Creating an Investment Worksheet - Part Two

This week we move on to the second set of ratios for our investment worksheet. The idea of the investment worksheet (as set out by Jason Kelly in his book The Neatest Little Guide to Stock Market Investing) to keep track of stocks you are interested in watching was first discussed in last week’s post. Today, we will review the next nine ratios to add to the worksheet. The final set of ratios will be discussed next week. After that, we will look at tracking the stocks and when to buy and sell. 

Dividend Yield: We have talked about this metric previously in a number of different posts. A high dividend yield is important for investors in large companies and as you will recall, was a factor in the Dow dividend strategy (a previous post). Many smaller companies that are working on growing, and therefore keeping the cash and investing it back into their business, do not declare dividends so you will have to leave this part blank on the worksheet. Look at the past five years and decide whether the trend in dividend yield is going up or down. 

Return on Equity (ROE): This is net income divided by total shareholder equity (how much money the shareholders have invested in the company) to get a percentage figure. A bigger percentage is better as it answers the question of whether, as the company has grown with more income, it can support its larger size. If the company can maintain the high ROE as it keeps growing, Jason Kelly suggests that this means the company is directing its profits wisely. Jason Kelly likes to see an ROE of at least 20%, recognizing you may accept lower occasionally, if you think the company is set to grow or make positive changes.

Insider Buys/Ownership: Why is this relevant or important? It is relevant and important because if the individuals running the company owns shares in it, it is a good sign. They will have a self-interest in seeing it do well and will hopefully run the company efficiently and profitably. Jason Kelly also says investor sells are of less importance as the seller simply just might need some extra cash for their own personal uses. The more insiders who own shares the better! 

You may have to dig a bit to find this information. Value Line does have a box discussing Insiders but Yahoo Finance may be a better source. It sets out extensive information on insiders buying shares. 

Stock Buyback: We have not talked much about this on the site to date. It has been mentioned briefly in a few company profiles where there were share buybacks. One example was in the Michaels profile where the company has a share buyback in place. A company buying back its shares is a good sign. Why? One reason is that they feel the shares are undervalued so they can buy them back now and then sell them later at a higher price thus automatically raising new money for the company. Also, if the company buys back significant amounts of shares, and the overall earnings stay the same, the EPS has just increased which is a positive attribute. Further, generally speaking, less people owning shares in a company is better as it keeps it more tightly controlled. Jason Kelly indicates you must use your judgment as to whether the company is actually buying back its shares of a significant magnitude or whether it is just a few shares being bought back here and there. 

You will also likely have to do a bit of digging for the answer on this metric as well. The best place to start is the company website under its Investor Relations tab to see if they have a stock buyback program in place. Otherwise, if you are ambitious, you could call the Investor Relations employee and ask them directly. Hence Jason Kelly's suggestion of writing down the phone number!

EPS Rank: This metric compares the EPS of the company you are watching with other companies. Jason Kelly states that the Investor’s Business Daily is the place to go to grab the EPS ranking from 1-99 with 99 being the best. You can access the ranking by typing in your stock symbol and looking for the EPS ranking that way. Growth investors are looking for a ranking of 85 or better. Value investors have no particular ranking in mind but are rather looking for a company that is a good value but maybe its earnings have faltered as of late.

Relative Price Strength Rank: Investor’s Business Daily also provides this information. This metric solely looks at the stock’s price performance in the last year. A ranking of 80 for example means that the stock’s price has outperformed 80% of all other stocks. This means the price has gone up significantly which is important for growth investors who are looking for stocks that are gathering momentum upwards.

Five-year sales and earnings gain: We continue to move into ratios we have never considered before on the site. With any company we are looking to invest in, strong sales and earnings are key factors to consider. This ratio looks at how the sales and earnings growth has been in the past five years. Jason Kelly likes to see 15% growth in this area for small companies, at least, and at least 10% for larger companies. Anything less suggests the growth trajectory is really quite weak and that doesn’t bode well for your investment in the company making you any money. It appears you will have to go to Value Line for this information. I will update this page if I find another site that has this information as well. On Value Line, you will find this info on the left hand side of a page (once you put the stock symbol in to the top and pull up a particular stock page). It is under Annual Rates of Change on the left-hand side. You are looking for the Earnings Tab and for what the current five-year growth rate under the current year.

Five- year price appreciation: This measures how the stock price has changed over the past five years. To calculate, you take the current price and divide it by the high price from five years ago. You then subtract 1 to get the difference in percentage change. For example, $50/$30= 1.67. Then subtract 1 to get 0.67 which means 67%. Value investors like to see a price that has gone down from five years ago while growth investors want to see an increase or a stock on the rise. You can get these figures off Value Line. It is a bit tricky to find but I went to Charting, then to Show Data and from there you can use the arrow tabs to find out the high price five years ago.

Next week we will work on the last of the ratios.

**Top photo courtesy of Hans M on Unsplash