Buying a stock: Step 2 – Confirming the Quality
Well, we’ve taken the first step in our six-part series, intended to show you the simplest and quickest way to select and buy the shares of a good company. And, from that first step, we now can identify all of the stocks that would meet our criteria, sorted in order of quality. The next step is to confirm that the one we select deserves the Quality Index it was awarded.
Still in the screener, the first on the list is FDS, FactSet Research, with a Quality Index of 10 out of 10. One click on the words, “Take Stock,” to the right, and voila! I’m looking at the company in that software. [If you should click on this link, you can see how it works for yourself; and, while you’re there, plug in any other symbols or names you might be curious about.]
If I wished to, I could prowl around on that page, drilling down to explore the various elements that produce that excellent rating. However, the easiest way is with a second mouse-click on the word, “Summary” on the frame to the left, which prints out the following, which plainly tells my why:
Summary
If there’s no fundamental reason for the current low price, FactSet Research Systems, In would be a buy at 48.84
Reasons to Buy
- Sales growth is very predictable.
- Earnings growth is very predictable.
- Sales have grown historically at 19.63%.
- Earnings have grown historically at 16.85%.
- Recent sales growth has been 19.10%.
- Recent earnings growth has been 17.20%.
- Profit margins are trending up or are steady.
- Return on Equity is strong.
- 48.84 is a reasonable price for this stock.
- Total return is 28.03%.
- At 5.40%, the Risk Index shows the risk to be reasonable
Items to Check
- Investor interest has cooled. There may be a valid reason.
That’s pretty tough: two clicks and that part’s done. And, if the first one doesn’t pan out, I can go right down the list until I find one that does.
And guess what! The next step is even easier.
Ellis, why do you check quality so closely before you look at price?
Sorry I didn’t respond sooner. In a nutshell, our whole process is based upon a company being of good quality; i.e., strength and stability of sales and earnings growth within our guidelines and profit margins not declining.
When those fundamentals are deficient, it’s likely that those long-term investors who hold the stock will start selling it; and the price will decline. This will, in turn, magnify all of the parameters we look at to determine if the price we’re being asked to pay is a reasonable price: the PE will be down, the price will be down, the U/D ratio or Risk Index will be down, and the projected return will escalate.
The worse a company performes, the better a value it will APPEAR to be; and one can be seduced into thinking she has a bargain, when her buying it would benefit only the seller! NO PRICE IS LOW ENOUGH to pay for a company that isn’t of a quality capable of producing the returns you are seeking.