NEW LOW OBSERVER

How do you determine that a stock price is undervalued?

Because there are many ways to answer your question, I will first refer you to the standard responses to your questions. Please follow the link to Wikipedia's response to the question of when a stock is undervalued.

Our view at New Low Observer on undervaluation is that, after selecting companies that have a proven track record of dividend increases over many years, stocks are likelier to be fairly valued or undervalued as the price falls to a new 1 year low. Although this seems obvious, most investors are unwilling to investigate a stock that has a falling price history for fear of a continuation of the trend. The prevailing view is, "I will wait until the price starts moving up before investing in company X."

Our experience has been that, provided the company has a history of dividend payments (something that cannot be manipulated through accounting methods) and all other financials attributes being in order, the company is put on a list to be acquired at the earliest opportunity. A great book that summarizes our general approach is "Dividends Don't Lie" by Geraldine Weiss and the upcoming book "Dividends Still Don't Lie" by Kelly Wright. In these books the main idea is that quality stock tend to trade in a price range based on the dividend yield.

Question:

How do you define P/E ratio? What does it indicate?

Answer:

In addressing your question, I would refer you to Investopedia's response to what P/E means. The idea of price-earnings (P/E) ratios is pretty straightforward. However, we use the P/E ratio as a means to compare to the relative history of the stock in question. Some people like to compare the P/E ratio to the stock market indexes like the S&P 500 or Russell 2000 Index. A P/E above the indexes would signal that the stock might be overpriced, a P/E below the indexes might mean the stock is underpriced. However, we try to identify what the historical range for the stock is as compared to itself and not the index. If it is a quality company, there may exist a pattern of falling and rising price based on the historical tendency of the P/E ratio.

Question:

What does the one year low indicate?

The new low of a company's price indicates that the stock in question needs to be examined for potential purchase. This is in stark contrast to recommending a stock that has increased in price by 30% to 50%. Just like shopping for clothes, food, or a computer, we gravitate towards lower prices and careful consideration of what we buy. We operate on the mantra of caveat emptor or buyer beware.

I hope the above explanations have peaked your interest in the basics of investing. Much of what we have pointed out about considering the purchase of stocks is rooted in being reluctant participants of a consumer society. However, we have transferred the same skills as consumers of liabilities to the acquisition of assets. I hope you have time to read the book "Dividends Don't Lie" through your local library (save some money) until the new book comes out next year. Touc.