Stock purchasing: Fair or Undervalue

[stewardinlife]

Hello,

I just recently joined the forum, and just starting out with DGI, and I am planning to make purchases for stock through a broker. And I have a list, and want to choose few from them. I am probably going to be using an initial seed of 3K, and add 1K every month going forward.

My question is as I am learning that it is better to buy when the stock is "fair" or "undervalued" to get the most of it. Also, I understand a Morningstar rating of 3 or 4 stars is good. Am I understanding it right? Is there a place/tool where one can go to, to determine this criteria before purchasing?

Here is the list I have (I'll be using the initial money to collect few from these):

Johnson & Johnson (JNJ)
Wal-Mart (WMT)
Altria Group Inc (MO)
Aflac Incorporated (AFL)
ConocoPhillips (COP)
Chevron Corporation (CVX)
Procter & Gamble (PG),
Philip Morris International Inc. (PM)
Realty Income Corp. (O)
Kinder Morgan Inc. (KMI)
Royal Dutch Shell (RDS.B)
KO
PEP
XEL, D, WEC
RTN, CL, CLX
TROW
MSFT

Thank you for your feedback.

Paul

[EricL]

Chuck Carnevale had a nice article on Seeking Alpha today looking at some companies trading at reasonable valuations and also plenty of screenshots of FAST Graphs where you can see how the tool works.

I've been a FAST Graphs subscriber for a couple years now and for $9.95 a month its a great low-cost way to quickly check out potential investments.

[rapidacid]

Paul,

I'd suggest taking the time to read through this series of articles:

http://www.dividendgrowthinvestor.com/20...estor.html

[Kerim]

And keep in mind that "overvalued," fairly valued," and "undervalued" are ultimately subjective terms. If there was a single agreed-upon way to determine actual value, there would be no stock market. You'll need to develop a set of criteria that you apply, and get comfortable that you'll never know for sure, especially in the short term.

[cannew]

No problem with your list or seeking to buy when the stock may be fairly valued. However, I would keep in mind your possible trading costs. I like to keep my trading costs less than 0.25%

A $9.95 fee on $3,000 is 0.33%, so your fee would have to be less than $7.95 to be 0.25%

With only $1,000 to invest, even a $4.95 fee would cost you 0.50%

Fee do make a difference so try to keep them a small as possible.

[DividendDragon]

(04-30-2015, 01:55 PM)Kerim Wrote: And keep in mind that "overvalued," fairly valued," and "undervalued" are ultimately subjective terms. If there was a single agreed-upon way to determine actual value, there would be no stock market. You'll need to develop a set of criteria that you apply, and get comfortable that you'll never know for sure, especially in the short term.

Totally agree with Kerim here - they're all subjective terms.

For example I'd be reluctant to buy a stock priced at 30 p/e if it's growth potential was limited but I just bought into ABF plc at a 30 p/e, Call me crazy but I think it's rapid growth justifies the price.

Looking at JNJ at the moment and it looks fair value from my calculations. What's wrong with paying fair price for a stock that I can buy and hold forever?

I've learnt many lessons (even in my short time investing) about 'waiting' for stocks to become 'undervalued' or to see their p/e's lower only to watch them rocket. Visa is one such example.

Personally I don't even have a problem buying a good quality dividend paying stock that looks after it's shareholders at slightly over fair value.

[stewardinlife]

Thanks guys. Great info. I am going through all the info. you have given me.

[rapidacid]

(04-30-2015, 04:17 PM)Lewys120 Wrote: Personally I don't even have a problem buying a good quality dividend paying stock that looks after it's shareholders at slightly over fair value.

Totally agree.

[stewardinlife]

(04-30-2015, 01:51 PM)rapidacid Wrote: Paul,

I'd suggest taking the time to read through this series of articles:

http://www.dividendgrowthinvestor.com/20...estor.html

rapidacid, I went through the link -- it's very helpful.

So, based on the recommendations there is a section in the entry criteria where he says: "The second criterion includes removing companies which trade at a price/earnings ratio of over 20. Even the best dividend paying companies such as Coca-Cola (KO) or Procter & Gamble (PG) are not worth owning at any price..."

Link: Entry Criteria

I checked KO and the P/E is over 25 currently -- So would you say it is okay to pass on purchasing KO presently, and invest in other ones. And maybe once KO's P/E does below 20, consider purchasing?

Thanks.
Paul

[EricL]

(04-30-2015, 06:04 PM)stewardinlife Wrote: I checked KO and the P/E is over 25 currently -- So would you say it is okay to pass on purchasing KO presently, and invest in other ones. And maybe once KO's P/E does below 20, consider purchasing?

Thanks.
Paul

KO must have had some one-time adjustments to earnings that is skewing your PE number. KO is expected to make $2 per share in 2015 and is trading right around $40 with a 3.25% yield. I would consider it at fair value now, and the 3.25% yield is higher than you will normally see for the company.

[rapidacid]

(04-30-2015, 06:04 PM)stewardinlife Wrote: I checked KO and the P/E is over 25 currently -- So would you say it is okay to pass on purchasing KO presently, and invest in other ones. And maybe once KO's P/E does below 20, consider purchasing?

Paul,

20x earnings is very popular with dividend growth investors but it's still just a guideline. At the end of the day you still need to trade according to principals that you're comfortable with.

Like Llewys + I said above, there's a large handful of companies, maybe 20 or 25, that whenever I buy I'm completely looking forward to holding onto them forever, and I recognize that today's Price and today's Earnings are totally transitory. Paying 22X or 24X for today's earnings becomes pretty irrelevant when I'm still holding the company 10 years later and I actually ended up paying 5X future earnings.

It's not like we're investing in Little Mikey's Lemonade Stand here. These are historical, battle worn companies that know how to survive, how to make a profit, how to reduce share count, how to reward long term investors with yearly dividend raises.

KO, from your example, is going to be around in 50 years from now. You can hitch a ride at today's P/E or next years, or the year after that, it's probably not going to make that much of a difference. But if you jump on KO today, it's pretty much set in stone that your dividends received are going to be about 17% higher than they would be if you wait two years.

That said, if you look around there's *always* going to be quality companies currently priced at 20X or below.

To name a few: ROK, BAX, UNP, BA, GE, DOW, DEO, PM, JNJ, LMT, PH, QCOM, UTX, NSC, TUP, HRS, AAPL, RTN, CALM, GPS, WFC, BNS, ACE, XOM, CVX, STX, BBL, ARLP

[stewardinlife]

(05-01-2015, 06:51 AM)rapidacid Wrote:

(04-30-2015, 06:04 PM)stewardinlife Wrote: I checked KO and the P/E is over 25 currently -- So would you say it is okay to pass on purchasing KO presently, and invest in other ones. And maybe once KO's P/E does below 20, consider purchasing?

Paul,

20x earnings is very popular with dividend growth investors but it's still just a guideline. At the end of the day you still need to trade according to principals that you're comfortable with.

Like Llewys + I said above, there's a large handful of companies, maybe 20 or 25, that whenever I buy I'm completely looking forward to holding onto them forever, and I recognize that today's Price and today's Earnings are totally transitory. Paying 22X or 24X for today's earnings becomes pretty irrelevant when I'm still holding the company 10 years later and I actually ended up paying 5X future earnings.

It's not like we're investing in Little Mikey's Lemonade Stand here. These are historical, battle worn companies that know how to survive, how to make a profit, how to reduce share count, how to reward long term investors with yearly dividend raises.

KO, from your example, is going to be around in 50 years from now. You can hitch a ride at today's P/E or next years, or the year after that, it's probably not going to make that much of a difference. But if you jump on KO today, it's pretty much set in stone that your dividends received are going to be about 17% higher than they would be if you wait two years.

That said, if you look around there's *always* going to be quality companies currently priced at 20X or below.

To name a few: ROK, BAX, UNP, BA, GE, DOW, DEO, PM, JNJ, LMT, PH, QCOM, UTX, NSC, TUP, HRS, AAPL, RTN, CALM, GPS, WFC, BNS, ACE, XOM, CVX, STX, BBL, ARLP

Thanks for this rapidacid. It helps me a ton as I read through the insight you guys share. Thanks for settling the KO question.