Real value stocks can be a fine investment, offering the investor both generous dividends and rising stock prices in the future.
Some stock tips that look like bargains turn out to be losers, not value stocks.
Here's a simple example of a stock tip I was given by a broker years ago.
He suggested that a stock, JKL, was a value stock, cheap.
I'll give you the numbers, the investment basics, then his reasoning.
After that we look at some investing basics as I share some valuable stock tips with you.
JKL was selling at $5, at the bottom of its 12-month trading range ($50 to $5).
Dividend yield was 10%, and the P-E ratio was at 6 times earnings.
According to the broker, JKL was a value stock, a real bargain if you look at the investment basics.
His reasoning follows.
The price of $5 is low, it sold for $50 less than a year ago.
You want to buy low and sell high.
JKL pays a dividend yield of 10% a year vs.
2% or so for stocks in general.
The stock sells at only 6 times earning per share.
Since the market in general was selling at 15 times earnings, JKL was a value stock and a bargain.
As a new investor I decided to "wait and see".
A few months later all of JKL's numbers changed.
The stock was at $1, there was no dividend yield, and no P-E ratio.
What happened? Investment basics like dividend yield and the P-E ratio do not lie, but you must understand what they really tell you.
It is important to understand investing basics as well when investing in stocks.
In the case of JKL obviously something went wrong in paradise.
The to-good-to-be-true numbers would have served as a warning to those who understand investing basics.
Here's an explanation and some stock tips to help you avoid losers like JKL.
A stock selling cheap near its one-year low might look tempting, but more than likely the company is in trouble.
The investing basics are this: investors bid down a stock's price when they (on balance) see problems.
Investor tip: take a wait and see approach.
If and when the stock starts to move up on heavy volume it might be a buying opportunity.
Other investors are buying because they see value.
Dividend yield is based on past dividend payments.
In other words, you could enjoy a 10% yield in JKL at $5, if they pay the dividend indicated and paid previously.
In our example JKL stopped paying dividends because they were having serious financial problems.
Look before you leap.
The P-E ratio is derived by simply dividing the stock price per share by the company's earnings per share.
It tells you how expensive or cheap a stock's price is in relation to profits or earnings.
A low P-E implies that a stock is selling cheap, a bargain.
The problem is that earnings per share in the calculation are based on the past 12 months.
Future earnings can improve, or they can turn to losses.
When JKL was selling at $5, the last 12-month earnings were almost $1 per share.
JKL had fallen to $5 because investors sold the stock in anticipation of poor future earnings.
They continued to sell the stock off as JKL reported massive losses.
With the stock at $1 there was no P-E ratio, because there was no E, earnings.
Don't get too excited when you see a real low P-E ratio.
What looks like a value stock can in reality be a company in trouble.
Once again, wait and see what happens to the stock price.
As a final stock tip, don't rush in to buy a stock when it is falling.
Stocks fall for a reason.
The smart investor pays attention to stock price movements.
A stock on the way down is seldom a bargain.
That's investing basics.