1. Oklahoma Securities Commission
INTRODUCTION TO
STOCK RESEARCH, part 2
by Matt Ingram
Invest Ed®
All Rights Reserved
Oklahoma Securities Commission
July 2016

2. Warren Buffett on Stocks
My favorite holding period is forever.
Leave yourself an enormous margin of safety. You build a bridge that 30,000-pound trucks can go across, and then you drive 10,000 pound trucks across it.
Forget what you think the stock market will do; focus on what the business will do over time.
There are no called strikes in investing; you don’t have to swing at every opportunity.

3. So What Numbers Matter the Most?
There is no one number that determines the best stocks.
Some numbers matter more than others.
Growth rates relative to the P/E
Profitability (margins, ROE)
What about the number of competitors and barriers to entry?

4. Numbers, cont’d.
P/E
PEG ratio
Earnings expectations

5. Chicken A brown chicken lays one egg per week, $10 per chicken.
A tan chicken lays 2 eggs per
week, $12 per chicken.
Which chicken is the better buy?

6. Price Earnings Ratio Price-earnings ratio (P/E ratio)
Price Earnings Ratio
Price-earnings ratio (P/E ratio)
current stock price divided by annual earnings per share (EPS)
High P/E stocks are often referred to as growth stocks while low P/E stocks are often referred to as value stocks.
If you buy a high P/E stock, you will be disappointed if it grows slowly.
If you buy a low P/E stock, the market already expects low growth—it’s zero or negative growth you have to look out for!

7. Financial Ratios
We need to look on the Balance Sheet and Income Statement for this stuff.
Net Profit margin = Net Income
Sales
Price-earnings (P/E) = Stock Price
EPS

8. PE/G Ratio
In general, the P/E ratio is higher for a company with a higher growth rate.
Thus using just the P/E ratio would make high-growth companies overvalued relative to others.
It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio (the PEG ratio) is better for comparing companies with different growth rates.

9. More on the PE/G Ratio We should use future growth rates.
A PEG ratio equal to 1 is a fairly valued firm.
A PEG ratio less than 1 is an undervalued firm.
A PEG ratio greater than 1 is an overvalued firm.
PEG Ratio = P/E (Price/Earnings)
Annual Expected Growth Rate

10. Class Activity
You have been given a name of a publicly traded company.
Has this stock been a winner or loser? (versus the market)
What is the profit margin?
What does it sell?
What do analysts expect for growth?
How does the P/E compare to its expected growth rate?

11. Group Presentation Discuss as a group and select a stock.
10-15 minute presentation (PowerPoint)
Pretend you are recommending a stock to a fund committee.
Why should the fund buy this stock?
Back up your recommendation with analysis.
Answer questions about the company.

12. Things You Might Include in Your Group Presentation
Ticker symbol, location of company, how long in business, industry, competitors, products, innovations
Growth rates, ROE, profit margin, P/E
Expectations about growth, dividends
Use the Internet as a resource; visit corporate homepage.
What are the risks?
Be creative!