First let me say that these are not recommendations to buy these stocks. I use this watch list as a way to track potential investment opportunities. Just because the current price is below the target buy price, doesn’t mean I’ll buy the share it just means that I’ll consider buying it. This usually means doing some more research and then deciding to buy or not.
When I complete a dividend dividend stock analysis (DSA) I like to determine a price that I would be willing to buy the stock at: the target buy price. I usually only update these target prices once a year, which is why it is important to pay attention to date the DSA was completed as things may have changed since I first completed the DSA. For instance say there was a 2:1 stock split and because my target price hasn’t been cut in half to match the split, it looks like the current price is way below my target buy price. (Contact me if you see a situation like this.) This example highlights the importance of doing your own research before buying a stock.
My personal watch list has more stocks than shown below because I don’t want to show a target buy price without a DSA. I want readers to understand a bit about the company and how I came up with the target buy price before posting the target. I think it is irresponsible to post a target buy price without an explanation behind it. This means that as I continue to post DSAs for companies the list will grow.
For the full screen watch-list (Google Spreadsheet) use this link.
How I calculate target buy prices:
I believe it’s important to purchase stocks at a reasonable to cheap price. This helps preserve your capital and will generally result in better returns. Rather than rely on just one method I like to use a variety of different methods. Using this approach allows me better identify reasonable targets. I find that one measure could point to a cheap price, but another measure may not. For instance Price to Earnings (P/E) may point to a cheap price, but the Price to Book (P/B) may point to an expensive stock. By using a variety of different tests you get a better idea if something is truly value priced.
I use the lowest price for the fiscal year to determine the 5 year, 10 year and 2008-2011 fiscal averages. Investors commonly use 5 and 10 year averages, but I like to include the fiscal 2008 to 2011 low price average as I feel that the low prices during this era represent a reasonably low stock price. During 2008 and 2009 most companies experienced a really low price due to the global financial crisis followed by increases in 2010 and 2011.
I use 6 main ratios to determine a fair price: Yield, Discount/Premium of the low price compared to the Graham Price, P/E, P/B, P/Sales and P/Cash flow. I like to look at both EPS and EPS from continuing operations so it ends up being a total of 8 ratios as the Graham Price an P/E both use EPS. Sometimes I’m not able to use all 8 ratios, due to limited financial data, but I do my best.
Calculation Note: I compare the low price to the calculated Graham Price (GP) to determine the discount or premium to GP. I calculate the GP using the square root of (22.5 x Book Value x EPS*). For EPS in this formula I use the lesser of the 3 year EPS average or the current EPS. If the GP calculated is negative then I set the Discount/Premium to GP as -25%. The other ratios are calculated in the normal fashion.
The majority of my valuation methods use historical averages, so it’s important that you expect the company to continue to operate in a similar manner to its past. If you expect the company to change then these valuations become less useful.
I use the averages to determine a target buy price. Using these averages will create a lot of different target prices, so I like to compare this strategy to previous years. Ideally what I’m looking for is a strategy that would have given me a chance to buy the stock in two to three years in the past 10 years. It’s not always possible to test my strategy back 10 years, due to limited financial information, but I do my best.
I would say that this strategy is quite conservative and as a result I don’t buy stocks very often. I’m usually waiting around for a few months before I’m able to buy something. Sometimes my target price is too conservative, so much so, that occasionally I have to revise my target up. I like to use the dividend yield as a way to gauge if my targets are realistic or not. For instance if my target price would result in a dividend yield that has never been paid by the company, then odds are the price isn’t going to come down that low. In these cases I adjust my target to a more realistic value. In rare instances I’ll adjust my target down further.
I am a blogger and not a financial expert. These writings are my own opinions and should not be considered financial advice. Always perform your own due diligence before purchasing a stock. I mention target buy prices, but this is not a recommendation to buy this stock, it is just a target price I use for my own personal investing that I have chosen to share.
You should also be aware of the date that the last DSA was completed. If the last DSA was awhile ago, then the target buy price may no longer be relevant as some recent company developments may have changed the business fundamentals.