Stock purchasing: Fair or Undervalue

[KenBob]

As an income investor, I am interested in not overpaying for a stock. Either undervalued or fair valued is fine. It is more important to buy an undervalued stock if you are a value investor with a plan to sell the stock when it rises in price to the point where it is no longer undervalued.

As Kerim pointed out, valuation is the trick. I have struggled with this for awhile and have settled on two valuation metrics. The first metric is the forward price to earnings ratio compared to the market forward price to earnings ratio (which can be found on The Wall Street Journal website). The second metric is how does the stock adjusted yield (a 5 year extrapolation of the current yield based on forward earning growth rate minus inflation divided by the price plus debt per share) compare to the corporate bond rate minus inflation (I use VCIT for the corporate bond rate). When a candidate stock has a valuation that meets or is better than both of these two metrics, I consider the stock a buy.

[rayray]

I would take it slow and not get overly rambunctious investing right off the bat, just in case there is some sort of correction in the near future. Read a lot and invest in baby steps making informed decisions with the intentions of holding for the long haul through the ups and downs of the market. Remember, it's not if there is a correction but when--it will happen. Too many investors set themselves up to fail expecting too much, slow and steady has been my approach for a few years and it's worked out well.

Having goals has helped me stay focused and keeps emotions at bay when investing. I like seeing a P/E under 20 with a 3% dividend, it doesn't mean I will invest but it catches my eye for further research.