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  1. #1
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    building a pool of potential companies

    The first step in choosing the right stocks is to build a pool of stocks you are interested in. This way when you do more in depth research you have eliminated a large number of companies before you started and have less work to do.

    Part of this is for diversification, you will want to invest in muliple companies so if one loses money you still are ahead overall, bigger companies are lower risk, but usually cost more. Depending on how much you are starting with you can build over time and invest in just one to start. I also recommend starting out with companies that are your long term goals first, then go short term.


    Find 10-20 companies that you use their products or know of their products. Then start eliminating ones that dont fit the criteria here or your orginal goals.


    The first elimination I would do is price, if you cant afford ten or more shares it is too expensive, this is because the dollar change you would need to make money plus the cost of your trading fee from your broker would be too high.

    The elimination for people just starting would be companies that are not profitable, even though this eliminates a lot of good buys, it lowers risk by a lot.

    At this point see how many companies your left with.

    Here is my starting list:

    Toyota
    Dell
    Microsoft
    Sprint
    Gap Clothes
    Wal-mart
    citi
    gamestop
    electronic arts
    yum foods(KFC, taco bell)

    and my eliminated list(assuming $500 per stock)
    yum food(YUM)
    gamestop(GME)
    Gap (GPS)
    Dell(DELL)
    Microsoft(MSFT)


    I am making the assumption to sell when it reaches its 52 week high, this may or may not be attainable on some or all of these, but its a decent strech goal, i probably would end up selling when i reach half to 2/3 of what i estimate the potential at.
    Last edited by darkangelism; 07-12-2008 at 08:42 PM.


  2. #2
    Join Date
    Dec 2004
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    Re: building a pool of potential companies

    I will now do individual analysis of the stocks from my previous post.

    YUM YUM BRANDS INC

    the first thing I will look at is the current price which is ~36 and compare it to the 52 week low and high and try and see where it is relative to it potential price here that is ~28 to ~42, so i would set my sell goal at around the 52 week high. If i bought $500 worth of stock I would have 13 shares and if it reached $42 i would have made $78 which is about 16% which is a reasonable return if it reaches that in the next year. The next thing I look at is if it pays a dividend, and it does 2.2% so if i hold for a year and it gets to $42 a share then i will make an 18.2% return.

    Next I will look at its historical pricing, see if it was ever really high and if i could make way more by holding it longer, in this case no, it usually traded a lot lower in the $10-$20 range, because of the fact that it historically traded lower I will look at the price to sales ratio and price to earnings to see if its overvalued now. In this case the P/S is 1.56. If this is under 3 thats usually good. P/E is 19.49 and under 25 is considered good, so that is also fine. The next indicator I check is the PEG ratio which is a modified P/E which accounts for growth, a good PEG is 1 or lower, here it is 1.6, which is a little high, meaning that it probably wont have a upside much higher then my $42 goal.

    So overall it would be a good buy until it reaches $42 then sell, and would hopefully do that within 6 months to a year.


  3. #3
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    Re: building a pool of potential companies

    Gamestop GME


    Current price ~39

    low and high ~37-63 really good upside potential about 39%

    would be able to buy 12 shares($468) and make $288 if it got back to the high.

    no dividend, so return stays at 39.5%

    much lower historical pricing $10-$20

    P/S 0.83 good, P/E 20.16 good, PEG 0.76 good

    This is a definite buy.


  4. #4
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    Re: building a pool of potential companies

    Gap (GPS)

    ~15 current

    low- high ~15-22

    33 shares($495) potential $231 32%

    dividend 2.1% total return 34.1%

    historical pricing as $50 so significant upside.

    P/S 0.74 good P/E 13.05 great PEG 1.21 a bit high

    This would be a buy, probably can make 1 year high, but not longer term because of high PEG.


  5. #5
    Join Date
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    Re: building a pool of potential companies

    Dell (DELL)

    ~22 current price

    low-high ~18-30

    22 shares($484) potential $176 (27%)

    no dividend

    historical as high as $50, some upside

    P/S 0.72 good P/E 16.45 good PEG 1.12 a little high

    This would also be a buy. probably long term 5 years or more.


  6. #6
    Join Date
    Dec 2004
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    oklahoma
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    Re: building a pool of potential companies

    Microsoft (MSFT)

    current price ~25

    low-high ~23-37

    20 shares($500) potential $240 (33%)

    dividend 1.7% total return 34.7%

    historical high about $60 but probably wont get there again soon.

    P/S 4.09 high P/E 14.67 good PEG 1.18 a little high

    this would be a buy, but news and if they buy yahoo could affect them either up or down. same with windows 7 and a new xbox. short to medium term


  7. #7
    Join Date
    Dec 2004
    Location
    oklahoma
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    Re: building a pool of potential companies

    this next one isnt on my list, but i wanted to do some that are higher risk, so i am putting GM and Ford in this post.(legal disclosure:I own Ford in real life)

    General Motors(GM)

    current price ~9

    low-high ~9-42

    55 shares($495) potential $1815 (over 400%)

    no dividend

    historical high $90 only low gas or great new vehicles will save them, may go bankrupt.

    P/S 0.03 you cant get much better P/E none PEG none.

    this is a high risk high reward buy, could make a ton of money or could lose it all.


    Ford (F)

    current price ~5
    low high ~4-9

    100 shares($500) potential $400 (90%)

    historical $40 so has some upside but same issues as GM with gas and cars.

    P/S 0.06 amazing P/E none PEG none

    I own this and am hoping to sell at about $7 a share, the company is still 40% owned by ford family so likelihood of going ot of business or bought out is low.


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