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7 Ways To Gauge Growth And Evaluate Value

Growth and value are cornerstones of fundamental analysis. Here we explore some of the most popular methods of gauging a company’s growth and a stock’s value. “Growth” and “value” are thought of as two very significant metrics in the world of fundamental analysis , two things that can cause a trader to buy, sell, or ignore. But what is growth? And what is value? These are words we hear and read every day, and that most people think they can easily define. You might think that a musician’s songwriting has grown, or you might give (or get) what you believe to be valuable advice. But in both of these instances, growth and value are subjective-matters of perception. But when it comes to the markets, growth and value are not so subjective. Rather, they are things that, for the most part, can be measured or weighed. Growth refers to a company’s performance, whereas value applies to its stock price. Moreover, there are very specific ways of gauging growth and value. Here we’ll discuss seven popular ways of doing just that. GROWTH: Past, Present, and Future. In simple terms, growth describes earnings. There are three different ways of looking at those earnings: past, present, and future. 1. The Past: Historical Growth As the common disclaimer goes, “past performance is not indicative of future results.” And as true as that may be, it doesn’t mean that it’s not good to know a company’s past. With that in mind, many traders and investors look at a company’s historical growth, which is really just a catchy way of describing the company’s annualized earnings in the past. When there exists a consistent increase in annualized earnings, there exists historical growth. 2. The Present: Free Cash Flow When it comes to measuring growth (or growth potential), some traders and investors like to follow the cash or, more specifically, the free cash flow. Free cash flow is, put simply, the difference between cash in and cash out. When there’s significantly more cash coming in, the free cash flow is strong. When the cash coming in is close to (or less than) the cash going out, the free cash flow is weak. Companies with strong free cash flow may have capital for R&D, acquisitions, etc. In other words, things that may very well help it grow. 3. The Future: Projected Growth If you’re going to look back, you may also want to look ahead. But where a company’s historical growth can be calculated by looking at their past performance data, a company’s projected growth is determined by analysts who look at a variety of information, including a company’s current and recent finances, as well as its stated objectives and outlooks. VALUE: Price Comparisons Growth places a heavy emphasis on, of course, growing. Value, however, does not. (After all, not every company aims to keep expanding, or even growing, its earnings. Some companies, whether they want to or not, just stay relatively consistent.) Value looks at the price of the company’s stock relative to the performance of the company, regardless of whether or not the performance is improving. Here are four popular ways of gauging the value of a stock. 1. Price to Earnings Ratio (P/E) This metric takes the stock’s price and compares it to the company’s earnings. It does that by dividing the stock price by the earnings per share (EPS). A “normal” P/E ratio is typically 20-25 times higher than the EPS. So a stock with a “normal” P/E ratio may be trading at $20/share, and have an EPS of $1/share. In this case, the P/E ratio is 20. Perhaps you can see where this is going: If a company is earning more money per share, but it’s not reflected in the stock price, the P/E ratio can be low (lower than 20), and this can suggest that a stock is undervalued (and thus, may be a good buy). For example, remember the example stock that was trading at $20? Now, let’s say its EPS is $5. The P/E ratio for that stock would be 4, which may suggest the stock price should go up to reach normal range. Or, consider the reverse: the stock is trading at $20, but the company is only earning $0.50/share. Now it has a P/E ratio of 40, which suggests the stock may be overvalued. 2. Price to Book Ratio (P/BV) To arrive at this measurement, you have to consider a hypothetical, which is to say, you have to know its book value. A company’s book value is the theoretical amount that every share would be worth if the company were to be completely liquidated. That number is then compared to the actual share price of the company. The result is the P/BV, or Price to Book Ratio. If the ratio is low (meaning the price is lower than the book value), the stock may be undervalued. 3. Price to Sales Ratio (P/S) How does a company make money? One major way is by selling, some in a traditional retail sense, and others in a more abstract sense (by selling its ideas or services). Regardless, since sales are often a significant source of money for a company, many traders and investors like to compare a company’s sales to its stock price. Here they do this by actually breaking down the sales to a per-share amount. With this figure, they formulate the Price to Sales Ratio. Like the above two ratios, a comparatively low stock price means a low ratio, which may be indicative of an undervalued stock. 4. Dividend Yield and Historical Rate of Dividend Growth Since dividends are cash payouts that companies pay their shareholders, dividends can be an important thing to many traders and investors. For one thing, dividends can allow a shareholder to earn income without actually selling the stock. And for another, the amount of dividends can be a good indicator of the health of the company. To take a deeper look, many users of fundamental analysis will look at a company’s dividend payment history. Consistent and increasing dividends may be a sign of a strong company, and a stock price that has not grown along with those dividends may be a sign of an undervalued stock. So, in the end, when you think about growth and value, think about these seven points. For growth, there’s the past, the present, and the future. And when it comes to value, do price comparisons-against earnings, against book value, against sales, and against dividend yields. Disclosures Schwab does not recommend the use of technical analysis as a sole means of investment research. The information here is for general informational purposes only and should not be considered an individualized recommendation or endorsement of any particular security, chart pattern or investment strategy. Past performance is no guarantee of future results. ©2015 Charles Schwab & Co., Inc. ( Member SIPC ) All rights reserved. (0614-4161)

Best Stock ETF/Fund Categories For Future Gains

I’ll start with the good news. The overall market, including nearly all subcategories of ETFs/funds, especially international ones, is no longer at what I previously felt was a dangerously high level. One year of relatively flat, or even negative returns, have helped restore fund performance to more sustainable levels. (However, more traditional measures of stock valuation, such as forward-looking price to earnings ratios remain elevated – over 17, vs. the long-term average of about 14 for the S&P 500, according to bloomberg.com). I look at both stock valuations and on-going momentum as important yardsticks in judging the relative attractiveness of a particular stock fund and its overall category. While over- vs. under-valuation tends to arise as a result of long-term factors, momentum (relatively positive or negative) can be regarded as more short-term in nature. Given this, I place somewhat more importance on valuation issues than momentum in determining which stock fund categories look the most and least promising over the next several years at any given point. Now for the not-so-good news: Unfortunately, most stock ETF/fund categories, while not appearing excessively overvalued, don’t appear undervalued either. Of course, any time stocks are undervalued, they can be assumed to have much better prospects than if they are overvalued, or even fairly valued. At the same time, virtually every category of stocks has lost the momentum they exhibited in early 2015. My most favored and least favored stock category selection procedures do not employ the use of economic variables, such as GDP, level of interest rates, etc. However, since stocks often become over- vs. under-valued or momentum-impacted based on investors’ reactions to such data, my procedures do, in a sense, indirectly reflect such variables. Using my proprietary selection procedures has resulted in my specific fund selections outperforming an equivalently composed portfolio of benchmark index funds over the most recently available 3 year period, 10.9 vs. 9.6%, as well as the entire 5 year period, 11.1 vs. 9.6%. (Data annualized thru Sept. 30, 2015; see here to review the data. Note: One, 3, and 5 year data that include the just completed 4th quarter will be published on my website during the 2nd week of Jan.) Based on current valuation and momentum factors, the best that can be said is that the majority of fund categories are what I consider to be HOLDs. There are very few categories that exhibit the characteristics I consider as meriting a BUY designation, along with a few REDUCE/SELLs; for specifics, see the tables below. All categories designated as HOLDs are expected to be worth holding over the next 3 to 5 years, generating decent returns if held over the entire period. Here, then, are my current category recommendations for the nine most recognized U.S. ETF/fund categories starting with those with the most positive longer-term prospects near the top to those with least promising prospects near the bottom: Fund Category Recommendation Large Growth HOLD Mid-Cap Growth HOLD Large Blend HOLD Small Growth HOLD Large Value HOLD Small Value REDUCE/SELL Mid-Cap Value REDUCE/SELL Mid-Cap Blend REDUCE/SELL Small Blend REDUCE/SELL Note that none of the above basic fund categories show up as having particularly strong prospects over the next several years according to my research. While not currently overvalued, each of these categories has run up considerably over nearly the last 7 years, limiting, in my view, their future prospects. International Funds The following table shows my current category recommendations for five international fund categories starting with those with the most positive longer-term prospects near the top down to those with least promising prospects: Fund Category Recommendation Emerging Markets HOLD Japan HOLD Europe HOLD Diversified Pacific/Asia HOLD Diversified International HOLD My research shows that the first 4 out of the 5 international stock fund categories shown above show better prospects than any of the above U.S. fund categories. International stocks have had their problems in recent years, but looking ahead, I believe that prospects, including the economic fundamentals not directly considered in the above recommendations, will improve going forward. Sector Funds While I am not a big advocate of sector funds/ETFs, I present this data for those relatively aggressive investors who might be. Note that because sector funds can be highly volatile and relatively unpredictable, even when considered as longer-term investments, there is an above average risk that any sector forecasts, including mine, will not turn out as expected. Additionally, while you may not choose to invest in sector funds at all, you may find that the non-sector funds you do invest in (or are considering) can have a sizeable proportion of their holdings within one or more sectors. To learn what the sector breakdown is, enter the fund symbol at morningstar.com and look for “Top Sectors.” If the fund overweighs sectors that show up near the lower end in the table below, you may want to factor in this information when considering your ownership of this fund. For example, the PRIMECAP Odyssey Growth Fund (MUTF: POGRX ), a fund highly recommended by Morningstar (see my Dec. Newsletter ), has about 36% of its investments in the Health sector. Since this sector is one that my research does consider highly overvalued and a REDUCE/SELL sector, one might want to be cautious about owning this fund. The following table shows my current recommendations for 14 sector fund categories starting with those with the most positive longer-term prospects at the top to those with least promising prospects near the bottom: Fund Category Recommendation Precious Metals BUY Natural Resources BUY Energy BUY Commodities BUY Technology HOLD Communications HOLD Consumer Defensive (Consumer Staples) HOLD Consumer Cyclical (Consumer Discretionary) HOLD Global Real Estate HOLD Real Estate (U.S.) HOLD Financials HOLD Health REDUCE/SELL Industrials REDUCE/SELL Utilities REDUCE/SELL

Every Single VIX ETP (Long And Short) Lost Money In 2015

Just one month ago, in The Current VIX ETP Landscape , I plotted all twenty-four VIX exchange-traded products with respect to leverage and maturity, using leverage on the Y-axis and maturity on the X-axis. I also included a half dozen VIX strategy ETPs that have no easily discernable point on the leverage-maturity grid. Depending on how finely you wish to split hairs, these twenty-four ETPs cover approximately seventeen unique ways to trade volatility long and short, across various maturities and according to a wide variety of strategic approaches. The big story is that in 2015, not one of those VIX ETPs was profitable. In fact, the mean VIX ETP lost over 21% for the year. This means that in those instances where there are long and inverse pairs – notably the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ) and the V elocityShares Daily Inverse VIX Short-Term ETN (NASDAQ: XIV ) as well as the iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA: VXZ ) and the VelocityShares Daily Inverse VIX Medium-Term ETN (NASDAQ: ZIV ) – both the long and short version of the same volatility trading idea lost money. This all happened in a year in which the VIX fell a mere 5.2% from the beginning to the end of the year. While contango was a factor during the course of the year, contango affecting the front month and second month VIX futures averaged a relatively mild 4.3% per month during the year, while contango between the fourth month and seventh month was slightly above average at 1.6% per month. The biggest culprit affecting the declines were the huge moves in volatility, with three one-day VIX spikes of greater than 30% occurring in the space of two months. The large volatility spikes had a considerable impact on end-of-day rebalancing, leading to volatility compounding price decay. One last technical note, with respect to the AccuShares Spot CBOE VIX Up Shares ETF (NASDAQ: VXUP ) and the AccuShares Spot CBOE VIX Down Class Shares ETF (NASDAQ: VXDN ) products, I have yet to see AccuShares or anyone else attempt to calculate the performance of these products for 2015. Given the chaos created by regular, special and corrective distributions, in addition to reverse splits and stock dividends, calculating performance for these two ETPs is not a project I have the inclination to tackle right now. That being said, until I see the calculations, I cannot be 100% sure that VXUP had a losing year in 2015. Consequently, in the event that VXUP did post a gain, this would be a good time for AccuShares to post some performance data and claim at least one public relations victory in this space. To the broader audience, if you happen to be sitting on an idea for a VIX or volatility-based ETP that would have been a winner in 2015, this is an interesting time to consider moving forward with that idea. Looking ahead, I will have a lot more to say about VIX ETP strategies, VIX ETP performance and related subject going forward. [source(s): VIX and More]