PurpAnd

Well it seems this was the natural progression. My posts on finance, investing, etc., have brought me to posting on individual stocks as I have received a few requests for tips/information on individual stocks.

I recognize that this topic may be a little uninteresting for some of you, so I promise I will mix it up in the next few posts.

The goal of this post is mainly to explain to readers what I consider when looking at a potential stock to buy. With this, I fully expect you will make suggestions on how I can further my analysis, as well as pose questions on my process. This is not intended to be a complete or extremely thorough stock analysis, but it gives you an idea of the kinds of ‘homework’ you can do when picking for your own portfolio.

The stock: MMM - 3M Company.

One of the first things I consider when looking for potential buys is the sector(s) I want to focus on. For example, in today’s market, it is pretty safe to assume that certain sectors (or kinds of businesses) will outperform some others. I’d expect over the next 12 months that car companies and retail stores will lag utilities and consumer staples/food product companies (think Johnson & Johnson, Kellogg, and Procter & Gamble).

In this especially tough market, I think diversity is an important element of a company’s business. So, I’ve chosen 3M, one of the more diverse conglomerates in the country.

Once I find a sector and stock I am comfortable with, I go to Yahoo Finance and start drilling down on my stock.

I look at Key Statistics, Competitors, Balance Sheet, and sometimes the Chart and Insider Transactions. Also important things to read are the recent news clips about the company. You don’t want to buy into the company if they’re facing some huge lawsuit, accounting problem, etc.

Key Statistics I focus on are:
- P/E Ratio - Price/Earnings ratio - this is the true price of the stock.
- Dividend Yield - how much will I be paid while holding this stock.
- Debt (a high debt/equity ratio is trouble in many cases)
And for shorter trade horizons, I’ll check the short ratio to see if it has a potential of being ’short squeezed’ up in the near term.

These numbers give me a basic feel for the stock.

When looking at competitors (for 3M this is Johnson & Johnson, Avery Dennison, and Dupont), I look at some key metrics:
- Quarterly Revenue Growth
- Gross & Operating Margins
- P/E
- PEG (this is a good one cuz it tells you how the price is compared to the expected growth. Any number near or below 1 is an indication it may be cheap; any number 2 or higher means expensive.)

3M is in the middle of the set of competitors with respect to growth and margins, but near the low end with respect to P/E and PEG. So the stock looks cheap compared to its competitors.

After looking at the competitors, I check the balance sheet to make sure asset appreciation has remained consistent/growing, and I look for the cash on hand and the assets versus liabilities. If the stock is not a speculative growth stock, assets better be higher than liabilities.

3M has had continued increases in assets over the past three years and total assets outweigh liabilities nearly 2-to-1.

Lastly, I take a look at the chart to see where pricing now relates to pricing from recent history. I am not a chartist so I don’t spend a lot of time on this, but for 3M, I notice the stock price hasn’t been at the current level since Summer 2002. At quick glance, it seems it is below many support levels and I believe there is now more pressure to move up than down (once the market turmoil settles, of course).

My conclusion based on this analysis is that 3M is a good candidate for a buy. If the price moves further downward, the yield will go up, making it even more attractive. Earnings are expected to be released next week and the projections are not expected to be good. If that results in a drop in the share price, I might use it as an opportunity to begin a position, with small purchases, and buying more if the price moves down further. Remember, when all else is the same, a drop in the stock price means it is going on sale. (As of Oct. 17, I did not own any 3M).

There you have it, a quick and dirty stock analysis. It is not intended to be an all encompassing guide for you to make your own picks, but rather a summary to give you some ideas on what to look at when reviewing your own potential buys. (Please note that some stocks require different types of analysis and this is just an example).

Good luck and happy hunting.