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Picking Stocks Pennsylvania

If you have heard fund managers talk about investments, you know a great many use the top down approach. To learn more about the top down approach to investing in the stock market, read the following article.

Local Companies

Janney Montgomery Scott, LLC
(610) 797-1477
1 East Broad Street
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Edward Jones - Donna Hollenbeck
(814) 362-3915
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National Planning Corporation
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East Penn Services, LLC
(610) 807-0336
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Robinson & Robinson, Inc.
(610) 530-7763
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(610) 298-9991
2001 Market Street, Suite 4000
Philadelphia, PA

Raymond James & Associates
(877) 747-3311
3773 Corporate Parkway, Suite 180
Center Valley, PA

Gordon H. Dickinson & Co. Inc.
(610) 434-1742
1401 North Cedar Crest Boulevard, Suite 109
Allentown, PA

Morgan Stanley Smith Barney
(610) 559-0728
1550 Pond Road, Suite 202
Allentown, PA

A stock’s earnings yield is the inverse of its P/E ratio. So, a stock with a P/E ratio of 25 has an earnings yield of 4%, while a stock with a P/E ratio of 8 has an earnings yield of 12.5%. In this way, a low P/E stock is comparable to a high – yield bond.

Now, if these low P/E stocks had very unstable earnings or carried a great deal of debt, the spread between the long bond yield and the earnings yield of these stocks might be justified. However, many low P/E stocks actually have more stable earnings than their high multiple kin. Some do employ a great deal of debt. Still, within recent memory, one could find a stock with an earnings yield of 8 – 12%, a dividend yield of 3- 5%, and literally no debt, despite some of the lowest bond yields in half a century. This situation could only come about if investors shopped for their bonds without also considering stocks. This makes about as much sense as shopping for a van without also considering a car or truck.

All investments are ultimately cash to cash operations. As such, they should be judged by a single measure: the discounted value of their future cash flows. For this reason, a top down approach to investing is nonsensical. Starting your search by first deciding upon the form of security or the industry is like a general manager deciding upon a left handed or right handed pitcher before evaluating each individual player. In both cases, the choice is not merely hasty; it’s false. Even if pitching left handed is inherently more effective, the general manager is not comparing apples and oranges; he’s comparing pitchers. Whatever inherent advantage or disadvantage exists in a pitcher’s handedness can be reduced to an ultimate value (e.g., run value). For this reason, a pitcher’s handedness is merely one factor (among many) to be considered, not a binding choice to be made. The same is true of the form of security. It is neither more necessary nor more logical for an investor to prefer all bonds over all stocks (or all retailers over all banks) than it is for a general manager to prefer all lefties over all righties. You needn’t determine whether stocks or bonds are attractive; you need only determine whether a particular stock or bond is attractive. Likewise, you needn’t determine whether “the market” is undervalued or overvalued; you need only determine that a particular stock is undervalued. If you’re convinced it is, buy it – the market be damned!

Clearly, the most prudent approach to investing is to evaluate each individual security in relation to all others, and only to consider the form of security insofar as it affects each individual evaluation. A top down approach to investing is an unnecessary hindrance. Some very smart investors have imposed it upon themselves and overcome it; but, there is no need for you to do the same.

About the Author:

Geoff Gannon writes a daily value investing blog and produces a twice weekly (half hour) value investing podcast at www.gannononinvesting.com.

geoff@gannononinvesting.com

Article Source:

thePhantomWriters Article Submission Service

Featured Local Company

Janney Montgomery Scott, LLC

(610) 797-1477
1 East Broad Street
Bethlehem, PA

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