Safe Money
How to Spot Stocks to Earn Safe Money
By Dr. Bob Rubin
Do you know safe money investments when you see one? You’ll know after you read this article.
What is a safe money investment?
Safe money investments have two characteristics –
- Value that will last. Real, significant, durable value.
- No trendy stocks whose price is built on hype and hope.
- You want companies whose assets can be turned into cash.
- A price well below the stock’s value.
- Buy bargains. If a great company is down, that’s when to buy.
- Great companies bounce back from a down market or a temporary slip.
What is value in a company?
True safe money investments have –
- Lots of cash.
- Cash keeps the business going when sales dip. It’s insurance.
- Cash pays for sales and advertising.
- Cash pays for research, new equipment, and acquisitions.
- Cash pays for growth.
- Little or no debt.
- Debt payments take money away from profitable activities.
- When times are tough, debt payments can drag a company under.
- A safe money investment can pay all its debt, with cash left over.
- Lots of free cash flow.
- Free cash flow is the money that’s left after all costs of operating a business are paid.
- Free cash flow can add to a company’s cash or reduce its debt.
What is the opposite of a good safe money investment?
- A company with huge loans, searching for future earnings that may never arrive.
- A company spending more than it makes.
- Companies like that may succeed, but they often flame out.
When is a price well below the value of an investment?
Here are two definitions of safe stock prices – both work.
- Price less than 15 times free cash flow.
- Blue chip stocks often sell for around 30 times free cash flow. Half that is a bargain. Your stock could double in price.
- Price to Sales Ratio below 0.9.
- History shows double digit annual returns for such stocks over 5 years. Price to Sales Ratio over 0.9 returns less than half that.
Two other popular definitions use the Price to Earnings Ratio (P/E), and the Price to Book Ratio (P/B). These don’t work quite as well, because -
- Earnings are often manipulated.
- Book value may not reflect the value of intellectual property such as software and patents.
Now that you know what a safe money investment looks like, you also know when to get out. Never hang on when a company loses its value or gets too expensive. Don’t be afraid to sell, even if you’ve held for years.
Here’s an example. (This is only an example – not a recommendation.)
- Intel (INTC) closed at $20.84 on the day I write.
- INTC has $20.75B in cash, and $2.5B in debt.
- INTC has enough cash to pay its debts with plenty left over.
- INTC has $8.26B in free cash flow – enough so that the company could buy itself in a few years.
- INTC sells for 14.1 times its free cash flow – a bargain.
- INTC does have a high Price to Sales Ratio of 2.72.
- The market may worry about Intel’s relatively slow sales growth.
- With all that free cash flow, INTC is still safe.
Low risk makes for big profits is the lesson. Don’t gamble, especially with your retirement investments. You’ll make more money playing it safe.
Keep us growing! Let us hear your comments below.
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Wishing you safe, profitable investing.
Dr. Bob Rubin, Editor
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Safety is more important than ever, now that the economy is so uncertain. The point of safe investments is that they survive the storms that sink most investments.
Bob Rubin recently posted..Trading Strategies – Does The Stock Market Need The Fed?
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Posted by Bob Rubin | July 8, 2011, 5:27 PM