Friday, January 8, 2016

Evaluate stocks for beginners

Today's market is risky. Do not buy stocks. However, it is a good time to learn investing. When the sea is stormy, do not go out to fish but spend your time in mending fish net.


This chapter and the next are NOT for beginners but for couch potatoes who have more investing knowledge. I recommend beginners to buy ETFs only such as SPY.

Many stocks have already been researched. Most are available to us free of charge. I start with five free sites as described in the link, followed by Blue Chip Growth and my simple scoring system. If you are a customer of Fidelity, try out their Analyst Opinions.

Several sources

The popular ones are Morningstar, Value Line, The Street and Zacks. If they are not available free, check out whether they are available from your library.

Blue Chip Growth

Click here for Blue Chip Growth which is free currently for stock analysis. To illustrate, enter IBM as the stock symbol. As of 2/2013, it gives C for a Total Grade, D for Quantity Grade and B for Fundamental Grade. The Total Grade is a composite grade of other grades. If the Total Grade and the Fundamental Grade are A or B, the stock most likely is good.

A simple scoring system

Bring up and then enter the stock symbol.

Forward P/E1
Between 2.5 and 12.5,    Score   = 2
> 50 or < 0, Score = -1

< 12,    Score   = 1
>30 or < 0,  Score = -1

< 0.8,   Score   = 1
< 0,              Score = -1

P/ B1
< 1,      Score   = 1
< 0,              Score = -1

Compare quarter to quarter of last year

Sales Q/Q
> 15%,    Score = 1
< 0,             Score = -1

> 20% ,   Score = 1
< 0,             Score = -1

Grand Score

Stock Symbol  Date2
Current Price

1                   Negative values for Sales (due to accounting adjustments), Equity and Book are possible but not likely.
2                   The last row is for your information only. SPY is used to measure whether it will beat the market by comparing the return of this stock to the return of SPY.

The Score

Score each metric and sum up all the scores giving the Grand Score. If the Grand Score is 3, the stock passes this scoring system. Even if it is a 2, it still deserves further analysis if you have time. You may want to add scores from other vendors. To illustrate using Blue Chip Growth, add 1 for score A and -1 for score F.

Other sources

If you have other sources (most require subscription or being a customer), skip the stocks with one of the failing grades. Ignore them if there is new positive development such as increased insider purchases.

Analysts’ Opinions
< 4
< 50
Value Line
Proj. 3-5 yr. return. Also its composite rating
< 3%
Vector Vest
< 0.7

Visit your local library to see whether they are available. Most likely, IBD and Value Line are. IBD’s Relative Pricing is useful too. Vector Vest has free analysis for a limited number of stocks.

Very basic advices for beginners

They are Market Cap (capitalization), Debt/Equity and P/E. For beginners, stick with U.S. stocks with Market Cap greater than 800 M (million), Debt/Equity less than .25 (25%) except for debt-intensive industries such as utilities and airlines and P/E between 5 to 20. These metrics are available from

Do not have more than 20% of your portfolio in one stock and do not have more than 30% of your portfolio in one sector.

Do not buy stocks if they are not A or B in both the composite grade and the fundamental grade from Blue Chip Growth.

For more conservative investors, use beta (available from Yahoo!Finance) less than 1. Beta of 1 represents the market (S&P 500 index). For example, a stock with beta 1.5 statistically fluctuates more than 50% of the market. 

Try virtual trading (i.e. trade stocks without real money) to check out your strategy and your skill in trading stocks. If your broker does not provide one, use a spreadsheet to record your trades or


The above is from my book "Complete the Art of Investing" from Amazon.


  1. Ugh...I tried this on the stocks: ADT, GM, F, being solid stocks (supposedly) and the ETFs that hold the mentioned in opinion only about not good timing to buy stocks, wait and repair the fishing net....

    So no to investments now timing?

  2. Or....maybe wait until after 1st quarter earnings are reported for companies....

  3. It may be a good time for testing, not investing as the market is risky. Try out the market timing on the Beginner book which tells when to exit and return to the market. When the entire market plunges, the good stocks plunge too.