of unwarranted short-term market pessimism.
Share prices of solid companies generally bounce back over time, so you can have higher confidence that a short-term selloff may well be an opportunity to make more money over the long-term.
In the near term, investors are notoriously famous for making wrong predictions. Among the most famous was in 1929 just a few weeks before the stock market crashed when Professor Irving Fisher, the Yale economist, proclaimed that “stock prices have reached what seems like a permanently high plateau.”
Although experts are frequently wrong over the short-term, the long-term price performance of the market to go from strength to strength has been evident.
Some stocks that have strong upside potential include:
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Stock Ratings: Piotroski Score
The Piotroski Score is a rating system from 0-9 that assesses the financial strength of a company and identifies the best value stocks.
Finding undervalued stocks can sometimes seem like a lot of work. Discounted cash flow forecasts, EV/EBITDA multiples, P/E multiples, Earnings Power Value… where should you begin? If only there were an easy way to view the financial strength of a company on a simple scale that was intuitive to understand.
It turns out the Piotroski Score does precisely that. The Piotroski Score is designed to find the best value stocks using a scale from 0 to 9, with 9 being the best. For each criterion that is met, the stock earns a single point. The factors used in the Piotroski Score are:
- Higher gross margin compared to prior year
- Higher asset turnover ratio compared to prior year
- Cash Flow from Operations are greater than Return on Assets
- Higher Return on Assets in current period than prior period
- Positive Return on Assets in current year
- Positive operating cash flow in the current year
Source of Capital, Leverage & Liquidity
- No new shares were issued in the past year
- Higher current ratio this year than in the prior year
- Lower ratio of long-term debt to total assets this period compared to prior period
Stocks that rate highly according the Piotroski Score include:
Avoid Companies With a Lot of Debt
It’s important to take a look at how much debt a company has before investing your hard-earned cash.
To be clear, having SOME debt is not a problem for a company. Companies often take out loans or take on other forms of debt to raise capital necessary for operating costs or for expansion.
However, if a company has large amounts of debt, especially relative to its cash and income levels, that could be a red flag, for a couple of reasons.
- A company with a large amount of debt could be at risk of insolvency. If a company goes belly-up, investors who hold common stock in that company don’t always get a payout. This is because an insolvent company must pay off its creditors first and then pays stockholders with anything left over – and what’s left over could be nothing. This is especially true if a company continually refinances old debts; this practice suggests the company is having trouble meeting current financial obligations and won’t be able to expand any time soon.
- Debt limits a company’s ability to create a cash surplus. The more debt a company has, the worse it is for its bottom line. Companies in debt have to pay their creditors every month – that’s a cost that cuts into their profits. As a stockholder, this means one thing: the company stock may be less valuable even if the company takes in a lot of money than the stock of a company that has less debt and thus more cash on hand.
Steer Clear of Accounting Scandals
If a company is embroiled in a financial accounting scandal, that’s a clear sign that you need to invest elsewhere!
Accounting scandals mean potential fraud. The most likely outcome of investing in such a company is that you lose whatever money you put into it when the company folds and/or the people in charge are arrested.
Fortunately, you don’t have to worry that your name will be associated with anything fraudulent. While in most cases it is the executives at the top who go to jail, you don’t want to lost your money because of ethical transgressions of others.
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